The Debate Over Fundraising Costs

The last few months have brought our profession more than its fair share of negative headlines. And now there's the threat of a Senate investigation into fundraising practices. The Chronicle of Philanthropy actually published a front-page article calling for more government regulation of nonprofits!

Sensationalistic headlines aside, from a legal and ethical perspective, these cases can be reduced to two issues:

1. Was the fundraising honest? For example, did the nonprofit accurately describe its programs and do what it said it would? Did it value its gifts-in-kind honestly?

2. Is the nonprofit organization contractually and practically in control of its own marketing and budgets (including its lists), or has it ceded de facto control to an outside party?

If nonprofits were not honest in their fundraising or their use of fund, or were not in control of their budgets, there are major legal and ethical problems to be addressed in a court of law.

But the problem here needs attention beyond a court of law; in the end it's the court of public opinion that matters. The media, fueled by self-appointed, self-anointed charity watchdogs, have reduced the issues once again to fundraising costs — implying that spending money to raise money is, at best, a necessary evil.

What we can learn

Rather than rehash the accusations and cases here, I simply want to explore what we can learn from these painful situations.

At a minimum, let's agree to some key principles:

• Nonprofits operate based on the public's trust; hence, like Caesar's wife, we must behave in a way that it is entirely above suspicion.
  
• Fundraising appeals must be accurate and honest.
• Nonprofits must do what they promise and should be judged on the impact of their programs.
• The nonprofit (not the consultant) must be in control of its own programs, fundraising strategies, budgets and lists.
• Common business ethics dictate that consultants should never recommend something to a client that is good for the consultant but not for the client. Those who do will soon find themselves without any clients.
• Certainly, nonprofits (and their consultants) need to understand and obey all applicable federal, state and local laws.

The recent cases should have been about transparency, honesty, the impact of a nonprofit and ethical business practices. Instead these key issues have been eclipsed by a debate on the cost of fundraising.

What it's really all about

There's a lesson in all this. The manner in which nonprofits raise and spend money is a hot-button issue. And it's incumbent on all of us in the fundraising profession to do a far better job of honestly educating media, donors and the public about the realities of fundraising (another good reason we should all be part of the Direct Marketing Association Nonprofit Federation).

Is it better for a food bank to spend $1 million to raise $3 million or to spend $5 million to raise $10 million? The fundraising ratio is much better in the first example. But the net revenue is much better in the second. The key question should be: Which one allows you to feed more hungry families? You can't feed people with ratios. It takes net revenue.

Russ Reid's "Heart of the Donor" study shows that donors don't mind a nonprofit spending more on fundraising and management if it allows the organization to raise more money and have more impact. Author Dan Pallotta gives the hypothetical example of a cancer organization seeking a new chief medical officer. Candidate A has a cure for cancer but costs $1 million. Candidate B only costs $200,000 but doesn't have a cure for cancer. The watchdogs would want the organization to hire the less expensive candidate, while those who actually want to fulfill the organization's mission would clamor to hire the person who can cure cancer!

Who among us would invest our retirement savings in an organization boasting that it spends the least on management and marketing? No one. That organization would be doomed to failure. Shouldn't nonprofits tackling the most pressing problems of our day have the best management and marketing available?

Fundraising is a complicated business, one designed to help nonprofit organizations raise maximum net revenue to accomplish their vital missions.

What that means is …

Let's not be afraid to explain that:

• Like it or not, it costs money to conduct programs (e.g., to build houses, fight cancer, feed hungry families) and to manage a complex nonprofit organization.
• It costs money to find donors and raise money.
• Fundraising is hard. It's often far more cost-effective to spend a little more to hire experienced experts than to do it cheap and fail.
• Because of the cost of printing and postage, direct mail costs more than e-mail cultivation. But direct mail provides far more net income for the charity.
• Acquiring new donors costs more than cultivating existing donors. But charities need to do both to grow net revenue over time and achieve maximum impact.
• We may internally measure each campaign against its own goals. But for the purposes of calculating fundraising costs, it is rarely useful to do so by campaign. Charities need to calculate fundraising costs and ROI on an annual basis — at a minimum. That way, donors can get a clear picture that whether you contact them via acquisition or cultivation, through mail or e-mail or phone or TV or banner ads, at the end of the year, 70 cents (or whatever is true) of every dollar raised by your organization goes to accomplish your vital programs.

Shamefully, there are organizations out there that abuse the public trust. But there's a risk that the recent media coverage will wrongly tar all nonprofits with the same brush.

Let's consider the recent brouhaha an important reminder to our high calling as fundraisers that we need to behave with honesty, authenticity and transparency. Equally important, we need to stop apologizing for spending money on more effective management and fundraising and, instead, educate people about the realities of how fundraising works.

Tom Harrison is CEO of Russ Reid and a member of the FundRaising Success Editorial Advisory Board. Reach him at tharrison@russreid.com