Focus on Overhead (It'll Lower Investments in Major-Gift Fundraising)

Invest More in Major Gifts!

This will be the year when a solid group of enlightened nonprofit organizations jump fully into the overhead discussion that is rapidly gaining traction among leaders in this sector.

My question for you is this: Are you ready to handle the questions, concerns and yes, heated discussions you might get into with a donor on your caseload regarding this subject?

If not, you need to get ready because it will likely happen this year.

Over the last few years, GuideStar, the Better Bureau Business Wise Giving Alliance and Charity Navigator have asked the donating public to stop focusing on overhead as a sole measure of nonprofit success.

These three respected organizations are taking a position that journalists, foundations, the government and individual donors are placing too much emphasis on how much nonprofits spend directly on programs and are, therefore, discouraging donors from investing in critical areas of infrastructure like training, evaluation and internal systems. I would add that they are also discouraging donors and even the organization itself from investing in fundraising.

Think about this point—investing in fundraising. One of the very complicated pressures a nonprofit has is to balance the ratio of overhead expense to program expenditure, while aggressively and wisely spending money on acquiring new donors to replace the donors that have attritioned off the donor file. If a director of development does not watch this area carefully, he or she will find that revenue will decline year after year and the nonprofit will be in a financial crisis.

So money must be spent on acquiring donors. The problem is that donor acquisition these days is expensive and has a longer payback time than in the past. It is not unusual to spend $1 to acquire a donor and only get back $0.50 initially. And that is if you are doing well! Then it takes months to recoup the investment.

The result? Ratios that get out of whack, and a donating public that thinks the organization is spending irresponsibly. So, the nonprofit doesn’t invest in fundraising, and the result is a compromised financial future. Not good.

And the same thing happens in major gifts.

I am dealing with a situation right now where $59 million has been lost from a very good group of donors because the organization is unwilling to invest in infrastructure and major-gift officers (MGOs) to manage those donors. So these good people, much like ripe fruit on the tree, just “hang there and rot” and eventually go away—and this is no marginal nonprofit. They are doing critical work that our society needs, but because of the fear of “hurting the ratios,” they don’t do what any wise businessperson would do and invest in the very process that secures revenue.

Jeff and I are currently working on a proposal for a well-known and respected national organization that is approaching one of their major donors with the following proposition: Invest $2 million per year for 10 years in developing a major-gift infrastructure (MGOs, admin support, research, writers, a photojournalist, etc.) and through that investment, produce $120 million in donations over the same period.

What a deal! It will take time to ramp this program up, but the financial rewards to the organization will be enormous. Our revenue forecast is very modest and does not include any seven-figure gifts that will most assuredly come in, raising the period total way beyond the $120 million! All we did was forecast out regular MGO performance over all of those years.

I have three points I am making in this post:

1. Donors will continue to worry about overhead, and it could distract you from the real task at hand. You need to face this head-on with the donors on your caseload and be part of our growing group of professionals who are pushing back on this topic and retraining these good donors to think and act with business minds—not charity minds. There really is no virtue in saying you have overhead that is less than 20 percent while your organization is running in deficits, starved for infrastructure investments and not investing in fundraising. There is no successful business on the face of our planet that would operate this way. Why are you?

2. Approach your best donors with an offer to build the organization through their giving, which in turn, will produce more net revenue for program. Most of your best donors come from successful business backgrounds. They understand the economic dynamics of building a business and keeping it successful. Sit with them and explain how your nonprofit economics are no different. You have to invest in donor (customer) acquisition, retention and upgrading. This is what causes net revenue. I have found that once a business-minded donor understands how the whole thing works, they are way more open to investing in fundraising and organization infrastructure. Try it. Also, this response to a donor who worries about overhead may have surprising results.

3. Invest in growing your major-gift program. Way too many nonprofits are doing too little in this area. They have one MGO when they should have three. Or three when they should have 10. And all this is happening, while very good high-inclination and high-capacity donors who could be on a major gifts caseload are flying out the door. It does not make sense!

Bottom line, as major-gift fundraisers, we cannot just sit back and let this overhead thing crush the economic life out of our organization and move us away from investing in and building up major gifts. Take steps to change this.