31
Jul
09

Efficiency and Effectiveness in Fundraising

How does an organization measure its fundraising efforts? How does an organization determine whether its fundraising efforts are effective and efficient ? These and similar questions are commonplace among nonprofit boards and leaders who are responsible for evaluating fundraising performance. Unfortunately, there is not a single measurement universally recognized to evaluate all fundraising activities. Nonprofit organizations rely on a variety of measurements, observations, assessments, and the like to determine their own level of performance and often compare their results to that of other organizations. Given the variety of fundraising methods, types of gifts, and types of donors, the effectiveness and efficiency of fundraising can be especially difficult to accurately measure. In the absence of a consistent measurement tool, complicated by the endless ways to raise a dollar, organizations are increasingly challenged by questions concerning their effectiveness and efficiency.

 

Effectiveness is defined as the extent to which an activity fulfills its intended purpose or function. If the goal was achieved, the activity would be considered highly effective. If the goal was only partially successful, its effectiveness would be questionable. Effectiveness is commonly described as “doing the right things”. Efficiency, on the other hand, closely considers inputs or costs and is generally recognized as the extent to which these costs relate to the goal. As effectiveness is indicative of “doing the right things”, efficiency is “doing the right things the right way.” The “right way” in and out of fundraising often translates into greater success at the least cost. (Harvey, 2004)

 

In order for a fundraising operation to be deemed effective, the operation must accomplish its primary purpose – the operation must successfully raise funds. The extent to which the operation reaches this goal will determine whether or not the operation is considered effective. In fundraising, effectiveness is often recognized as maximizing net income while efficiency is reducing costs. Unlike effectiveness, fundraising efficiency emphasizes the costs associated with the effort. A highly efficient fundraising operation will achieve its goals while controlling the costs of direct mail, special events, major donor meetings, or any number of other inputs demanded of a fundraising operation. Michael Sack Elmaleh writes: Efficiency is not just about minimizing administrative and fund raising expenses. Efficiency is ultimately about choosing the best strategy to accomplish the non profit’s goals. (2006)

 

Nonprofit organizations are wise to consider a variety of measurements to internally measure fundraising effectiveness and efficiency. However, there is debate as to how and for what purpose these measurements should be used.  There is debate as to what different measures account for and whether they are relevant. Debate also brings into question whether organizations are comparable to one another. Mark Hager insists: Efficiency cannot be wrapped up in a single standard. Efficiency means different things to different organizations. (2004)

 

The use of ratios as a means to measure effectiveness and efficiency receives constant criticism and continues to spark debate. The debate is usually aimed at comparisons among multiple organizations. However, neither side adamantly opposes the use of ratios for internal measurement and evaluation. Without question, the use of simple ratios to measure an organization’s effectiveness and efficiency is hardly an inappropriate practice. As a internal assessment, these ratios offer valuable perspectives for staff, board members, management, and donors. (Gerrity, 2008)

 

For the purpose of this post, we will examine five simple ratios that can be utilized to measure the effectiveness and efficiency of an organization’s fundraising operation. The first three ratios — the growth rate, the average gift size, and the reliance ratio – offer the organization a method of evaluating the effectiveness of the organization’s fundraising efforts. The final two ratios – the average cost per gift and the cost of fundraising – offer the organization some perspective as to how efficient their fundraising operation is.

 

In an effort to evaluate fundraising performance among nonprofit organizations, the Association of Fundraising Professionals recently conducted the 2nd Fundraising Effectiveness Survey. The survey compares growth from one year to the next with that of losses from one year to the next. The results indicate either a net gain or loss and provide the motivation to improve the effectiveness of an organization’s fundraising operation. Without question, the universal objective is to maximize gains while minimizing losses. (AFP, 2007)

 

In the survey, gains are calculated as income gained from new donors (donors who never gave prior to the current period), recaptured donors (previously lapsed donors who gave again in the current period), and upgraded donors (those who gave more in the current period than in a previous period). On the losing end, losses are calculated as income lost to downgraded donors (who gave less in the current period than in a previous period), lapsed new donors (new, first-time donors in a previous period who did not give in the current period), and other lapsed donors (those who gave in a previous period but not in the current period). The net presents either a net gain or loss which determines the overall growth rate in an organization’s fundraising.

 

Interestingly, this method of evaluating an organization’s overall growth rate is especially useful in guaging the organization’s fundraising effectiveness. It can be reasonably assumed that an organization with a steady annual growth rate of 10%  has an effective fundraising operation. To achieve additional growth, the organization will need to address several aspects of their fundraising operation that influence the variables in the measurement.

 

For example, annual events and major donors often suffer as a result of lapsed and downgraded donors — two of the variables used in the growth rate calculation. Special events often fail to generate similar audiences year after year while major donors sometimes choose not to renew their substantial gifts. In a number of ways, these losses are the reflection of an ineffective fundraising operation and would suggest a need for improvement. These weaknesses would be reflected in a comparison of an organization’s growth rate. Conversely, those events that repeatedly grow in audience and income and those donors that continue to upgrade their giving are a reflection of an effective operation. These positive characteristics would be reflected in a steady and/or improving growth rate.

 

The average gift size ratio offers the organization a means to determine the effectiveness of a solicitation method, a mailing list, a special campaign, or a unique message. To calculate the average gift size, total income from a particular solicitation is divided by the total number of responses received from the group who received the solicitation. The variables for this measurement are limited to the particular group and the income received as a result of the solicitation. This enables the measurement to remain isolated from both other fundraising methods and other groups. The result serves as a measure of effectiveness which can be compared to the average gift size generating from other methods or other groups. (Levis, 1981)

 

For example, a study was conducted to evaluate the effectiveness of four approaches used in online appeals. The study demonstrated how three out of four approaches had the potential to effectively increase the average gift received. The multiple appeal approach, as opposed to a stand-alone, one-time appeal, effectively increased the average gift from $55 to $90. The deadline-driven approach resulted in an average gift increase of $33 when compared to those appeals without a deadline. Similarly, the matching gift approach increased the average gift by $20. Interestingly, the dollar goal approach failed to be considered statistically significant. (Matheson, 2007)

 

An effective fundraising operation should use of a variety of fundraising methods generating gifts from a broad group of donors. The reliance ratio, indicative of a diversified fundraising operation, reflects the organization’s ability to effectively grow and expand their base of support. The measurement divides a source of income, whether individual or method, by that of the total. The low reliance ratio suggests that the organization operates an effective fundraising operation by generating income from a variety of methods and/or a large group of donors. On the other hand, a higher reliance ratio suggests the organization is overly dependent upon a particular fundraising method, individual donor, or charitable institution. (Wall Watchers, 2001)

 

The critical nature of the reliance ratio is no more common than among those organizations that rely heavily on private and public grants. Some organizations may rely on grants for half to two-thirds of their fundraising budget. The risk these organizations have overlooked can easily be observed by calculating this measurement. For example, a newly formed charity operates with an annual budget of $500,000. The charity annually receives $100,000 from one private foundation. The charity also generates $200,000 from two annual events. By calculating the reliance ratio, the charity depends upon a single foundation for 20% of its operations. In addition, the charity relies on two special events to generate another 40% of their budget. The reliance ratio would suggest that this charity is at risk of losing a substantial portion of their income from a very small group of sources. The reliance ratio demonstrates the charity’s need to effectively expand their support base.

 

The costs associated with fundraising always demand perspective of what an individual gift costs to be raised. The average cost per gift ratio, regardless of the amount of the gift, offers the organization a measurement of the costs associated with each charitable gift raised and can be used to measure the efficiency of an entire fundraising operation or that of an particular method (ie. direct mail, special events, etc.). It is important to recognize that the costs per gift will differ substantially depending on the method of fundraising. The average cost per gift is especially useful when an organization considers the costs associated with very small gifts (ie. direct mail) and very large gifts (ie. major gifts).  The average cost per gift ratio is calculated by dividing the total expense (costs) by the number of gifts (responses). This offers the organization a measurement to monitor current costs as well as a means to anticipate costs in the future per assumed responses. (Greenfield, 1997)

 

Nonprofit managers responsible for an organization’s direct mail or major gifts efforts will likely concern themselves with the average cost of the gifts they receive. Beginning with direct mail, let us suppose an organization’s appeal generated a total of 300 responses at a cost of $300. These variables, regardless of the amount raised, would result in an average cost per gift of one dollar. As is often the case, the average cost per gift may then be compared with the average gift size. Assuming the average gift size was $25 at an average cost of $1 per gift, this appeal would typically be considered efficient.

 

Similar to direct mail fundraising, the average cost per gift may also enlighten the major gifts fundraiser to his or her level of efficiency. Major gifts fundraising often involves a significant investment of time and resources as do many fundraising methods. The most common expense is that of travel which might include airfare, meals, lodging, and other travel related expenses. For example, a major gifts officer may spend $30,000 to interact with and solicit a specific group of 15 donors which results in his or her raising one million dollars. Assuming each donor follows through on their commitment, the average cost per gift for this particular group would be $2000. Compared to the earlier results arrived at in the direct mail example, this result may seem highly inefficient. However, as is often the case, he third variable being one-million dollars, will arguably make this investment appear much more efficient.

 

Among all the ratios used by fundraising professionals and presented to donors, the cost of fundraising ratio may be relied upon the most. This ratio suggests overall profitability of fundraising efforts. It is calculated as fundraising expense divided by fundraising revenue. The result offers a percentage that can be compared to previous years and is often compared to that of other organizations. As an organization’s cost of fundraising drops, we can assume the organization either increased revenue or reduced expenses. As such, the cost of fundraising ratio is argued by some as a measure of both efficiency and effectiveness. As a measure of efficiency, the ratio is improved with lower expenses. Similarly, as a measure of effectiveness, the ratio improves as revenues increase. (Greenfield, 1997)

 

To put the cost of fundraising ratio into perspective, we begin by discovering that an organization spent $100,000 on fundraising-related expenses. The same year, the organization raised $1,000,000. Using the cost of fundraising ratio, we arrive at 10%. In the following year, we might assume the organization spent an additional $10,000 in fundraising-related expenses.  We also discover that the organization increased revenue for that year ($1,200,000) and therefore became more efficient (8.3%) with the increased expenditure. Alternatively, had the organization maintained the same level of expenditure but increased revenue, we would also see the ratio drop.

 

Similar to the cost of fundraising ratio, organizations may also consider using the fundraising efficiency ratio. This ratio answers the question “what portion of each dollar goes to programs and services as opposed to fundraising?”. Unlike the cost of fundraising ratio, the fundraising efficiency ratio results in a smaller number and is therefore sometimes more appealing. The ratio is calculated as total fundraising expense divided by total contributions. The result is then compared to the dollar. For example, if an organization spends $500,000 to raise $3.4 million, the organization’s fundraising efficiency ratio is 14.7 cents. The statement many organizations would therefore offer a suspecting donor is that 14.7 cents of each dollar is spent on fundraising. (Charity Navigator, 2006)

 

Admittedly, after considering each of these ratios, a professional fundraiser or a charitable donor might be either highly confused, curious, or suspicious. It is easy to see how  one might be confused; granted, there appears to be endless ways in which to measure fundraising effectiveness and efficiency. One might also reasonably question whether the above mentioned ratios accurately reflect either measurement and suspiciously ask whether organizations actually know how effective or efficient their fundraising programs are.  Either of these concerns, in addition to a host of others, which bring into question whether an organization is effective or efficient is moving in the right direction; for, in order to increase fundraising success, increase performance, and reduce costs, organizations must first ask questions. Ultimately, however, in spite of any and all confusion, once these ratios are fully understood and put to use, they can be truly valuable tools for the fundraiser as well as the donor.

          
References

Association of Fundraising Professionals (2007) First Fundraising Effectiveness Survey Report    Published. Retrieved March 23, 2008 at http://www.afpnet.org/ka/ka-3.cfm?content_item_id=24126&folder_id=3272

Charity Navigator (2006) How do we rate charities? Retrieved March 23, 2008 at http://www.charitynavigator.org/index.cfm?bay=content.view&cpid=35

Collier, A. (1994) Criteria for audits and measurements for demonstrating fundraising success. Financial Practices for Effective Fundraising. New Directions for Philanthropic Fundraising. Jossey-Bass. San Francisco.

Costa, N. (2005) Integrating fundraising into finance. New Directions for Philanthropic Fundraising. Wiley Periodicals. New York.

Elmaleh, M. (2006) The Statement of Functional Expense: Measuring Nonprofit Efficiency. Retrieved March 23, 2008 at http://www.understandaccounting.net/StatementofFunctionalExpense.html

Gerrity, M. (2008) Return on Investment in Fundraising: Using ROI to your advantage. Retrieved March 23, 2008 at http://www.philanthropyassociatesinc.com/ROI/ROI.pdf Greenfield, J. (1997) The Nonprofit Handbook: Fundraising. John Wiley and Sons, Inc. New York.

Hager, M., et al. (2004) Nonprofit Overhead Cost Project. Center on Nonprofits and Philanthropy, Urban Institute, Center on Philanthropy, Indiana University. Retrieved March 23, 20008 at http://nccsdataweb.urban.org/kbfiles/521/brief%205.pdf

Harvey, L., (2004) Analytic Quality Glossary. Quality Research International. Retrieved March 23, 2008 at http://www.qualityresearchinternational.com/glossary/effectiveness.htm Levis, W. (1981)

The Average Gift Size Factor. Independent Sector. Retrieved March 23, 2008 at http://nccsdataweb.urban.org/PubApps/levis/gift_f.html

Lindahl, W. (1994) Multiyear evaluation of fundraising performance. Financial Practices for Effective Fundraising. New Directions for Philanthropic Fundraising. Jossey-Bass. San Francisco.

Matheson, K., et al (2007) Online Fundraising Tactics: What Works? M+R Strategic Services. Retrieved March 23, 2008 at http://www.techsoup.org/learningcenter/funding/page6917.cfm

Wall Watchers (2001) The MinistryWatch.com 5 Star Ratings System. Retrieved March 23, 2008 at http://www.ministrywatch.com/mw2.1/pdf/MW5star2.pdf

Weber, N. (1994) Misusing charitable statistics in evaluating fundraising performance. Financial Practices for Effective Fundraising. New Directions for Philanthropic Fundraising. Jossey-Bass. San Francisco.

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