Kickoff Presentation to Staff and Board

Report
SHARING KNOWLEDGE. GROWING IMPACT.
Activity-Based Costing Analysis
Kick-off Presentation
cfinsights.org
AGENDA
I. Aligning Fee Structures with Market Realities
II. Activity-Based Costing Methodology
III.Key Questions to Answer and Applying the Findings
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CF Insights 2012
Alignment
New Realities – and Opportunities to Create Value – Require Community
Foundations to Rethink their Fee Structures and Services
The role of community foundations has fundamentally changed
– The way community foundations calculate fees has not shifted as their role and activities
have changed
– As a result, they now face an imbalance between the cost of services provided and the
revenues generated
Solving this problem requires a re-examination of their cost and revenue models
– Fees must be linked more directly to services provided, requiring:
• Examination of the internal costs of services
– Program
– Administrative
– Development
– Donor education
– Community services beyond grantmaking
• Understanding the fees and offerings of other philanthropic service providers
• Learning what donors value and are willing to pay for
• Making informed decisions about which services to expand, maintain or reduce
• Developing alternative sources of revenue to more fully cover costs
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CF Insights 2012
Alignment
Operating Budgets Are No Longer Able
to Absorb the Cost of Continually Expanding Services
There is a growing mismatch between services and fee structures
– The traditional fee structure – an annual fee based on a percentage of assets – was never
intended to support today’s expanded range of services
– Community foundations have generally absorbed the cost of additional services within their
operating budgets
• Administering donor advised funds
• Advising and educating donors to become more knowledgeable about giving
• Providing advice and continuing education to professional advisors
• Helping local nonprofits raise funds or develop their own endowments
• Convening funders to organize solutions to community problems
• Compiling studies of the local philanthropic and nonprofit sector
– These costs have often been covered on a case-by-case basis through self-administered
grants or good luck in the rapid growth of investment portfolios
– There is no link between the cost of these services and the movement of asset values in the
stock market
• Flat asset-based fees do not reliably cover costs when a range of services are provided
unrelated to the investment and custody of funds
• The critical roles that many community foundations play in their regions cannot be
dependent on the volatility of the stock market
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CF Insights 2012
Alignment
Determinants of Revenue Are Not Aligned with Determinants of Cost
Determinants of Revenue
?
Value of investment portfolio
Contributions received
Determinants of Cost
Interest rate on float
Donor development
Stock dividends and bond income
Grant review and evaluation
Services provided to donors
Grants from other foundations
Services provided to nonprofits
Services provided to financial advisors
Community activities
?
Studies, commissions, convenings
Publications & website
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CF Insights 2012
Alignment
Different Kinds of Donors Require Different Kinds of Services –
The Cost of These Services Is Often Unrelated to Fund Size
More Engaged Donors Want
Advice and Participation
Less Engaged Donors Want
Efficient and Inexpensive Service
• Briefings on issues of interest
• “Money-in, money-out” pass through
account with no endowment or
minimum balance requirement
• Advice on grantmaking and local
nonprofits
• Self-directed control over how funds are
allocated and granted
• Leadership opportunities in priority
interest areas
• Tax and time-efficient processing of gifts
and donor advised grants
• Matching funds for their projects
• Prompt and accurate reporting
• Opportunities to come to the table
with others working for common goals
• Participation in setting the agenda for
the community
Different donor needs translate into different Foundation activities and costs
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CF Insights 2012
Alignment
Traditional Pricing Structures Do Not Reflect the Value That
Community Foundations Add for Differently Involved Donors
Pricing to Yield Revenue
Flat Fees
Fees
Dependent on
Size of Fund
Tiered
Service
Levels
Pricing To
Cover Costs
of Service
Delivery
Services and
Prices
Determined
by Donor
Preferences
Pricing to Build Relationships in the Community
• Offering low fee donor
advised funds and agency
endowments
• Putting a price tag on
foundation expertise and
knowledge
• Considering the difference
between the cost to service
the funds and the income
generated as an investment
in building relationships
• Determining access to highcost, high-quality services
according to fund size
• Setting prices in
accordance with donor
and agencies’ demand for
services
• Ensuring that foundation
operating costs are
adequately covered
Foundations have focused on increasing donors’ access to expertise,
but rarely price their offerings to reflect the value of these enhanced services
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CF Insights 2012
Alignment
A Competitive Model that Keeps Pricing Low
While Adding Costly Services Cannot Be Sustained
Commercial gift funds have economic advantages
– Commercial gift funds impose a ceiling on the annual fees that community foundations can
charge, although commercial funds have a significantly lower cost structure for donor advised
accounts
– Community foundations are differentiated by higher levels of advice and personal service
provided for donors, as well as the value created for their communities – but none of this
translates into revenue
•
A newly emerging market for philanthropic advisors demonstrates the value of providing
advice and service to donors
– Philanthropic advisors set an independent market price for services that parallel those a
community foundation usually offers to its donors for free
• Typical prices are $100-$250 per hour or 5-10% of the annual grants for managing a
small foundation, on top of investment advisory fees incurred
• Community foundation program staff are often more experienced and better qualified than
these professional advisors
• Community foundations can manage small foundations more cost effectively than most
independent advisors
New models must be designed to match the changing marketplace
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CF Insights 2012
Alignment
Sustainability Requires Aligning Revenue Models with Strategies –
Through Understanding True Costs and Perceptions of Value
Tiered pricing would better align revenue with the costs of service
–
•
Community foundations have the ability to package services for donors with different service
preferences
Valuing advice at market rates increases its perceived value
–
Rather than absorbing program costs as part of overhead, community foundations must begin
to see these activities as services that have a definable value
• Revenue models should recognize the market rates set by independent philanthropic
advisors
• Philanthropic services provided to the community should be recognized as an investment
in creating value, and the foundation’s contribution should be valued
–
Moving to an approach that recognizes the value of community foundation services requires
both a rigorous cost analysis and an understanding of the value customers place on these
services
New strategies require new revenue models
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CF Insights 2012
Alignment
The Case for Activity-Based Costing Analysis
WHEN YOU ANALYZE YOUR OPERATING MODEL YOU GAIN INSIGHTS
• Match economics to mission
Prioritize changes based on true surplus and subsidy of fund types in light of mission and other external
factors.
• Prioritize products
Inform conversations about intentional investments or the need to adjust revenues and costs.
• Adjust fee schedules
Consider fee or policy changes and analyze revenue impact of adjustments.
• Evaluate alternative revenue sources
Assess role of existing or new income sources beyond traditional administrative fees (e.g., fee-for-service).
• Gauge community leadership investment
Understand degree of investment and compare external funding sources for community leadership.
•
Compare your results to peers, highlighting unique strengths and challenges
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CF Insights 2012
AGENDA
I. Aligning Fee Structures with Market Realities
II. Activity-Based Costing Methodology
III.Key Questions to Answer and Applying the Findings
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CF Insights 2012
Methodology
The Cost-Revenue Study Uses Activity-Based Costing to Assess the True
Cost of a Foundation’s Products and Services
• Activity-Based Costing (ABC) allows organizations to determine the actual cost associated with each
product or service
• Cost data is gathered and traced to specific activities, then costs are allocated to products or services
based on their utilization of activities
Expense 3
Expense 2
Expense 1
Expense 4
Costs are
assigned
to activities…
Activity 1
Activity 2
Activity 3
…then allocated
based on utilization
of activities
Product 1
Product 2
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CF Insights 2012
Methodology
A Critical Component of Activity Based Costing Is Allocating
100% of Staff Time to the Activities that Enable the Foundation to
Deliver Each of Its Products
Staff
Activity
Survey
Product 1
Product 2
Product 3
Product 4
Product 5
Product 6
Product 7
Product 8
Activity A
X%
X%
X%
X%
X%
X%
X%
X%
Activity B
X%
X%
X%
X%
X%
X%
X%
X%
Activity C
X%
X%
X%
X%
X%
X%
X%
X%
Activity D
X%
X%
X%
X%
X%
X%
X%
X%
Activity E
X%
X%
X%
X%
X%
X%
X%
X%
Activity F
X%
X%
X%
X%
X%
X%
X%
X%
Activity G
X%
X%
X%
X%
X%
X%
X%
X%
Activity H
X%
X%
X%
X%
X%
X%
X%
X%
Activity I
X%
X%
X%
X%
X%
X%
X%
X%
Total
X%
X%
X%
X%
X%
X%
X%
X%
Staff costs are assigned to activities and products based on reported time, weighted by
individual salaries and including taxes and benefits
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CF Insights 2012
Methodology
Once Staff Costs Have Been Assigned, Direct and Indirect Foundation Costs
Are Allocated Across the Matrix of Activities and Products
Allocate Direct Costs
such as events,
publications, or
investment
management
consultants to
activities and
products based on
specific allocation
rules
Allocate Indirect
Costs such as
occupancy and
office expenses to
activities and
products based on
the distribution of
staff time
Staff
Activity
Survey
Product
1
Product
2
Product
3
Product
4
Product
5
Product
6
Product
7
Product
8
Activity A
$Y
$Y
$Y
$Y
$Y
$Y
$Y
$Y
Activity B
$Y
$Y
$Y
$Y
$Y
$Y
$Y
$Y
Activity C
$Y
$Y
$Y
$Y
$Y
$Y
$Y
$Y
Activity D
$Y
$Y
$Y
$Y
$Y
$Y
$Y
$Y
Activity E
$Y
$Y
$Y
$Y
$Y
$Y
$Y
$Y
Activity F
$Y
$Y
$Y
$Y
$Y
$Y
$Y
$Y
Activity G
$Y
$Y
$Y
$Y
$Y
$Y
$Y
$Y
Activity H
$Y
$Y
$Y
$Y
$Y
$Y
$Y
$Y
Activity I
$Y
$Y
$Y
$Y
$Y
$Y
$Y
$Y
Total
$Y
$Y
$Y
$Y
$Y
$Y
$Y
$Y
The complete matrix of products and activities includes
staff, direct and indirect costs for each activity and product
Note: Some allocation approaches will assign minor costs to all products
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CF Insights 2012
Methodology
Product Definitions Drive the Activity-Based Costing Analysis
• Before starting the work, the Foundation must identify 8-12 products to use for
the Activity-Based Costing Analysis
• These product definitions must not change through the project, so it is vital that
they are selected carefully
• Some products will be relatively standard fee-based philanthropic vehicles such
as:
o Donor advised funds
o Designated funds
o Scholarships
o Competitive grantmaking funds (Unrestricted and/or Field Of Interest)
o Supporting organizations
• Other products may be unique large funds, planned giving products, services to
nonprofits, or initiatives without any clear associated revenue such as convening
and community leadership efforts
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CF Insights 2012
Methodology
The Following Set of Criteria Should Be Considered in Defining a List of
Products Offered by the Community Foundation
– Bundled set of services delivered to customers/donors for a published fee. Note that
similar services offered for similar fees can be bundled together in one product category
(e.g. Donor Advised and Donor Designated Funds)
– Customized set of services delivered to customers/donors for negotiated fees
– Unique set of activities which represents a significant amount of the Foundation’s staff
time, is designed to serve the community or the field, but which may not generate revenue
(such as proactive initiatives or community leadership initiatives)
– Set of funds or activities that need to be separated from another product area because
the foundation is considering a major strategic decision concerning them or because
including them could significantly distort findings. For example, one large fund that
requires significant staff time and customized processes, or donor advised funds advised
by a committee vs. by individual donors)
– Note: Do not include your operating endowment in the list of products. There is a
separate analytical process that accounts for your operating endowment in CF Insights’
methodology
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CF Insights 2012
AGENDA
I. Aligning Fee Structures with Market Realities
II. Activity-Based Costing Methodology
III.Key Questions to Answer and Applying the Findings
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CF Insights 2012
Key Questions
Study Findings Answer a Wide Range of Questions
and Inform Major Strategic and Operating Decisions
Questions Answered
–
How much do the different funds and products we offer really cost?
–
Which products make money for the foundation and which do we subsidize?
–
How do our costs compare with other foundations?
–
Where can we cut back spending while still supporting our mission?
–
In an increasingly competitive market, how does the Foundation best position
itself for sustainability?
Each foundation should determine at the outset how the analysis
can best inform future decision making
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CF Insights 2012
Applying the Findings
Each Foundation Reacts Differently to Findings, But Each Makes
Major Decisions that Impact Its Strategy and Operations
Applying the Findings
– Foundations react to similar results in very different ways based on their mission and values,
history, asset base, and position in the marketplace
– Foundations have made or major changes as a result of the analysis:
• Prioritizing the acquisition of select products
• Reprioritizing or eliminating select products
• Changing fee levels to more appropriately match the cost of service for different products –
both raising and lowering fees, in some cases
• Differentiating fees for donors interested in enhanced services
• Changing policies regarding minimum fund size
• Decreasing customization and increasing standardization
• Examining processes to cut costs and redirect staff effort to the most valuable activities
– The best strategic decisions result not only from an understanding of costs and revenues – but
also from an understanding of the Foundation's mission and a perspective on the external
environment in which the Foundation operates
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CF Insights 2012

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