Activity-Based Costing Analysis Kick-off Presentation

Framing the Analysis Aligning Fee Structures with Market Realities Activity-Based Costing Methodology Key Questions to Answer and Applying the Findings Getting Started and Next Steps © CF Insights 2018

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 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 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 © CF Insights 2018

Alignment Create Value Deliver Value Capture Value Your Business Model Clarifies the Ways You Create, Deliver, and Capture Value and Ideally Aligns With Strategic Goals and Priorities Create Value The product portfolio and activities, e.g. DAFs, Agency, Community Leadership, etc. Deliver Value The operating capacity and cost structure of the organization, which is primarily staff Capture Value The revenue generated to cover the costs, such as administrative fees, distributions from endowments, fundraising, or fee-for-service arrangements © CF Insights 2018

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 Community foundations have generally absorbed the cost of additional services These costs have often been covered on a case-by-case basis through self-administered grants or 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 © CF Insights 2018

Alignment Determinants of Revenue and Costs Vary From Each Other Value of investment portfolio External grants Contributions received Administrative fees Determinants of Cost Donor development Services provided to nonprofits Services provided to financial advisors Community activities Studies, commissions, convenings Many others… © CF Insights 2018

Alignment Different Kinds of Donors Require Different Kinds of Services – The Cost of These Services Is Often Unrelated to Fund Size Less Engaged Donors Want Efficient and Inexpensive Service More Engaged Donors Want Advice and Participation “Money-in, money-out” pass through account with no endowment or minimum balance requirement Self-directed control over how funds are allocated and granted Tax and time-efficient processing of gifts and donor advised grants Prompt and accurate reporting Briefings on issues of interest Advice on grantmaking and local nonprofits Leadership opportunities in priority interest areas Matching funds for their projects Opportunities to come to the table with others working for common goals Participation in setting the agenda for the community © CF Insights 2018

Alignment Traditional Pricing Structures Do Not Reflect the Value That Community Foundations Add for Donors With Differing Needs 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 Considering the difference between the cost to service the funds and the income generated as an investment in building relationships Putting a price tag on foundation expertise and knowledge Determining access to high-cost, 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 © CF Insights 2018

Alignment Sustainability Requires Aligning Revenue Models with Strategies – Through Understanding True Costs and Perceptions of Value Tiered pricing may better align revenue with the costs of service Community foundations have the ability to package services for donors with different service preferences The conversation may also go beyond simply “tiered” Fixed vs. variable 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 © CF Insights 2018

The Case for Activity-Based Costing Analysis Alignment The Case for Activity-Based Costing Analysis ANALYZING YOUR OPERATING MODEL HELPS 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. Proritize 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 © CF Insights 2018

Framing the Analysis Aligning Fee Structures with Market Realities Activity-Based Costing Methodology Key Questions to Answer and Applying the Findings Getting Started and Next Steps © CF Insights 2018

Methodology Activity-Based Costing enables the foundation to better understand the true costs and revenues of its products and services Expense 1 Expense 2 Expense 3 Expense 4 Costs are assigned to activities… Activity 1 Activity 2 Activity 3 …then allocated based on utilization of activities Product 1 Product 2 First, products are identified and defined, then cost data is gathered and traced to specific activities before being allocated to products or services based on their utilization of activities © CF Insights 2018

Methodology 100% of the foundation’s staff costs and other expenses are assigned to a matrix of activities and products Staff Costs Agency Funds Designated Funds Donor Advised Field of Interest Supporting Organizations Scholarships Unrestricted … Acquiring or Establishing a New Fund or Gift $ Sub-activity A Sub-activity B Maintaining Funds Making Grants Providing Non-Grant Services to the Community Other Staff Activities Staff costs are assigned to activities and products based on reported time, weighted by the total compensation by each individual © CF Insights 2018

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 Staff Costs Agency Funds Designated Funds Donor Advised Field of Interest … Acquiring or Establishing a New Fund or Gift $ Sub-activity A Sub-activity B Maintaining Funds Making Grants Providing Non-Grant Services to the Community Other Staff Activities Allocate Indirect Costs such as occupancy and office expenses to activities and products based on the distribution of staff time The complete matrix of products and activities includes staff, direct and indirect costs for each activity and product © CF Insights 2018

Methodology Product Definitions Drive the Activity-Based Costing Analysis IMPORTANT: Before collecting data and beginning the study, senior staff are defining the products that we will look at for the Activity-Based Costing Analysis Some products will be relatively standard fee-based philanthropic vehicles such as: Donor advised funds Designated funds Scholarships Competitive grantmaking funds (Unrestricted and/or Field of Interest) Supporting organizations Other products may be unique large funds, services to nonprofits, or initiatives without any clear associated revenue Community Leadership Special Initiatives Services to nonprofits © CF Insights 2018

Methodology The Following Criteria Are Considered in Defining a List of Products Offered by the Community Foundation Bundled set of services delivered to customers/donors for a published fee. 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 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 © CF Insights 2018

Framing the Analysis Aligning Fee Structures with Market Realities Activity-Based Costing Methodology Key Questions to Answer and Applying the Findings Getting Started and Next Steps © CF Insights 2018

Key Questions Study Findings Answer a Wide Range of Questions and Inform Major Strategic and Operating Decisions How much do our different offerings really cost? Which products make money for the foundation and which do we subsidize? How do our costs compare with other foundations? How do we ensure that we have the right investments in donor engagement and community leadership, operations, etc to maximize impact? 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 © CF Insights 2018

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: Reprioritizing select products Changing fee levels to more appropriately match the cost of service for different products Either raising or lowering fees, in different cases Differentiating fees for donors interested in enhanced services 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. © CF Insights 2018

Framing the Analysis Aligning Fee Structures with Market Realities Activity-Based Costing Methodology Key Questions to Answer and Applying the Findings Getting Started and Next Steps © CF Insights 2018

SHARING KNOWLEDGE. GROWING IMPACT. Questions? cfinsights.org @CFInsights cfinsights.org @CFInsights David Rosado Member Services Manager (212) 807-2430 dar@foundationcenter.org SHARING KNOWLEDGE. GROWING IMPACT. © CF Insights 2018