1. Developing New Community Foundation Cost and Revenue Models Prepared for XYZ Community Foundation Date
Foundation Strategy Group, LLC
20 Park Plaza, Suite California Street
Boston, MA San Francisco, CA
Tel: Tel: Fax: (effective 10/15/02)

2. Agenda Aligning Fee Structures with New Market Realities
Activities and Timeline
Key Questions to Answer

3. 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

4. Operating Budgets Are No Longer Able to Absorb the Cost of Continually Expanding Services
Times have changed
The early community foundation model is based on fee structures established by bank trust departments, who never envisioned the range of services community foundations perform today
The traditional fee structure – an annual fee based on a percentage of assets – was never intended to support today’s expanded range of services
There is a growing mismatch between services and fee structures
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

5. Determinants of Revenue Are Not Aligned with Determinants of Cost
Value of investment portfolio
Contributions received
Interest rate on float
Stock dividends and bond income
Grants from other foundations ?
Determinants of Cost
Donor development
Grant review and evaluation
Services provided to donors
Services provided to nonprofits
Services provided to financial advisors
Community activities
Studies, commissions, convenings
Publications & website ?

6. 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
Different donor needs translate into different Foundation activities and costs
Source: FSG Interviews with Community Foundations

7. 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
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

8. New models must be designed to match the changing marketplace
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

9. New strategies require new revenue models
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

10. Agenda Aligning Fee Structures with New Market Realities
Activities and Timeline
Key Questions to Answer

11. Activity Based Costing Will Enable the Foundation To Better Understand the True Cost of Products and Services
Activity Based Costing (ABC) allows organizations to determine the actual cost associated with each product or service regardless of organizational structure
Rather than considering volume alone (i.e., number of donor advised funds) ABC takes into account non-volume related characteristics such as set-up costs and uneven allocations of administrative overhead
First activities are identified and defined, then cost data is gathered and traced to activities, finally costs are allocated to products or services based on their utilization of activities
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

12. 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%
Activity B
Activity C
Activity D
Activity E
Activity F
Activity G
Activity H
Activity I
Total
Staff costs are assigned to activities and products based on reported time, weighted by individual salaries and including taxes and benefits

13. 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 Activity Survey
Product 1
Product 2
Product 3
Product 4
Product 5
Product 6
Product 7
Product 8
Activity A $Y
Activity B
Activity C
Activity D
Activity E
Activity F
Activity G
Activity H
Activity I
Total
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
Note: Some allocation approaches will assign minor costs to all products

14. Timeline Work Steps Define analytical path Discuss data requests
Week 1
Week 2
Week 2
Week 3
Week 4
Week 5
Week 6
Week 7
Week 8
Week 9
Week 10
Week 11
Week 12
Work Steps
Define analytical path
Discuss data requests
Discuss workplans
Receive foundation data (e.g., budgets, grants and donor databases)
Map foundation activities to survey matrix
Schedule staff survey
Survey staff about activities using common time/task survey
Perform analysis
Review data with finance staff to ensure accuracy
Review initial results and implications with staff
Draft recommendations based on analysis
Prepare final presentation
Compare to other foundations
Ongoing
= Foundation Visit
= Final Meeting

15. Agenda Aligning Fee Structures with New Market Realities
Timeline and Activities
Key Questions to Answer

16. The Cost Accounting Analysis Will Answer a Number of Key Questions to Inform Strategic Planning and the Alignment of a New Revenue Model
Initial Questions Outlined in the Proposal
Which activities make a positive contribution and which are cross subsidized?
What size donor advised fund is needed to break even?
What is the development cost associated with gaining a new fund?
How much do we spend to make a grant?
How much are we spending on activities that promote philanthropy and create value for our community?
What questions are most important for the XYZ Community Foundation?
How can the cost analysis best inform future strategic decision making?