1. Activity-Based Costing Analysis Kick-off Presentation

2. 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

3. 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

4. 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

5. 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

6. 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

7. 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

8. 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

9. 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

10. 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

11. 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

12. 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

13. 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

14. 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

15. 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

16. 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

17. 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

18. 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

19. 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

20. 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

21. SHARING KNOWLEDGE. GROWING IMPACT.
Questions?
David Rosado
Member Services Manager
(212)
SHARING KNOWLEDGE. GROWING IMPACT.
© CF Insights 2018