While the holiday season often puts people in a charitable mood, Steve Froehlich is already bracing for the inevitable by the time October rolls around. As senior director of direct response at the American Society for the Prevention of Cruelty to Animals (ASPCA), Froehlich knows that donors may understand the cause they’re funding, but many don’t understand how those funds are allocated. Each year, he says, he’s confronted with family members who ask, “How much of each dollar really goes to the actual programs?” It’s a question that many nonprofits struggle to answer.
In December 2007, the Nonprofit and Voluntary Sector Quarterly published a report titled, “An Investigation of Fraud in Nonprofit Organizations,” cataloguing malfeasance that amounted to billions of dollars each year. In response, the authors advocated certain strategies, including the urging of “governing boards…to consider important controls in addition to the annual financial statement audit.” According to a report by the The New York Times, the authors—four United States–based university professors specializing in nonprofit accounting—determined that fraud impacts all organizations (i.e., nonprofits, for-profit companies, and government agencies), generating an average revenue loss of 6 percent annually. For the nonprofit sector, which reported donations of $665 billion in the year 2006 alone, that translates into approximately $40 billion.
Three weeks later, the Internal Revenue Service (IRS) issued a redesign for its Form 990, which public charities and other tax-exempt organizations are required to file. The IRS Web site states that the redesign was aimed at “enhancing transparency, promoting tax compliance, and minimizing the burden on the filing organization.” One change, according to the Times, was a question explicitly asking whether an organization had experienced theft, embezzlement, or other forms of fraud that year. Moreover, nonprofits had to disclose the share of donations spent on overhead. The metric—intended to gauge relative effectiveness with donor money—has been credited with helping reveal inefficiencies, but has taken on such weight that it often stifles technology initiatives that might otherwise benefit an organization’s cause. (See “Mistaken Metrics,” October 2009, for more on the havoc wreaked by a poorly applied yardstick.)
No Money, Big Problems
There are more than 1.5 million registered U.S. nonprofits, according to the National Center for Charitable Statistics. More than 80 percent collect less than $100,000 each year, so even without fraud, most are already struggling to support their missions long before they have to consider their technology options. Laura Quinn, founder and executive director at nonprofit-software research firm Idealware, says many nonprofits accumulate free or low-cost tools regardless of relevance, as opposed to measuring each tool’s potential return on investment (ROI). “They’re simply saying, ‘Free is better.’”
Resource insufficiency is an obstacle regardless of your outfit’s tax status. Nonprofits, however, bear the inherent burden of their very nature. “In the for-profit sector, you might study how supply chain management works,” says Keith Heller, principal and chief executive officer at Heller Consulting, which specializes in nonprofit software and corporate alignment. “In the nonprofit sector, you don’t study how successfully a nonprofit runs its operations.”
An article in the Stanford Social Innovation Review underscored some of the sector’s unfortunate behaviors. According to the article, “The Nonprofit Starvation Cycle,” nonprofits exhibit a “chicken-and-egg–like quality that makes it hard to determine where the dysfunction really begins.” The cycle typically starts with the unrealistic expectations of funders—or what the ASPCA’s Froehlich ironically calls “the charity watchdogs.” Pressured by the need to secure funding, nonprofits strive to conform to these expectations, an effort that often depresses spending on infrastructure. Antiquated systems lead to subpar performance, which only serves to intensify the oversight.
“People don’t want nonprofits spending more than 10 percent on administrative costs and overhead,” says Steve Williams, director of global technology donations at software giant SAP. “That hamstrings organizations. Imagine if SAP spent a maximum of 10 percent on salary, travel, training, technology, [and] computers; and yet, we expect nonprofits to spend [according to] that mentality.”
The Better Business Bureau’s Wise Giving Alliance (last updated in 2003) states that at least 65 percent of expenditures should go to program activities; its 2001 survey of donors, however, showed more than half of Americans expected nonprofits to spend no more than 20 percent on overhead. The pressure is palpable: The authors of the Stanford Social Innovation Review article, Ann Goggins Gregory, director of knowledge management at nonprofit consultancy The Bridgespan Group, and Don Howard, a Bridgespan partner, found that the nonprofits they examined had erroneously reported overhead costs of between 13 percent and 22 percent. In fact, overhead costs at the organizations actually ran between 17 percent and 35 percent.
“We’re efficient, but we’re efficient in crazy ways,” says Holly Ross, executive director at The Nonprofit Technology Network. “We’ve got to make every roll of Scotch tape last as long as possible, but [nonprofits are averse to] investing in technology that may build efficiencies over time…. The initial investment looks like such a big hit on their overhead that [nonprofits] are unwilling to make it.”
Froehlich recalls one instance in which an organization had a plan that would deliver a fivefold return over five years by engaging donors in smaller amounts of recurring monthly donations. The nonprofit, however, didn’t have the luxury of waiting for the development of an autopayment system, and had to sacrifice the long-term vision to meet short-term fundraising goals.
The Catch-22 is this: Beholden to funders and regulated on expenditures, nonprofits need proof that any solution will be worth the investment, but with too few use cases in the industry, the necessary evidence is often sorely lacking.
In lieu of understanding the business side of running a nonprofit, Heller says organizations are “substituting that education with passion and devotion to the cause.” Take Jesse Kelsey, for example. A development associate for the California-based Insight Center for Community Economic Development, Kelsey says he was drawn away from a gig at a for-profit startup by what he calls the “mission-driven ethos of nonprofits.” The appeal often centers on the organization’s lofty goals; those who enter the space rarely come into the position thinking about how technology and operations will generate efficiencies.
Effectiveness and productivity may be corporate jargon—but they’re principles at the core of successful nonprofits as well. Heller says people who are attracted to operations and technology may find more opportunities in the for-profit sector. But, he adds, those who are simultaneously interested in business best practices and serving a cause often find themselves much in demand among nonprofits.
What often happens is the elevation of what Quinn calls “The Accidental Techie”—the individual who’s able to fix the printer when it gets jammed, and suddenly becomes responsible for every technology decision the organization has to make. It’s a turn of events that’s painfully common in a world where a 10-to-20-employee organization is considered medium-sized. Quinn says that’s where Idealware comes in: helping small and midsize organizations make software decisions by reviewing solutions and providing advice about which technology best fits their needs.
And yet, as a nonprofit itself, Idealware is in an unusual position: promoting technology in an industry where technology investments are often secondary to the mission. “I don’t think many people would argue that it’s critical to have effective software,” Quinn says. “They just might [put] more or less emphasis on how critical it is.” The nature of that emphasis, she says, often depends on the source of an organization’s funding—some foundations and donors provide infrastructure themselves, simply by increasing capacity; others provide funds explicitly earmarked for training to help grantees.
Quinn points to certain funders—such as The Annie E. Casey Foundation, the W.K. Kellogg Foundation, The Robert Wood Johnson Foundation, and the Hewlett Foundation—that provide training and support to their grantees. Preferring an alternative approach, Quinn says, Idealware launched its Research Fund campaign last December to raise money to capitalize on popular technology trends, such as online payments, mobile text messaging, and constituent databases. The effort, she says, supports “efficiency and effectiveness of all nonprofits…as opposed to funding a single organization’s CRM implementation.”
CRM Without Technology
“What’s really fascinating—and, truthfully, heartening—about nonprofits,” Heller says, “is [that] when they sit down to spend a dollar, they look at where they can spend that dollar instead of [on] technology.” A sense of guilt is present when any activity diverts a dollar away from the mission. Planning for the future means someone isn’t being helped today.
“Nonprofits need to almost be better than corporations at CRM,” says Matt McCabe, vice president of community at Orange Leap, a provider of on-demand constituent and donation management. While many businesses champion the notion of building long-term customer relationships, results are still very much measured in terms of direct transactions.
Nonprofits, on the other hand, aren’t necessarily selling a product or service that can be measured quantitatively. “There’s an emotional ROI [for the donors],” McCabe says. The gift itself is the donor’s reward, but it’s the responsibility of the nonprofit to confirm for donors the choice they made.
“In every other sector, people are getting something back in return,” Froehlich says. “We need to convince donors that giving a voluntary donation to us is the most cost-effective way for them to make a difference on an advocacy issue they care about.”
Understanding constituents is critical to capturing their interests, especially when the spectrum is so varied. (See “Personalizing the Plea.") As with any segmentation strategy, each type of donor—new donors, continuing donors, key donors, midlevel donors, lapsed donors, reactivated donors—requires a unique approach.
Instead of requiring that someone periodically query the system for potential contacts, a good CRM system can trigger a donor notification when, say, six months have passed since a prior gift. (Any longer, McCabe says, is at the cusp of losing the donor altogether.)
Donors only represent a subset of the groups nonprofits have to maintain relations with. Tad Druart, director of corporate communications at Convio, recalls working with a Humane Society group that had separate databases for volunteers, veterinarians, donors, major gifts, and vendors. Cross-marketing opportunities were essentially impossible with information in siloed databases, he says. With unified data, nonprofits can better identify relationships between those in need to provide better quality services and manage programs more effectively. Using Convio’s Common Ground solution, for example, Druart says the Humane Society group was able to identify key volunteers who also had made donations and even adopted a number of pets.
Heather Hill had no nonprofit experience when she became vice president of marketing and communications for the Special Olympics 2009 World Winter Games. “I approached it as if we were not a nonprofit,” recalls Hill, who is also the founder of marketing consultancy H2 Brandworks. Instead of the nonprofit world’s typical solicitation style, Hill has been trying to advocate more-creative—and potentially more-successful—options, such as cobranding opportunities or requesting ad-space donations.
Bringing in Technology
Chris Sarette is the vice president of business operations at Invisible Children, a nonprofit organization that creates documentaries capturing the war-torn lives of children in east Africa. He says he never intended to work for a nonprofit—until, just before finishing graduate school, an Invisible Children documentary changed his life. “I had to do as much as I could to help the cause,” he recalls, and a volunteer position at the organization eventually became full-time, working to promote change in Uganda.
Up until the summer of 2008, Invisible Children seemed to be, well, the poster child for dilapidated nonprofit processes. Data was stored in disparate locations—Microsoft Excel documents, Microsoft Outlook, Post-it notes.
“[Finding a solution] was something we talked about for years,” Sarette says, “but it was always the last priority when you have this mandate to do great things in the world.” The irony, Sarette points out, is that with all its work in documentary filmmaking, Invisible Children considers itself progressive in its use of technology and media. But data management was never at the top of the organization’s list. It wasn’t until partner outfit Better World Books began seeing success with its own CRM deployment—a software-as-a-service (SaaS) solution from Salesforce.com—that Invisible Children finally took the plunge.
The jump was made somewhat less daunting thanks to the CRM vendor’s Salesforce.com Foundation. Begun shortly after the company’s groundbreaking debut in 1999—see the November 2009 issue of CRM for an in-depth look at its successes—the foundation is powered by the “1/1/1 model” established by Marc Benioff, Salesforce.com’s cofounder, chairman, and chief executive officer: One percent of employee time spent volunteering; 1 percent product donations in the form of 10 free licenses for any qualifying nonprofit (and an 80 percent discount for additional licenses); and 1 percent of founding equity for grants supporting youth programs, technology innovation, and employee-inspired projects.
Salesforce.com isn’t the only CRM vendor to donate licenses to the nonprofit sector, and these donations have opened a window for many organizations to aspire to enterprise-level initiatives. (See the sidebar, “Keeping Up with the [For-Profit] Joneses,” for a comparison, and see http://sn.im/feb10-issue for an online-only reference chart of CRM vendors.) Perhaps the most-revolutionary factor, however, is the SaaS model itself.
Keith Heller, for one, says SaaS makes a “substantive difference” in the success of Heller Consulting’s clients. And at software provider Convio, where the client base is 99.5 percent nonprofits, Chief Executive Officer Gene Austin credits the company’s SaaS delivery model as one of the main reasons that, of Forbes magazine’s 50 largest nonprofits (based on revenue), 30 have adopted Convio’s solution. “They don’t want to spend money on maintaining technology,” he says. “They want to spend it on constituents.”
Austin says that, when he became CEO back in 2003, the nonprofit sector was a technological backwater still learning the Internet. At that time, barely two out of 10 nonprofits were accepting donations online, and most didn’t feel donors wanted to engage through email and online marketing channels. Now, Austin is educating nonprofits on SaaS.
Even with SaaS, however, rarely is the solution ever as simple as solution vendors make it out to be. “There’s no such thing as free, no such thing as fast,” Heller says. “You have to plan ahead even if the system is free and instantly available.” In other words, nonprofits still need to have an infrastructure-planning process, and that often requires that they hire consultants to get the software up and running.
James Bullard, director of information technology at TransFair USA, an organization that promotes equitable trade, has been involved in nonprofit technology for the past 20 years. The hardest part of the job, which is also 80 percent of the work, he says, is defining existing business processes, enduring endless meetings, drawing up diagrams, and establishing policies, procedures, and reports. Once that’s set, he says, the actual implementation and customization is easy.
Salesforce.com is among those hoping to ease the challenges of getting started. In December 2008, the company released a Nonprofit Starter Pack offering five functionalities key to the sector—such as contacts and organizations, households, and relationships—that can be installed jointly or separately. Yet even when the licenses are free, says Steve Wright, director of innovation and technology at Salesforce.com Foundation, the company is “very aggressive about saying there’s a cost involved…. We think we’ve got a tool that will allow [nonprofits] to scale quickly with very good [ROI], but you have to invest in the operations of your organization.”
Personalizing the Plea
Segmentation and direct marketing can improve results, even within a motivated constituency.
steve Froehlich says he doesn’t mean to sound bitter, but he still can’t help feeling a tinge of envy when he reads about the marketing successes of for-profit companies. At least in the marketing space, he says, it was nonprofits, most notably child-welfare organizations, that made direct response an acceptable medium in the first place.
As the senior director of direct response at the American Society for the Prevention of Cruelty to Animals (ASPCA), Froehlich recalls that the first years of the 21st century were largely devoted to the basic recency/frequency/monetary (RFM) model of direct marketing. While the model helped increase efficiencies, he’s seen increased use of CRM strategies to create a more sophisticated donor profile. To Froehlich, CRM isn’t about the technology. “You could have all the technology or no technology at all and still put a CRM-based approach together,” he says. Everything his team does is focused around gaining a deeper understanding of the customer.
Personalized address labels are a commonly used marketing strategy in the nonprofit world, but despite its high response rate, the medium is expensive and rarely leads to long-term donors. Looking at its database, the ASPCA found that one segment in particular was highly motivated by the labels: the 10 percent who had recently moved. “These people don’t already have a closet full of labels,” Froehlich says, which incrementally increased the chances they’d open the ASPCA’s package.
Because the rest of the mailing list received less expensive materials, the premium mailing became more cost-effective, even though response rates were the same for both segments. Reducing the number of premium mailings, Froehlich says, enabled the ASPCA to save a significant amount of money that could be better spent elsewhere.