1. Activity-Based Costing Analysis
SHARING KNOWLEDGE. GROWING IMPACT.
Activity-Based Costing Analysis
Kick-off Presentation
cfinsights.org

2. Aligning Fee Structures with Market Realities
Activity-Based Costing Methodology
Key Questions to Answer and Applying the Findings
CF Insights 2012

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 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 3
CF Insights 2012

4. 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 4
CF Insights 2012

5. Determinants of Revenue Are Not Aligned with Determinants of Cost
Alignment
Determinants of Revenue Are Not Aligned with Determinants of Cost
Determinants of Revenue
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 ? 5
CF Insights 2012

6. Different Kinds of Donors Require Different Kinds of Services –
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
Different donor needs translate into different Foundation activities and costs 6
CF Insights 2012

7. Traditional Pricing Structures Do Not Reflect the Value That
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
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 7
CF Insights 2012

8. New models must be designed to match the changing marketplace
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 8
CF Insights 2012

9. Sustainability Requires Aligning Revenue Models with Strategies –
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 9
CF Insights 2012

10. The Case for Activity-Based Costing Analysis
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 10
CF Insights 2012

11. Aligning Fee Structures with Market Realities
Activity-Based Costing Methodology
Key Questions to Answer and Applying the Findings
CF Insights 2012

12. 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 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
CF Insights 2012

13. 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%
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
CF Insights 2012

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 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
CF Insights 2012

15. Product Definitions Drive the Activity-Based Costing Analysis
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:
Donor advised funds
Designated funds
Scholarships
Competitive grantmaking funds (Unrestricted and/or Field Of Interest)
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 15
CF Insights 2012

16. 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 16
CF Insights 2012

17. Aligning Fee Structures with Market Realities
Activity-Based Costing Methodology
Key Questions to Answer and Applying the Findings
CF Insights 2012

18. 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
CF Insights 2012

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:
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 19
CF Insights 2012