The 21st Century Nonprofit: Remaking the Organization in the Post-Government Era

by Paul B. Firstenberg

What follows are slightly abridged versions of chapters 1 and 2. For remaining chapters see Contents.

INTRODUCTION

Many of our institutions public and private, domestic and international have been severely strained in accommodating the economic and social changes that have taken place since World War II. To cite just one example of this change: Financial markets are no longer places, to quote from George Shultz, but electronic networks. The concept of fixed exchange rates as one foundation of international economic stability, as envisioned in the Bretton Woods Treaty of 1944, has been overtaken by the enormous volume of currencies that the private market can move anywhere in the world at the flick of a switch. Money now moves electronically at such speed and in such volumes that even the combined power of the world's strongest central banks cannot control the flow by intervening in the currency markets. Fixed exchange rates have become anachronisms, and rates are now determined daily by the global markets' perception of the relative values of national currencies. The market has thus displaced government as the arbiter of exchange values, with a profound impact on international as well as domestic economic policies. As a result, our government and other governments are often caught between the conflicting demands of two distinct markets - the global money market and domestic political constituencies.

The visible straining of our political, economic, and judicial institutions to cope with a new world has undoubtedly been a prime factor in changing our perception of government's efficacy and the role it ought to play in our lives. This, in turn, has led to one of the greatest changes we have experienced in the latter half of this century. For decades, starting with FDR's New Deal, we perceived government, especially at the federal level, as the source of the remedial actions and policies required to keep our society economically and socially healthy and to execute our post-World War II assumption of world leadership in foreign affairs. By the mid-1990s, we appeared to be in the midst of a counterrevolution designed to minimize radically the federal role.

Where Will the New Ideas Come From?

Finding sources of effective new ideas is one of the primary challenges of this era. One of the driving forces behind the fervor to scale back the size of government is a profound skepticism that the new ideas for governing America can best be developed in the public sector. The question is, then, where do we turn for such new ideas and a political framework for their implementation?

Today's government at all levels is constrained in its ability to innovate by the following factors:

• The power of lobbyists for interests with a stake in any change in the existing scheme, coupled with the increased dependence of candidates for elective office on wealthy contributors and political action committees established by wealthy interests (largely to get around the limitation on individual contributions to candidates)

• The overlapping jurisdictions and consequent turf wars within government, whose basic organizational structure is inherited from an earlier time (since change in government is dealt with not by eliminating obsolete agencies but by overlaying new bureaucracies on top of existing ones)

• Civil service requirements that tend to protect mediocre government servants from discipline, reinforced by the unionization of government workers and low pay scales (all of which discourages the hiring of lively, risk-taking public servants)

• Conflicts between administrations and partisan, politically divided legislatures, along with erosion in party discipline, and the multiple political constituencies that have to be satisfied.

All these factors mitigate against effective innovation by government.

The limitations on government's and the major political parties' capacity to engineer the policy changes required by a new America make it tempting to look to the tax-exempt charitable sector, universities, research institutes, foundations, and other exempt organizations, as an increasingly important source of new ideas. The continual growth of the charitable sector, its diverse achievements, its role as an outlet for individuals' sense of altruism and civic responsibility, and the very form of such exempt organizations are all factors encouraging the belief that the sector can play an increasingly important role as an agent of change.

Downsizing: Activity-Based Cost Reduction

At one time or another, most organizations confront a potential gap between revenues and expenses and are forced to cut back their expenditures in order to restore financial equilibrium. The causes of such a situation can be quite varied. Frequently, senior management, lulled by good times or inertia, allows more and more additions to the budget. Soon, the buildup of expenditures starts to exceed the normal rate of increase in revenues. The inevitable crunch will be worsened if, at the same time, revenue growth slows, sometimes for reasons beyond the organization's control (e.g., because a funding source reduces its support, or because a downturn in the economy adversely affects the flow of contributions). On occasion, some unforeseen adversity (e.g., severe storm damage to a university's campus buildings) strikes either the expenditure or the revenue side of the budget. Even endowed institutions such as foundations may encounter a period during which the securities markets take a nosedive and the total return from investments falls significantly.

Few institutions are wealthy enough to ride out such periods by allowing their capital to absorb operating losses. Since it is often hard to predict how long a period of adversity or disequilibrium may last, the prudent course is either to find new sources of revenue or to scale back expenditures lest the organization find itself in a deep financial hole from which it cannot easily dig itself out.

Unfortunately, organizations often look for cost-cutting measures only after experiencing (in the case of a business) a sharp fall-off in profits, or (in the case of a nonprofit) a looming budget deficit. Such hasty measures are born of an urge to slash expenses and shore up the bottom line or balance the budget as quickly as possible. This can be a costly mistake, for how one goes about curtailing expenditure growth will have a powerful effect on the future character and strength of the enterprise.

Cutting costs in a time of contraction demands as much strategic thinking and careful implementation as the building of new programs in a time of expansion. Examining the "value added" of each activity in an organization, relative to the costs of implementing the activity, is a method of systematically establishing the positive or negative value of each activity in an organization.

The test of an activity's value is whether the organization would be hurt in its ability to carry out its mission effectively especially relative to other organizations in the same field and whether its long-term financial strength would be undermined if an activity or function were eliminated. If the answer is no, the decision to eliminate the function is easy. If the function does contribute significantly to the programmatic or financial strength of the organization, then one needs to determine whether its value is worth its cost. For instance, if the budget is in the red, can one eliminate or reduce in size the department that evaluates whether programs achieve their aims? Is it possible to cut back the staff that supports volunteers or creates programs for alumni without hurting the organization's fundraising?

As a rule, the tasks with the least value added should be the first to be scaled back or eliminated. The idea is to anchor a cost-reduction program in the curtailment of the lowest-value-added work, and then to cut staff to reflect the reduced work load, rather than first eliminating people and leaving the surviving staff members to figure out how to get the work done.

Traditional accounting systems break down expenses by category: salaries, fringe benefits, supplies, and fixed costs. In contrast, activity-based accounting views an organization as groups of individuals performing a wide variety of specific activities. Under this system, costs are allocated to what the entity pays for the different tasks its employees perform to produce the product. This process can also be used to identify opportunities for outsourcing functions, or to pinpoint functions that can be redesigned for increased productivity.

In the case of service organizations, where personnel costs make up the bulk of expenditures, activity-based cost reduction is likely to be a much more productive approach than simply slashing the costs of various units. Any extensive cost-containment program within such organizations invariably means reducing staff size. Cutting people from a payroll is very different from curtailing capital outlays, reducing inventories, or slashing advertising and promotion budgets.

The turmoil associated with layoffs harms the survivors of the enterprise as well as the people who lose their jobs. Managers will resist such staff cuts if they perceive that the reductions will undermine their ability to get the job done. Unless specific tasks are eliminated first, cutting personnel will leave a unit facing the same work load with a smaller staff, an unappealing prospect for any manager.

Three Principles of Cost Reduction

Any cost-reduction program must address how the organization is going to maintain the quality of its products or services once expenditures and staff are reduced. Often, top managers simply give up on identifying specific reductions and dictate that each of their subordinates reduce expenditures — meaning any form of expenditure — by a certain percentage or dollar amount. This "blunt instrument" approach fails to meet three principles that should be inherent in any sound cost-reduction program:

1. The cost-reduction program should serve as a method of restructuring and strengthening the enterprise competitively; at a minimum, it should avoid damaging the organization strategically over the long term.

2. The savings identified should be realizable and sustainable over time.

3. The savings should be sufficient to achieve its financial objective, so that everyone is not soon forced to try to cut expenses even further.

Before scaling back the budget of an organization that is on shaky ground, one needs to give careful thought to the feasibility of reassembling the scarcest resource — talented people who work well together. It may prove wise to underwrite a part of the organization during the down cycle, even at the expense of short-term budget deficits, especially if the employees involved are versatile and, given time and training, may be able to adapt their talents to new work within the organization.

In activity-based cost-reduction analysis, here is what each unit or department is asked to do:

• Identify objectives in order to establish a set of priorities against which to evaluate its activities, staffing levels, and expenditures.

• Break down its staffing and expenditures according to the specific tasks performed by the unit, and then evaluate the importance of such tasks to achievement of the unit's short-term goals. This comparison of the cost of a task to its value is what determines the task's "value added."

• Consider the potential impact of various possible levels of resource availability on the nature and amount of work the unit can perform. This involves detailing what tasks would be curtailed or eliminated if expenditures were reduced by various amounts (e.g., 5 percent, 10 percent) and the consequences of such cuts.

Making Reductions Stick

Regardless of the process adopted for cutting expenditures, certain principles must be followed if cost reduction is to be effective:

• The organization's top executive must establish a specific dollar level of reduction.

• A system must be established to monitor whether promised cost-saving actions are in fact taken.

• Because an organization will invariably capture fewer than all promised expense reductions, the target established for savings must be higher than necessary to achieve the desired financial goal.

• Organizational unit heads must be held accountable by the CEO for achieving the savings target established for their unit.

• Future proposals to add to expenditures must be separately flagged in the unit's budget submission and must be subject to the value-added test that was applied during the cost-reduction process. The object is to avoid "expense creep," whereby the expenditure level set during a period of financial stringency is unknowingly allowed to creep back to pre-reduction or even higher levels. The idea is to put the executive spotlight on any proposed increases from the baseline of expenditures produced as a result of the cost-reduction program.

The Merger Option

Nonprofit organizations might combine for one of the following reasons:

• To consolidate their fundraising programs and to gain efficiencies in administration, or to broaden their joint appeal beyond the reach of either individual enterprise. The goal would be to increase the net take from fundraising through cost reduction or increasing revenue.

• To bring together two organizations operating in the same market, where the market is not large enough to support both institutions (e.g., two hospitals serve the same community), or to avoid duplication of services (e.g., both hospitals build expensive oncology services).

• To expand the resulting organization vertically in order to capture revenues in an allied market by broadening its customer base (e.g., a hospital acquires a nursing home or a health maintenance organization).

• To combine the publicly recognized reputation of one nonprofit with revenue-generating capabilities of a less well known organization (e.g., a television production company with a powerful brand name in the children's market but no computer product combines with a computer software company that has outstanding software programmers but little brand recognition).

• To enable a small organization that is struggling to raise enough funds to support its program, to merge with a larger, more financially stable organization. The two organizations have complementary programs, but the smaller entity operates in a market where the larger enterprise is not present. The larger organization wants a presence in this market, and its entry is eased by capitalizing on the smaller organization's contacts and relationships. In exchange, the larger organization can raise for the smaller entity's programs additional grant funds that the latter lacks the managerial depth to acquire.

• To expand an organization's field of service by acquiring the staff, programs, and funding relationships of an organization in an allied field with the expectation that the insight gained from participation in related activities will enhance the quality of performance of both entities. In effect, their merger will produce a synergy in the programming area (e.g., an organization dedicated to assisting troubled adolescent women combines with an organization serving troubled adolescent men).

If a merger of two nonprofit organizations is to work, a number of things have to be done well:

• Both organizations must think through in advance the strategic, financial, and managerial costs and benefits and must have a clear idea of how the combined entity is going to perform more effectively and efficiently than the separate enterprises.

• The management structure of the combined enterprises must be resolved quickly, diligently, and decisively. Peoples' minds will not be on business while they are waiting to see what job they get or whether they will have a job at all in the combined enterprise. Power struggles, as factions and individuals contest for positions, are counterproductive.

• Both parties must have a good sense, before they merge, of the differences in their respective organizational cultures, whether the two staffs can co-exist, and, if so, how to blend them. Unless the cultures are blended, it is unlikely that the two organizations will operate effectively as one enterprise.

• The new senior management must move quickly to meld the two companies at every level, including operations,management, and culture. Unless the combining of the two organizations is done rapidly, not only will performance be undermined during the delay, but employees who feel their interests threatened by the merger may solidify practices that undermine the bringing about of an effective consolidation.

One of the frequent barriers to blending two management teams is figuring out the pecking order of officials in the new entity. Here, a small team of board members from both organizations may be helpful in resolving conflicts, or an outside management consulting firm can be brought in to provide advice. It is best to determine the composition of the board and the CEO of the new enterprise prior to the merger.

Since a nonprofit is not a stock company, it has no shares to exchange in a merger. (This also means that there can not be an unfriendly takeover of a nonprofit through the acquisition of publicly traded shares.) To effect a merger, the trustees of both organizations have to agree to it, and they have to obtain the approval of the state attorney general (the government office involved in general supervision of charities). It is also prudent to contact the IRS in order to ensure that there are no objections from a federal tax standpoint and that the merged organization, as a new legal entity, will receive the same 501(c)(3) tax status as the predecessor organization did.

PERFORMANCE MANAGEMENT

Performance Management Defined

The term performance management describes the set of processes for controlling the quality and cost with which programs are delivered. The essence of performance management has a number of elements:

• Identifying up front, in the preprogramming phase, in measurable form, the objectives an organization intends to achieve, or, where objectives cannot be quantified, identifying the specific tasks to be accomplished;

• Establishing a budget for achieving these objectives and tasks, and an action plan that enumerates the steps that have to be taken by each unit within the organization, including a timetable for accomplishing these steps;

• Tracking actual progress in implementing programs against the action plan and the budget adopted at the outset; and

• Comparing actual costs, timetable, and results with those set forth at the outset, and, whenever possible, with similar programs mounted by other organizations.

Why Performance Management?

Performance management provides a reasonably objective basis for assessing how well an organization is accomplishing the mission it has defined for itself. Equally important, it also provides a clear sense of direction to the staff as to exactly what is to be done, when.

Measuring Performance

Of course, not every activity can be measured in quantitative terms. This is also true in business. The point is to measure in objective terms what can be quantified and to obtain qualitative information about other tasks. For instance, an organization may have the goal of improving the lives of young women who grow up in poverty. This goal is a compelling one but it does not lend itself to quantification. However, when the broad goal is broken down into specific objectives, as it must be to create concrete programs, those specific objectives can be quantified. For instance, one objective might be to reduce by a specified percentage the rate of pregnancy among teenage women who participate in the organization's program in a target community, relative to the rate of pregnancy among teenagers who do not join. The extent to which this specific objective is accomplished and the cost of doing so can be calculated and compared to the cost to society of dealing with teenagers who give birth. This comparative cost analysis can be factored into an overall evaluation of the program's effectiveness and efficiency.

An organization's performance can also be compared with the performance of organizations that undertake similar tasks and are considered to employ the "best practices" in the field. In business, it is taken for granted that leadership over one's competitors in a given field is the name of the game. Leadership and the reputation that go with it are important in the nonprofit sector as well. The sector is engaged in competition for funding, for talent, for community support. How an organization performs relative to its "competitors" is therefore relevant. The competition among colleges and universities has long been an acknowledged fact. U.S. News & World Report's annual best colleges survey and Business Week's annual survey of the "best" business schools have capitalized on this reality, and these magazines' rankings of schools have an impact on the market. Other types of nonprofits must deal with the same reality.

Moreover, competitive considerations aside, one of the most effective ways to improve performance is to understand how others who are thought to be outstanding performers accomplish their goals. By comparing the degree to which specific measurable objectives are achieved, and the costs associated with achieving them, one can assess the degree to which another organization is more successful and/or cost-efficient in achieving its objectives. Moreover, the most important aspect of the comparison is not the comparison of numbers; rather, it is the inquiry into what specific actions of the other organization account for its superior performance.

The Specific Elements of Performance Management

Below is an overview of the principal components of performance management and a discussion of how each part is interrelated with other components of the process. The terminology and detailed pattern of actions set forth here are not intended to imply that there is only one perfect formula. Indeed, each organization should adopt a process that suits its needs, taking into account the resources it has available for this purpose as well as the training and experience of those who will be involved in doing the work.

A system of performance management can be viewed as involving six steps:

1. Identify goals and objectives. As part of a planning process prior to the start of a program, identify the goals of the program and the specific objectives that will achieve those goals. Goals are an intended result of the project or program as a whole; they are broad and general. Objectives are a specific measurable and time-limited result of an activity designed to bring about the goal or goals of the program. Staff members as well as selected outsiders should participate in the goal- and objective-setting process.

2. Formulate action plans. Assign the specific goals and objectives to the component units of the organization best suited to effect them. Then ask each unit to come up with an action plan consisting of (a) the specific steps required to achieve each assigned objective, including obstacles to be overcome and the extent to which the authorization, cooperation, or support of others is necessary, (b) identifying the person or persons responsible for accomplishing each task, and (c) a timetable for accomplishing the objectives and the sources of the funds required. The action plan should be submitted to senior management for review and discussion with staff members and should receive a final blessing from both groups before the program is implemented.

3. Identify advanced management practices in the field. In setting goals and objectives, and in designing an action plan to achieve them, examine, to the extent feasible, what other organizations have been able to accomplish with similar programs, and especially how they were able to accomplish what they did. As I noted earlier, in business, this practice is known as benchmarking. This exercise is by no means limited to discovering what measurable results other organizations have achieved in similar programs, although that information is worth having in setting your own standards. The most important function of the exercise is to understand the managerial and operational practices that enable outstanding organizations to achieve the results they do. The focus of comparison can be any aspect of your organization's activities that you believe can be improved, even a part of a program. For example, one organization may be renowned for making effective use of volunteers; another organization may be skilled in setting performance objectives for its staff members; a third organization may have a model budgeting process, and a fourth an outstanding strategy for using its management information system to shape its program practices. There is no point in reinventing the wheel if one can simply emulate or even improve on an established practice of another organization.

4. Identify necessary data. Identify in advance the data that will have to be collected and collated to enable an evaluation of the extent to which program objectives are achieved as well as their overall impact, whether intended or unintended.

5. Review progress. Once the action plan gets underway, management and staff should periodically compare actual progress with the plan, including cost overruns and other problems, and decide on corrective action.

6. Evaluate results. When the program is complete, or the funds for it have been exhausted, undertake an evaluation of what has been accomplished, including (a) the degree to which the specific objectives of the program have been achieved, (b) the variances between the program as actually implemented and the action plan adopted at the start, with an analysis of reasons for the variation, (c) the actual outcomes of the organization's efforts, whether intended or unintended, and the extent to which the outcomes are consistent with the goals of the program, and (d) the cost of the program compared to the value of the benefits achieved. In item (c), the specific outcomes achieved in your program should be compared with the outcomes achieved in other programs. The point of this comparison is not only to assess how effective your organization's performance may have been, but also — quite important — to develop more insight into what objectives are attainable in a given field and the best means of attaining them.

Assessing the Potential to Raise Money

The starting point in any effort to raise funds from any source is to recognize that funding sources are typically inundated with appeals for support, and that getting their attention takes skilled planning and execution.

In fact, such a profusion of messages is unleashed on the public today that it is hard for any single enterprise to be heard. A torrent of advertisements for commercial products and services, campaigns for political candidates and issues, and appeals for worthy causes flood the communication channels. To be noticed at all, one has to create a sharply differentiated and powerfully delivered message.

A marketing approach to fundraising will be premised on a realistic assessment of the potential of the organization to raise money. Past efforts of the organization, results achieved by comparable organizations, and sounding out of prospects will inform the judgment as to how successful a campaign is going to be. Fundraising goals will not be defined solely by the cost of the programs the organization wishes to conduct. Rather, program aspirations must be tempered by a realistic assessment of the market potential for raising support.

Fundraising, whether directed at individuals or at institutions, must also be seen as involving an exchange: value is given by a donor in exchange for value received from the fundraising organization. For instance, government agencies look to advance programs that further their political interests; foundations seek organizations that implement their objectives; businesses give research grants because university-based researchers often can do the work less expensively than the company's own staff; corporations want to advance their public relations goals or even get help with sales promotions; and private donors tend to seek enhancement of their self-esteem.

While not every gift involves such motives, an organization seeking money has to think about and carefully research what will motivate a funding source to contribute, as well as the right time and place to make the pitch. As Philip Kotler writes in Marketing for Nonprofit Organizations, "Donations should not be viewed as a transfer but as a transaction."

Positioning Your Appeal

A marketing approach begins, then, with a conscious calculation of an organization's potential appeal to various possible fund providers ("market segmentation"). This analysis will seek to identify a particular segment of fund providers to whom the organization may have a stronger appeal than those of other fund seekers. The single most important decision in devising a marketing campaign is this positioning.

Edward L. Nash asserts in his book Direct Marketing: Strategy, Planning, Execution:

The essence of strategic product planning requires…a commitment about what your product or service is and how you want it perceived. You can't have it be all things to all people. It can be the best or the cheapest, traditional or innovative, entertaining or educational. To try to be everything at once is to be nothing. To position an organization in the fundraising market, then, a careful definition of the organization's appeal is required. Often, the organization's internal description of its services has to be recast in broader, more basic terms to appeal to potential contributors. For example, the American Film Institute's campaign to preserve old film negatives from physical deterioration is presented to potential donors as a program to preserve an essential element of America's cultural heritage.

Communicating Your Appeal

In a well-conceived marketing effort, careful research is conducted into the motives that prompt funding sources to give, as well as their stated criteria for gifts. The form and content of appeals is then tailored to the interests and nature of specific funding targets. In every case, the form and manner in which the appeal is communicated to the donor are as crucial as the content of the message.

For instance, if alumni loyalty to a school is seen as the primary motivator of giving, an educational institution will organize a system whereby selected alumni raise funds from their peers. In other words, an alumnus or alumna of each class (i.e., a class agent) is appointed to conduct a mail solicitation of funds from classmates. This effort is backed up by phone calls from the agent and other volunteer alumni or, occasionally, by current students. Cultivation of very wealthy alumni for major gifts is handled by personal visits from university officers, generally the president.

Nonprofit institutions without a core of loyal supporters may solicit funds from targeted segments of the public by using volunteer door-to-door canvassers; this method usually requires publicity in order to succeed. Appeals may also be cast in the form of invitations to expensive theater benefits or dinners honoring a well-known figure, both of which require a reliable list of upscale potential ticket buyers in order to attain their goals.

If the best potential fund providers are foundations or government agencies, a skillfully written grant application is usually required. But carefully planned personal contact with officials is also important in helping the nonprofit organization to become familiar with the funding source's interests as well as its criteria and process for making awards.

Coordination and Diversification

The fundraising effort should be centrally coordinated in order to avoid solicitation of the same potential donor by more than one department. An attempt should also be made to diversify the sources of support so that an organization is not beholden to one or even a handful of powerful benefactors. Wherever possible, vulnerability to the inevitable volatility of government and foundation funding should be minimized by the solicitation of private support. Indeed, a prudent nonprofit institution that obtains foundation or government support will anticipate from the outset that such aid will be phased out someday and will plan for alternative sources of funds.

Market Feedback

A marketing approach to fundraising is a two-way system. It involves planning and formulating the institution's appeal for funds to potential donors, but it is also an important source of information as to how well the institution's product is being received in the marketplace and to changes in that marketplace. A marketing network thus serves as an intelligence system.

Tom Peters and Robert Waterman, Jr. point out in their book In Search of Excellence:

Excellent companies are better listeners. They get a benefit from market closeness that for us was truly unexpected, that is, until you think about it. Most of their real innovation comes from the market.

In sum, marketing is a deliberate and conceptual approach to raising funds; it is a disciplined managerial process involving analysis, planning, and execution. It is an assertive process; it sees a nonprofit organization as earning the support it receives by conferring important benefits on funding sources rather than simply appealing to the goodwill of benefactors.

The four major sources of funding are government, foundations, corporations, and individuals. Each of these sources can be regarded as a separate donor market with its own special characteristics and requirements.

Corporate Support

Many corporations provide support for charitable activities, as the federal tax code permits such businesses to deduct up to 5 percent of their adjusted gross income for gifts to charities. Some corporations, as I noted earlier, organize their charitable activities in the form of a foundation; some operate quite informally. But some programs of nonprofit organizations may also be funded out of a corporation's regular operating budget, if the programs further a specific business purpose of the company. For instance, the underwriting of a public television series may be charged to the corporation's public relations or advertising budget, while counseling services for chemically dependent employees or job training may be funded by the personnel budget. In considering the potential for corporate support, therefore, nonprofit institutions should begin by analyzing how their program can serve the interests of specific business entities. Initially, in the attempt to narrow the universe of corporations to a prospect list that can be explored in depth, the following criteria may be useful:

• Geographic proximity. Corporations tend to favor supporting nonprofit organizations located in the same geographical area, especially where it can be shown that the service provides some benefits to the corporation's employees (e.g., a local health care facility or cultural activity).

• Specific benefit to the corporation. Corporations will favor supporting a necessary service provided by the nonprofit enterprise directly to a company, such as counseling the corporation's chemically dependent employees. Other services may be attractive to companies because they have a general need for them, although the benefit to the company from any particular nonprofit organization may be only indirect. For example, engineering schools might seek support from companies that hire large numbers of engineers.

• Personal relationships with key officials. Personally knowing someone in the right corporate department, or at least someone senior enough to steer a nonprofit institution to the right person in the corporate structure, is an obvious advantage. Board members of a nonprofit organization, as well as professional staff members, should always review their corporate contacts as part of a fundraising search.

• An image fit. A corporation's advertising and public relations efforts may suggest themes or objectives for which the nonprofit institution's program can provide support.

• An existing area of interest. A corporation may have previously supported similar programs. For example, since the Mobil, Exxon, and Atlantic Richfield corporations are known for their interest in underwriting public television series, so a nonprofit entity with a public television project might consider them as possible prospects. Other companies will be known for their active support of the performing arts, museums, hospitals, and so forth.

Individual Contributors

The vast majority of funds provided to 501(c)(3) organizations permitted by the IRS to solicit tax-deductible contributions are contributed by individuals rather than by foundations and corporations; 80 percent of the $129.88 billion Americans gave to charity in 1994 came from individuals.

Successful fundraising from individuals (including solicitation of gifts from entities they control) is in the first instance a product of an appealing cause, persuasively advocated by senior representatives of the exempt organization who have a gift for donor cultivation and the ability to close a transaction. Like every type of fundraising, it is also very much the result of careful planning and investigation by an expert staff.

The Characteristics of a Successful Fundraising Campaign

Certain intangible qualities make for a successful fundraising campaign. To paraphrase the American Express commercial, don't start a campaign without them. I call them the Ten Fundamentals of Constituency Fundraising.

1. Dynamic and Well-Informed Leadership is Essential.
   • Be proud of the cause you represent and of asking others to contribute to it. It's good work.

   • Do meticulous homework not just to identify prospects but to know all that you can about them. This kind of previsit preparation is the key to successful cultivation.

   • Know what will motivate prospects to give — for example, access to someone they value but could not meet on their own, be it Larry Tisch or a leading faculty scientist or economist. Another example would be a chance to offer advice or to have one's name on a building. Do not equate capacity to give with a willingness or readiness to give.

   • Above all, the leaders of the campaign must be well known among the organization's constituency or enjoy a strong reputation with the group. They must come across as personally committed, focused, persuasive, and visibly confident in the success of the cause they represent.

2. Not Every Gift Can Be Accepted.

   Early in my work at Tulane, I learned another indispensable ingredient to successful fundraising: learning when to say "no" to a gift, hopefully without antagonizing a potential donor. At Tulane, a leading board member and his wife very much wanted their name on a new building the university was planning. They offered what they considered a substantial gift, but the building's naming was one of the university's best opportunities to raise a very large gift. The offered gift fell short of this standard. Since the largest share of any campaign's contributions comes from a relatively small number of very large gifts, the university could not afford to give away the building name for what, in terms of the campaign's needs, was a modest gift.

   Moreover, since this donation would have been one of the campaign's firsts and by a major figure in the Tulane community it would have sent the wrong signal. As I learned in studying other university campaigns, if a drive is to start off on the right note, it is critical that the first gifts come from important figures in the community and in amounts that represent a "stretch" on their part. The gifts need not be among the largest of the campaign, but the leaders of the university have to demonstrate that they have gone the extra mile, relative to their own resources, because of the campaign's importance. The goal is to send out a signal to other leaders that this campaign is so important that they are going to be called upon to dig deeper into their pockets than usual.

   Since I had been the one to point out within the administration that we could not afford to accept the proposed gift, the president assigned me the task of informing the trustee that his gift had been rejected. The trustee was not at all pleased when I delivered the response, but I went to some pains to explain the logic of the university's position and to stress that the university was very pleased with being offered the gift and would be happy to provide a naming opportunity in a prominent place within the building. The prospective donor rejected the alternative, but a few years later he and his wife offered a much larger gift, and the building was named after them.

3. The Majority of Funds Will Be Contributed by a Few Individuals.

   Peter Edles, a veteran campaign consultant, makes the following observations in his book Fundraising: Hands-On Tactics for Nonprofit Groups:

   1. Ten percent of the goal comes from a single gift.
   2. Approximately 80 to 90 percent of incoming funds are donated by 10 to 20 percent of the membership or constituency.

   A similar picture was painted for us at Tulane by our campaign consultant, Marts & Lundy; the initial Tulane Campaign Plan projected that half of the target $300 million would come from 49 donors who gave a $1 million or more, including one gift that would account for 8 percent of the total and nine gifts that accounted for nearly 30 percent of funds raised.

4. The Campaign Must Have a Sense of Urgency.

   Fundraising has a way of taking much longer than one expects, unless the campaign staff and leadership are driven from the outset by a strong sense of urgency. When one embarks on a multi-year campaign, it is easy to think there is plenty of time to get things done. But time has a funny way of slipping by, if the campaign staff and leadership become overly absorbed in internal meetings and don't "get out on the road." My point is simple: you are not going to raise money by talking to each other; the potential donors are "out there," and you have to start the cultivation process as early as possible.

   Prospects can also sense the pulse of a campaign. If they get the feeling that the fundraising organization does not believe its needs are urgent, they are not going to be in a hurry to open their wallets. It's hard for an organization to convince prospective donors that it has a compelling cause if it proceeds to make its case at a leisurely pace.

   You also never know when some change in external and internal circumstances will upset a well-planned campaign. For example, the stock market crash of 1987 not only seriously reduced the wealth of some key prospects, it even unnerved people who were not as affected and made them less disposed to part with their personal resources. So, if conditions favor your campaign, don't assume life will always be thus; get going while the circumstances are right.

5. Paradoxically, You Can't Rush the Cultivation Process.

   Even when one is dealing with prospects who have previously made capital gifts and are active in the leadership of the organization, one must be prepared to spend time soliciting their views on the organization. This means listening carefully to them, responding candidly to difficult questions they may raise, taking them into one's confidence to explain the state of the organization and its plans, inviting them to special organizational events, exploring their gift-giving ideas, and offering a range of possible purposes for their gift. It's rare to make a first call on a prospect and have them whip out their checkbook and make the hoped-for gift. Getting a donation from a first-time prospect customarily takes quite some time, just as in business it may take a while to persuade a new customer to buy a product, especially if the product is a new one.

   At Tulane, an alumnus who was prominent in the community told me one day about one of the city's wealthiest and most successful entrepreneurs, who was not a graduate of a Tulane or of any university and whom the city as a whole had largely overlooked. This man wanted help from the university with a small matter: he wanted a hotel belonging to him and located near the campus to be listed by university departments as a place to send guests and hold meetings. The university arranged a luncheon with him, and within a week his hotel was listed as he wished. Shortly thereafter, the hotel's business from university guests improved substantially. My wife and I then spent months getting to know the man and his family (and, indeed, became good friends).

   The next step came six months after the initial meeting, when we asked the entrepreneur to help mobilize some of the people in the city's hotel and restaurant business to support the university's effort to become a member of a regional athletic conference. Our friend did this with great enthusiasm. Still later, he was asked to become a member of a new committee just established by the board of trustees to oversee one of the university's new business ventures. At no time during this process was the idea of his making a gift to the university broached; our goal was to get him involved with the university in areas in which he could contribute, so that eventually he might be receptive to the idea of making a significant gift.

6. A Well-Managed Organization Is a Prerequisite.

   The rules and realities of fundraising closely resemble those of raising capital for a business. A fundraising effort should be premised on the idea that contributors will be more receptive to an organization whose track record shows that the organization is well managed and can project and then deliver specific results. Donors, as a rule, go for "winners," not failing organizations. If an organization is newly formed, then its leaders need to have a record of experience and expertise, and they must produce a solid plan for both the management of the organization and its campaign.

   Donors also want to be told just how their money is going to be used and what concrete results they can expect to see. Once, the dean of Tulane's business school and the chancellor of the medical school were fighting over whose priority it was to cultivate a prominent and very successful graduate of Tulane's business school. To try to settle the dispute, I visited the donor and asked him whether he wanted to make his major gifts to the medical school or the business school. He replied that he and his family preferred to make their contributions to the medical school to support specific research projects by particular physicians, because they could see the outcome that resulted from their support. The donor was thus designated a medical school prospect, and the school was given a year to demonstrate that it could cultivate him to contribute in line with his means.

7. The Cultivation of Contributors Does Not End When Their Money Comes In.

   The results of a fundraising campaign should be measurable, and the organization should report to contributors how their money was used and what results were achieved. There is, in fact, no more effective way to stay in touch with contributors and to sustain their loyalty than to report to them regularly on the progress being made with the use of their funds. This kind of communication is particularly effective if it comes from the person or team employing the donor's funds. In the case of major gifts, an appropriate ceremony honoring the donor is in order.

   Perhaps most important of all is the organization head's readiness to spend time with a major giver after the gift is in hand. The president of a private research university and his wife, for example, spend a long weekend every year visiting the home of the university's largest benefactor, and they regularly accompanied another significant benefactor on a trip. Both of these occasions provided an opportunity for easy conversation about the university and other topics. Note that the subject of further giving by the donor is never raised on these occasions.

8. Keep Broadening the Prospect Base.

   It is risky to keep mining the same limited group of donors for large gifts. Some major donors are not financially able to keep giving on the same scale; others may develop new interests for their charitable giving (since the odds are that many of your major donors are being wooed by other organizations). Some may hold back until they see others step forward, not wanting to be looked to for yet another leadership gift. Indeed, at Tulane, one of the largest donors to the capital campaign told us that he wanted to see if the university could find others who could give in the way that he had because, unless we did, the university could not expect to increase significantly the amount it raised. Finding new major prospects has to be a top priority of the pre-campaign planning, and especially of the research staff.

9. A Customer-Focused Culture is Key.

   It is a formidable management challenge to educate personnel to rethink the way they view their jobs and the people to whom they should direct most of their energy. To do so amounts to changing the organization's culture. But this is precisely the challenge that leaders of many nonprofit organizations must meet if they want to increase the funds they raise from private contributors. Nonprofit employees, like their counterparts in many business organizations, are typically absorbed in accomplishing the tasks assigned to them by their immediate supervisors, and in their supervisors' reaction to their work. After all, it is those supervisors who determine employees' raises and promotions.

   Even within development staffs, it is not unusual for employees to focus on gaining exposure to senior officers of the organizations, particularly the head of the organization, rather than on cultivating prospective contributors. Following the familiar routine of pushing papers and attending internal meetings on fundraising issues is less demanding than leaving one's home terrain and addressing the concerns and attracting the interests of potential prospects.

   A fundraising staff that is too internally focused is the result of an organizational ethos that confers status according to how often one meets with the president or his or her chief deputies, as if one were working in a government bureau where the perception that a person has access to higher-ranking officers is itself a source of power. Such organizations are bureaucratic in character.

   Changing this kind of culture requires a revamping of both the financial and psychological compensation system so that cultivation of prospects is rewarded. In addition to changing the reward system, senior management starting at the top must promulgate for each organizational unit a very clear set of objectives. One universal objective should be that developing the goodwill of prospective donors is part of everyone's job. New values have to be established through clear and consistent communication.

   Within every organization, there are numerous opportunities to get across messages as to what the basic values of the organization are. I can remember Bill Bowen, as president of Princeton, emphasizing at every opportunity in large meetings and in personal conversations his conviction that a commitment to excellence in every phase of university activity was to be Princeton's hallmark. No one could fail to be aware of the standard of performance expected of them by Bowen.

   Part of bringing about a change in an organization's culture is making all employees aware of what is involved in cultivating prospects. Effective cultivation involves more than a call on a prospect; it relates to all the dimensions of potential interaction between an institution and a prospect. It certainly includes getting out fast, accurate, and thoughtful responses to routine inquiries by prospects, as well as listening carefully to issues raised by a prospect and treating the prospect as someone with ideas as well as money to contribute. The countless daily interactions between an organization's staff and prospective supporters need to reflect the priority to be given to these supporters. Nothing infuriates a donor or prospect more than a curt or inaccurate response to an inquiry about the status of his or her past gifts, particularly if the response reveals that the staff has not kept accurate records of how much a donor has contributed or how much of such a contribution has actually been used for the purpose for which the funds were raised. An employee who, rather than providing an explanation, reacts as if the donor's question were intrusive, can obviously have a negative effect.

   Cultivation of donors ideally takes place separately in time and place from the actual campaign. As an undergraduate at Princeton, I heard over and over again for four years how important alumni were. Days were set aside to bring the alumni back to the campus in a visible and prominent way, to honor many of them, and to express appreciation for their financial support. To top it off, before graduation, the senior class raised money for a class gift to the university. In marketing terms, the university took advantage of the four-year period during which it had potential future givers as a captive audience, and it drove home its message, albeit in a positive and not heavy-handed way. Princeton today has one of the highest percentages of alumni who contribute to the university. In contrast, Tulane made virtually no effort to convey to its undergraduates the importance of the role that alumni could play in the life of the university after graduation, or to communicate the expectation that alumni should give of their resources to the university. Tulane's percentage of alumni contributors, although rising, is still much lower than those of Princeton and a good many other schools.

   It is also very important for the organization's head officer to model the behavior he or she expects of others; word about what is important to the president travels quickly through an office network. If the president never leaves the office, this fact is noted. But the organization will also notice if the president or executive director devotes a substantial amount of time to seeing prospects and listening carefully to the comments of people outside the organization, and shows, by his or her personal priorities, that cultivation matters.

10. A Campaign Never Ends.

    Labeling a fundraising effort a "campaign" is typically associated with an organization's attempt to raise money for specific projects, programs, and facilities, as distinct from gifts that are not restricted in their use. Both capital or purpose-specific gifts and unrestricted gifts should be part of an organization's fundraising strategy. To heighten interest in capital or purpose-specific gifts, a numeric goal for such giving is announced and a deadline for raising such funds set. The program thus becomes a campaign. But if an organization is able to raise capital gifts, it should do so on a continuing basis, whether or not the effort is publicly labeled a campaign. The staff and resources required to raise the targeted funds should be maintained, and not disbanded simply because the public phase of the effort is over.

The Importance of Planning

To these ten fundamentals of fundraising, one more essential ingredient should be added: careful planning. Such planning entails a meticulous process covering a series of steps that build up to actually asking prospects for money.

Before solicitation of donors begins, the following elements must be in place:

A carefully crafted strategic plan specifying concrete objectives and a year-to-year projection of the amount and type of giving required to implement the plan.

A carefully researched projection of the level of funds the organization can expect to raise that relates to the cash flow assumptions of the strategic plan.

A specific plan for raising the targeted amount, including campaign strategies, themes, and organization.

A table of needs listing specific needs and assigning a target amount to be raised for each need.

A well-trained, well-organized, and highly motivated team including an expert research staff to conduct the campaign.

A campaign leadership group made up of board members and other prominent people with strong ties to the organization.