New York’s Proposal on Fund Raising Will Harm Charities

LETTERS TO THE EDITOR

To the Editor:

I have been in the fund-raising business for nearly 20 years. I am the first to acknowledge that there are enough unethical practitioners in the industry to warrant action by those who are in a position to do something about it. Unfortunately, while the laws and regulations enacted by the various state attorneys general usually do little to address the real problem, they are often very successful at making it more difficult and costly for nonprofits to do their work.

The proposed changes to New York’s fund-raising law are a perfect case in point (“New York’s Charity Crackdown,” November 28). Requiring nonprofits to secure multiple bids on every project, and boards to engage in the minutia of running the organization, will increase the charities’ cost of doing business. Consequently, the percentage of funds going to further the mission of the charity will decrease, which is exactly the opposite of what the attorney general says he intends.

I do think it is important to eradicate the unscrupulous practices and practitioners that are tainting our industry. However, we must first identify the difference between an unscrupulous practice and a necessary investment by a charity in its long-term health. If you look closely at New York’s own “Pennies for Charity” report, you will find plenty of both examples.

To suggest that a telemarketer is greedy and a charity is unscrupulous or a dupe because the two engage in a program that has a high cost of fund raising is untrue and is, in itself, misleading to the public. The public understands that a business must invest in research or projects that cost more initially than they generate, in order to secure the future success of the company.

There is no difference whatsoever between a company investing in research and development and a charity paying a professional fund raiser to conduct a lapsed-donor-recapture or new donor-acquisition program. In both cases, the entities are making an investment that is critical to their long-term survival. If anything, the charity can project much more precisely what its long-term return on investment will be.

The 80-20 rule that businesses often use applies to charities as well. Typically, 80 percent of a charity’s net revenue comes from 20 percent (or often less) of its supporters. Unfortunately, the average charity loses a significant portion of those good donors every year to normal attrition. If charities do not replace them, their revenue will quickly shrink, forcing them to cut programs to those they serve.

In order to replace the good donors who are lost, charities must conduct lapsed-donor-reactivation and donor-acquisition programs, which have a primary goal of inducing new donors to support the charity. No matter how you reactivate old donors or acquire new ones, this type of program has a very high cost of fund raising. In fact, new-donor acquisition, regardless of what charity does it or whether it is done via direct mail, telemarketing, e-mail, or any other means, usually costs more than the program brings in.

However, when you factor in the future giving of the new or reactivated donors, the return on investment is typically very high, which explains why very intelligent development professionals in some of the nation’s most respected charities continue to do these programs in spite of all the negative press and insistence by politicians that they are being conned by the self-serving telemarketers. It is a matter of survival for the charity.

The fact is that reactivation and acquisition are very difficult work and many charities outsource this work to the professionals because they know the professionals will do it more effectively and, yes, cost-effectively, than the charities’ staff or volunteers do it.

To mandate that charity boards ought to oversee the fund-raising function would be counterproductive for the same reason that the regulations of the various state attorneys general have been counterproductive; most board members understand little if anything about the dynamics of charitable fund raising.

In my nearly two decades in this business, I have seen a handful of charities’ boards deal with adverse situations by mandating that the charity maintain a minimum return on investment on each and every program it conducted. For some reason, a 2:1 return seems to have been popular.

Such a mandate obviously makes it impossible to do the type of reactivation and acquisition programs previously described. In each and every case where this mandate was given, the charity experienced so much net attrition of its active donor file that the mandate was either rescinded within 12 months or the charity went out of business.

If you look closely at all the programs on the “Pennies for Charity” report, you will find that a very high proportion of the programs on the report are reactivation or acquisition. The charities do much more of the highly profitable work in-house so it does not appear on the report. Therefore, the report is not at all an accurate reflection of how judiciously charities are spending their funds. It would be much more insightful to show the charities’ overall cost of fund raising along with the cost of fund raising on programs performed by professional fund raisers. Also, it would be useful to report on the percentage of the whole that the programs performed by professionals represent.

In addition to giving the public the whole picture, this would help to shine a very bright light on a particularly loathsome practice that is very prevalent in our industry. I am referring to the telemarketers who engage charities in long-term contracts whereby in exchange for guaranteeing the charity a nominal percentage of the funds raised, the charity allows the telemarketer to have whole or partial ownership of the donor file created.

The process basically works like this: The telemarketer guarantees the charity some small percentage of the funds (usually 10-15 percent) raised on all its programs. It then launches a major new-donor-acquisition effort, which probably does not even cover its costs, especially after paying the percentage to the charity.

Several months later, the telemarketer recalls the list of new donors with a new appeal on behalf of the charity. Once again, the charity receives 10-12 percent of the revenue generated but this time the calling generates much more income per contact because the telemarketer concentrates on people who are now donors.

After several repeat calls, the initial deficit is eliminated but the telemarketer continues to call the list three or more times per year. By this time, many of the donors have given multiple times and each time the telemarketer calls the donors, it generates two to three times the amount needed to cover its costs and pay the charity its percentage. The rest is taken as pure, obscene profit. Over the long run, the telemarketer is more or less printing money for itself while the charity never receives more than 10-12 percent of the revenue over the long run.

The new rules the New York attorney general has proposed would do little or nothing to combat this insidious practice, which causes a great deal of the negative feelings by the public toward charitable telemarketing. Many of the organizations participating in “percentage-based” programs have weak, “puppet” boards and getting multiple bids would be just a formality, especially because they do not even have control of their own list and would have to start over from scratch if they sacked their telemarketer.

The new proposed regulations will unquestionably drive up the costs of the organizations that are scrupulous and play by the rules. I just ask that the attorney general’s office take the time to educate itself more about the dynamics of this very complex problem. Recognize that some programs with high fund-raising costs are important investments in the long-term health of the charity.

As a professional telephone fund raiser, I am very proud of the contributions I have made to my clients over the years. At the same time, I am getting awfully sick of being dumped in the same bucket over and over again with the worst element of our industry.

Nick Stavarz
President
Synergy Direct Marketing Solutions
Akron, Ohio