A Bad Economy Forces Good Decisions

Let’s face it: times are tough. This economic slowdown has seen giving slump more dramatically than in the past. The explanation is obvious…just drive by your local gas station, go pick-up groceries or look at the unsold homes in your neighborhood. Donors have less disposable income and are anxious about the future.

So, is there any good news? Actually, I think there is. The economy will recover—economies, like history, are cyclical by nature—and oil prices are already beginning to stabilize and drop from record highs. In addition, in recent days, we’ve seen a remarkable rise in the dollar’s value, making imports and goods, including food, more affordable. These are all positive signs.

Positive, macro-economic signs, however, do not change the amount of money in a donor’s wallet, at least not for a while. The reality is that we will see lower levels of giving at least into 2009 (remember, even when things get better, donors are cautious for a while) and maybe longer. There are no guarantees, and nonprofits doing their budgeting should not bank on year over year revenue increases.

Until things really turnaround, however, there are some creative and tangible things you can do to operate your organization more efficiently and effectively. Start by finding the most obvious place to cut costs without losing effectiveness or capabilities and if you follow the example of today’s most savvy companies and governments, that means focusing on IT costs.

Most IT spending today is incredibly inefficient. It relies on an outdated model of paying huge up front costs and ongoing license fees to lease software over which you have little to no control.

For example, how much do you pay Microsoft for desktop applications and back office applications (like Exchange)? The City of Washington, DC saved millions of dollars each year in licensing fees by switching to free (Google Aps) and Open Source (Open Office) solutions for their desktop applications. All of these are fully compatible with Word, Excel, PowerPoint and other Microsoft standards. How much could you save by doing the same? How many more lives could your nonprofit improve with the funds you’d save and have available for programs and services?

This is a large part of the reason that MPower made its mature and full feature constituent relationship management (CRM) solution available as an open source offering earlier this year. You have all the functionality (and more) of a product like Blackbaud’s Raiser’s Edge®, but your cost of owning and operating the software will be 40-70 percent less. Plus, you don’t have to pay huge up front fees and you are not beholden to us. It’s open source. It is as flexible and customizable as you want it to be.

Hopefully, the silver lining to these difficult economic times is that nonprofits will find ways to creatively cut costs so they can focus more dollars on the people they serve. Software, including but not limited to CRM solutions, is a great place to start.

Do not let a “sunk” cost sink your organization

Large up-front license fees for software are a serious issue, and one we need to eradicate. However, one of the biggest things holding organizations back today is not the issue of paying those fees again now or in the future, but the issue of not letting go of the fees they paid in the past…even if it is the recent past.

I have often heard the comment, “Well, we spent a lot of money on that system and, even though it is not meeting our needs and holding us back, we need to wait until we have gotten our money’s worth to make a change.” While the “get your money’s worth” mindset seems to make sense, it is actually a logical and economic fallacy. “Sunk Cost” is one of the most important, but most overlooked, financial principals for nonprofits. It is important for organizations to take a holistic view around all decisions that takes into account all costs and potential revenue, so that they are focusing on total net revenue to achieve their mission. Let me elucidate with a simple example.

Say X organization has invested $50,000 dollars in a piece of proprietary software. That $50,000 includes license fees, deployment costs, staff training and time, etc. However, Soon after launch they discover the software is not meeting their needs. Staff time is twice what was expected and, as a result, their fundraising staff are only able to execute half as many campaigns as expected. In addition, restrictions in the data collection, tracking and segmentation means that certain targeted appeal strategies cannot be executed. But the organization feels like they invested so much in the software, they just have to “live with it” for a while and “make do”.

This sense of being held hostage is not only debilitating, it is a false sense of imprisonment. There are plenty of options for the organization. For example, the organization finds a piece of open source software they test out (for free) and find could solve th majority of their problems. 12 months after buying the current software, they invest $10,000 in data migration, implementation, some customization and staff training and time. Since the software is open source, they were able to tailor an number of modules to their specific business processes and adapt a community built adresss verification integration that significantly reduces duplicates and bad addresses in the system.

Once this new software is live, they find that they have cut staff time in half around standard operations with the software. Let’s say those two staff are paid $40,000 per year each and were each spending 25% of their time with the previous software. That is a staff cost savings of $20,000, netting $10,000 in efficiencies right there.

In addition, the new software capabilities around fundraising and the efficiencies gained have granted the staff time and ability to execute their more sophisticated fundraising strategies, which have yielded an additional $50,000 in the first 6 months!

Therefore, the move away from the previous system, even though it had only recently been acquired, yields an additional $40,000 in total net income to further the organization’s mission. This is why being anchored to a system that is not working, in the false belief that you have to get value out of a sunk cost, only serves to drag down your ability to help those you serve. And, in uncertain economic times, the ability to reduce costs while generating more dollars is needed now more than ever.

Open Source CRM Gaining Traction

I just finished reading Bill Snyder’s July 2 article on PC World (the same article was originally published by CIO on June 30) titled “Open Source Delivers More Control, Less Cost.” This article is more compelling proof that businesses, large and small, are shifting to open source CRM because it’s a superior way to run an organization. From giants like H+R Block to six-person operations, the commercial sector now is well underway in giving up cumbersome, closed and expensive CRM systems like SAP, Siebel and even Salesforce.com.

The reasons for this shift are varied, but come down to three key advantages:

1. Cost – Open source CRM does not require prohibitive upfront investment and the related risk. In addition, choice among vendors and service providers ensures the best pricing (i.e., you are not locked into your vendor for all changes and services).
2. Control - According to Matthew Carson, CTO of a streaming media firm with 500 customers in 77 countries, “Control is a big issue. You want to be able to write the (CRM) system around your business model, not the other way around.” Amen. Your software should not drive your business.
3. Ownership – Kurt Miller, president of a six-person business chose open source CRM over alternatives like Salesforce because, in his words, “No matter what happens, I control my own data.”

We are seeing this exact same trend among nonprofits, large and small, for the same reasons. In fact, as illustrated above, some of the most common arguments against open source CRM are being patently disproved by the diversity of open source success in the market.

One argument I often hear is that open source CRM lacks the robust features and functionality of closed, proprietary systems. This is a myth propagated by closed CRM companies’ sales and marketing machines. While different products certainly have different features and strengths, MPower Open is every bit as powerful and robust — and more powerful in many key areas — as the leading nonprofit CRM solutions.

But, don’t just take my word for it. Consider the assessment of Keith Heller, Founder and Principal of Heller Consulting, the nation’s leading technology consulting firm with a specialization in helping nonprofits use Blackbaud’s Raiser’s Edge®, which is one of the most common donor databases in the philanthropic sector: “No product matches MPower’s native features in enabling nonprofits to conduct highly complex segmentation to deliver the right message at the right time through the right medium.” And, since we are open source, you can download MPower to see for yourself.

The second argument I hear is that small organizations with limited or no IT resources will find open source CRM too complex. That is simply not true. As seen above, organizations with as few as six employees are reaping the benefits due to the cost, control and ownership of data. To quote Matt Asay’s comments July 2 on CNET, “Does this mean that the only way to benefit from open source CRM (and other open source enterprise applications) is if you’re a technology-savvy shop? Of course not. Most don’t need to tweak the code, and never will. But even those who don’t, benefit from those who do.”

Matt’s quote from an earlier post aptly sums up why the closed, proprietary model is in such trouble:

No decision is best made blindly. No product is best defined, designed, and implemented in an information/feedback vacuum. Opening up source code means customers can place greater trust in the software they use even if they never read a single line of code, precisely because others can exercise this choice in their stead.

I could not be more excited about what lies ahead for nonprofits as the advantages of open source CRM are realized. Openness, transparency and collaboration have long been hallmarks of the work that charities do in their communities and around the world. Isn’t it time you held your software to the same standard?

Stock Prices of Vendors to Charities Getting Battered

Yesterday I read an article in the Nonprofit Times about the stock prices of several public companies who work with nonprofits that are struggling. Ostensibly they are struggling because of the meltdown in the subprime mortgage market. Actually, except for the possible exception of Blackbaud, I think many of the companies listed might be struggling regardless of the present economic woes.

Blackbaud is another story. They clearly took a hit a month ago when Jefferies & Co. analyst Ross MacMillan speculated that because of the recession, nonprofits would be spending less and therefore Blackbaud would close less business, etc… “Given the outlook for more potential weakness in giving, we think non-profits are slowing the rate of spending on technology.”

Obviously, it’s a complicated issue. I’m not sure that our clients are seeing giving slow down that much. But assuming nonprofit giving does slow down, I agree that overall technology spending would decrease (especially spending on technology infrastructure) but I would hope that technology spending on fundraising and relationship building tools would not slow. After all, these are the tools that an organization needs most in a difficult economy.

Of course, this is just another reason why open source is such a beautiful model for nonprofits in any economy. Admittedly, open source software is not “free”. For instance, an enterprise class open source CRM like MPower needs implementation services and ongoing support in order to get the greatest value from it. But, because an organization doesn’t have to write that big up front check for license fees, they can spend the money needed to implement software correctly and still save 40% to 60% over comparable closed and proprietary software.