fundraising tools

When is it time to outsource your nonprofit’s investment management?

In the same way that a nonprofit’s size does not dictate its need for legal assistance, a portfolio’s size alone does not dictate the need for investment assistance.

The key role of a nonprofit organization’s trustees is to ensure that investment assets are protected and properly managed so that they can serve the organization’s mission. Regardless of the size of the investment assets, the investment committee seeks to balance the objectives of both long-term growth and ongoing funding of the organization’s grant-making activities. To fulfill their roles, trustees can and do seek guidance from objective third parties, whether for legal or investment advice.

At what point does the trustee determine if they should manage the assets on their own or hire an outsourced chief investment officer? The size of the investment portfolio may not provide a clear indication, but there are recognizable triggers that may require a closer look.

Here are five common situations when an Outsourced Chief Investment Officer (OCIO) can be the smart choice for an organization of any size.

Increased Complexity Overburdens Committees

Even savvy, well-intentioned professionals can feel overwhelmed by the number of decisions involved in maintaining complex investment portfolios — especially if they meet no more than once or twice a quarter, which is common. The growing number of managers in portfolios, complex alternative strategies, and increasingly volatile markets make it difficult for committee members to both keep pace and make thoughtful portfolio decisions.

The Uniform Prudent Management of Institutional Funds Act[1] (UPMIFA) provides trustees with the ability to delegate certain aspects of their responsibilities to an outside entity, if that can help them better meet their obligations as a governing fiduciary. Trustees retain responsibility for overseeing the OCIO service provider, who then acts as managing fiduciary and takes over the day-to-day responsibilities of managing the portfolio. The investment committee regains the time needed to focus on larger strategic decisions, while the OCIO becomes a co-fiduciary and shares the risk and responsibility.

Challenges in Continuity

Most nonprofit organizations have enjoyed strong investment returns over the last ten years. Yet memories of the 2008 crisis’s impact on investment-portfolio values and spending levels are vivid. In many cases, committee members have rotated since the last market downturn, and today’s members have not worked as a team through a similar market environment.

When committee membership faces regular turnover, each change introduces new perspectives, and new biases. Whether swayed by the dominance of a single member or by memories anchored to a single historic event, committees can become susceptible to difficult dynamics during periods of market volatility, when it is crucial to maintain a disciplined approach to investing.

An OCIO provides continuous institutional memory to the portfolio’s management and has the experience and perspective to adhere to a strategy appropriate for the long term.

Scale Impedes Growth

Smaller aspirational nonprofits with limited resources often find themselves at a disadvantage when competing with larger organizations for donor capital, whether for capital campaigns or ongoing fund drives.

With an OCIO managing their assets, small nonprofits can stand on par with larger charities by showing they have the resources of a large, professional entity, thus gaining the confidence of donors who are empathetic with their charitable mission. The larger the donation, the more sophisticated the donor, and having an OCIO is an advantage in these negotiations. When a large donor feels confident that their donation will be well-managed, the donor may even see an advantage in being a more meaningful contributor for a smaller charity. With an OCIO, even a small nonprofit gains the advantages of scale and expertise that are typically thought to benefit only large organizations.

Time Constraints Limit Strategic Focus

With limited resources, smaller charities often struggle just to meet day-to-day objectives and don’t get to spend the time needed to focus on larger organizational goals. Outsourcing the day-to-day workings of human resources, payroll, and accounting makes it possible for these organizations to develop and maintain a level of professionalism on limited budgets. Further, they can focus their resources on meeting larger strategic goals, such as growth, and on developing their missions.

With an OCIO taking care of day-to-day investment management responsibilities, boards and investment committees with responsibilities for endowment or foundation assets can free their time; instead of discussing individual investments and portfolio line items, they can focus on more strategic matters, such as reviewing their endowments’ broad strategic frameworks and aligning investments with funding and campaign goals.

In-house Costs Exceed OCIO Costs

The larger and more complex an investment portfolio, the larger the amount of resources needed to manage the investments internally. Whether that translates to additional people in the finance department or the development of people and systems for an entire investment office, the costs of an OCIO can be assessed both in dollars and in the additional organizational complexity that would be required to maintain these resources internally.

For a nonprofit to continue its mission today and in perpetuity, it must weigh the long-term value of important financial decisions, from capital expenditures to whether and when to leverage external resources to enhance the organization. The cost-versus-reward calculation of an OCIO is as important as the calculation for new computers or a more effective donor-communication and -marketing system that helps professionalize and streamline operations. Most investment advisors should be able to share several return-on-investment scenarios, based on the risk tolerance of the charitable organization, to aid in this decision.

With the number of nonprofits growing and with all of them competing for the same donor dollars, it is beneficial to step back and review the needs, limitations, and aspirations of your organization. It may be that in developing internal best practices and long-range goals for your investments, there could be room for another form of contribution — one an OCIO can make.

About Canterbury Consulting
Canterbury Consulting is a leading investment advisory firm overseeing $20.2 billion for foundations, endowments, healthcare institutions, and families, as of December 31, 2018. Founded in 1988, the company designs and manages custom investment programs aligned with each client’s goals. Canterbury acts as the investment office for its diverse clients and provides objective investment advice, asset allocation, manager selection, risk management, implementation, and performance measurement. Canterbury Consulting strives to deliver performance and service that exceeds the needs and expectations of its clients. Learn more about Canterbury Consulting at www.canterburyconsulting.com.

[1] The Uniform Prudent Management of Institutional Funds Act is a uniform act that provides guidance on investment decisions and endowment expenditures for nonprofit and charitable organizations. UPMIFA and its predecessor acts were first approved by the National Conference of Commissioners on Uniform State Laws (NCCUSL) in 1972.

Technology can be very good for the nonprofit world. While technology has fundamentally changed the way we do business, the world outside of the for-profit sector has just recently caught on to its benefits. Some tech phenomena have already successfully infiltrated the nonprofit sphere, including the use of Software-as-a-Service (SaaS) to improve donor relations and other daily business functions, or crowdfunding for fundraising purposes. While existing technologies remain useful for many, the next wave of using technology for good will be in the peer-to-peer giving model.

Becoming prime time in the corporate world in the early 2000s, SaaS took hold in the nonprofit space in the last 8-10 years. The very nature of SaaS made it ideal for the nonprofit sector: It’s easy to use, low cost, and avoids integration challenges that often come with on-premise databases. It was also readily adopted because of its ability to help groups manage donations and track individual donors.

For example, Room to Read, a global organization transforming the lives of millions of children in low-income countries by focusing on literacy and gender equality in education, relies on SaaS application Salesforce for project allocation, reporting and tracking. It helps their global teams track at scale for both the project and donor side, enabling them to make more meaningful connections and retain existing donors.

The next wave of technology modeled perfectly for nonprofit use was crowdfunding. Making its first appearance in the late 2000s, nonprofits quickly turned to Indiegogo and KickStarter to help fund their initiatives and programs. Crowdfunding caught on in the nonprofit world because it was an easy platform for anyone to access and donate to. With online payments becoming standard, it took the hassle out of mailing a check or donating in-person. Also, the collective community aspect allowed hundreds of people to work together to reach a common goal.

In 2014, Code.org launched its ‘Hour of Code’ program, with a goal of raising $5 million on Indiegogo to train 100 million students to code. They also created a viral video starring Mark Zuckerberg and Bill Gates for the campaign. It was the most successful Indiegogo crowdfunding campaign of its time, quickly surpassing its goal and showcasing the power of collective online donations.

While SaaS and crowdfunding have clearly made their mark on the nonprofit sector, the next technology that will be adopted in the nonprofit sector is peer-to-peer sharing. First emerging in the late 2000s and becoming mainstream in the last three years, the for-profit sector has already seen runaway hits in the peer-to-peer economy with startups like Airbnb, Uber and Zaarly. So what if this model was applied towards social good?

Elevating the sharing economy to the giving economy, nonprofits can tap this concept to allow donors to connect directly to those in need. Users are already familiar with peer-to-peer giving technology and it is easy to use and implement at a broad scale. Also, it is appealing to a millennial’s mindset who wants to help or receive help at the touch of a button.

Additionally, this model takes crowdfunding one step further by creating a meaningful one-to-one connection. Instead of being one of many, a donor can foster a direct relationship with someone in need and feel more satisfying for the donor. Donors who give in this way often receive immediate and direct feedback from someone they have helped, bringing a rush of emotions knowing they have impacted someone’s life. This is what turns random acts of kindness into a normal habit.

Out of all the nonprofit sectors, social services can benefit the most from peer-to-peer giving since it fosters a more dignified way for people to seek help. Because peer-to-peer giving is non-conditional and not predicated on paperwork, rules about sobriety, lifestyle, or impersonal prioritizations by well-meaning social agencies, those who need help can simply receive it from another community member. For instance, if a homeless person requesting a tent has to wait six months for social services paperwork to go through, it can mean they have to sleep outdoors, in the rain, in fear for personal safety, for another half a year. Peer-to-peer giving can drastically shorten the time to receive something critically needed for survival from months to days or even just hours.

The tech world isn’t just in a Silicon Valley bubble anymore. Technology has helped nearly every industry around the globe develop new product or services. With an ever-expanding influence, we have the opportunity to capitalize now on these innovations and benefit the greater good. Next time you spend 10 seconds requesting an Uber, imagine spending the same amount of time to help someone in need. Donating money, supplies or services to anyone, anywhere, with a single click.

As the new economy forces nonprofits to act more like the for profit world, you should ask yourself this question: is your organization fooling itself by managing to a number?

Are you devoting this year’s donor initiative to prospects that should be given a longer nurturing period in order for your organization to gain a larger gift? Where else might short term actions detract from the best decisions for long term social missions?

To better apply this to the nonprofit world, let’s start with the more easily visible version of this issue in the for-profit world. By applying the following points to your organization, you may be able to improve its sustainability. Leaders of both public and private companies sometimes publicly single out specific numerical targets for net income. Once stated, those targets often become obligations.

So why is this an issue for them and you? Well, in those leaders’ zeal to consistently reach numerical goals, for-profit organizations begin to fall for the temptation to stretch some quarters to reach targets. Sometimes, they even slow down, lest they bring in too much income above the target number in another quarter. The result: in their ever-increasing attention to reaching short-term numbers, leaders can lose focus on making the best long-term decisions to build values.

Month end, quarter end, and fiscal year end personal activities can be taken hostage in this teeter-totter process of getting just enough income (but not too much) in the current period. This phenomenon can be likened to Goldilocks tasting the three bears’ porridge! (Having been part of year-end deal-closing crunches, I can assure you that inordinate amounts of time, money, and focus are required to to get deals closed in the desired period. Often those crunch times occur during holidays or when special family events had already been scheduled, inconveniencing and annoying the employees involved.)

When they have gone too far in covering shortfalls to reach arbitrary numbers, companies often hold “fire sales” to ensure they get the last few sales needed for target revenues. This practice can backfire and result in customers quickly learning to hold off on purchases until the regular desperate overture is made at period end. All of these complications result from a focus on hitting the sacred numerical targets. This ends up reducing margins as well as creating a spiraling impact as the company continues to try to make upcoming period results.

What does this this obsession with exactly hitting stated numerical results do to the sustainability of employee or volunteer commitment throughout the organization? Consider this corrosive environment with stress and pressure from the non-economic energies required to reach those targets. How much does that pressure detract from corporate responsibility to shareholders to consistently build economic value for the enterprise within risk tolerances and resources available? (Some of you should be starting to see parallels in your nonprofit world.)

At what point does this create a situation where the for-profit or nonprofit organization gets too caught up in the process and loses track of real balance sheet and operating information needed to make the best decisions? The closer to customer facing activities this incorrect data reaches, the more likely it creates operational inefficiencies.

As a result, the company owner, leadership team, or staff will likely devote holiday time to managing wasted energy needed to hit those numbers, when instead they should be looking at building equity and long-term wealth.

But fear not good fellows! For good news is at hand: Santa’s got 3 stocking gift ideas to help you reduce emotional cost and financial fallout. These three actions can help bring back the spirit of good cheer, and happier spouses, families and significant others in the form of restored holiday time:

• Consider targeting a numerical range, not an exact amount. Why not set a number goal of, plus or minus 2 to 5 percent? Think of this concept sort of like a flex budget.
• To encourage employees or volunteers to emphasize consistently reaching longer-term goals and objectives, change or adapt incentive programs. A balanced scorecard approach fits very well with tailored incentive plans. Plans that can be measured produce
• Change the tone from the top to emphasize doing things right, instead of focusing on managing income. A number of experts suggest that an emphasis on doing things right does a better job of building long term equity or fund balance. This tone fits better with the mission and vision for most nonprofits, anyway.

And, in return, Santa only asks that you truthfully reflect on the possibility that this short-term income-oriented behavior runs deeply in your socially-concerned, mission-driven nonprofit. The fact is, you may need a fresh set of eyes to see where you are. Then, as you begin to eliminate non-economic activities, maybe the majority of your employees can enjoy their holiday time.

This concept can apply beyond the traditional holiday season to other holidays throughout the year like Valentine’s Day, Independence Day, Labor Day, Thanksgiving etc.

His Boardsource presentation and Roadmap to Sustainable Mission is available at http://www.boardsourceleadershipforum.org/session/boardroom-black-holes-and-taboos-2/