Part II – Measuring Success The Buffett Way

As promised in an earlier blog on Warren Buffett, this is the second entry in a series designed to question how development professionals (and others such as CEOs and Boards) should evaluate development effectiveness.

Warren Buffett uses a specific set of principles to evaluate successful businesses.  Can the investment methodology of the world’s greatest investor inform higher education and non-profit leaders in the evaluation of the effectiveness of their development programs?

If he were to assess the effectiveness of our development programs, what measures might Buffett use?

Below is my second answer to this question.  My first answer was Donor Retention Percentage.

Answer #2:  Unrestricted Gift Margin – This may be a new term for you, but it is an important one to understand.  Simply put, unrestricted gift margin is the amount of annual, unrestricted gift income – that is, all gifts that are unrestricted by donors plus any additional gifts which support the institution’s annual operating budget minus bequests divided by the total amount of the advancement office’s annual budget (including constituent relations, special programs, and salaries).  As a formula, it looks like this:

Why would such a calculation by important to Buffett?  Two of the financial tenets which Buffett uses to evaluate a business are return on equity and profit margins.  Simply put, return on equity (ROE) measures how much profit a company generates with the money invested by shareholders.  Profit margin is the ratio of net profit divided by sales.  Both of these tenets suggest that the ratio of gift income to the amount invested and/or the costs would be important to Buffett.

But should Unrestricted Gift Margin (UGM) be important to development and institutional leaders?  Absolutely!  Whether your organization is in a campaign or not, the amount of annual, unrestricted gift income being generated is hugely important.  Every CEO wants (and in many cases needs) more.

UGM provides us with a measure of effectiveness related to generating the most valuable of all gift income – that which can be used to support the budget or be utilized at the discretion of leadership.  And while bequest gift income may provide your organization with needed resources, including that number in this calculation would skew the ratio and, candidly, we should be taking credit for planned gifts as they are committed, not when they have matured.

At this point you may be asking yourself, “why not just calculate cost to raise a dollar?”  The primary reason I would suggest calculating UGM over cost to raise a dollar is because “cost to raise a dollar” typically is not used to assess the effectiveness of the entire enterprise at raising unrestricted gifts.  The typical use of the “cost to raise a dollar” metric is with individual campaigns (a direct mail campaign for instance) or with the total cost to raise all gift dollars – not simply unrestricted dollars.

However, with unrestricted gift dollars achieving a higher and higher position of importance at most non-profits and educational institutions, I believe that UGM is a prime measure to evaluate effectiveness.

So, what would be evidence of a good UGM?  From my experience an UGM of 1.5-2.0 would be considered fair.  2.0-3.0 would be considered good.  And anything above 3.0 is outstanding.  This would mean that if your annual advancement budget was $1,000,000, you would be raising at least $3,000,000 in unrestricted gift income.  However, it is important to note that a myriad of issues (age and type of organization, experience of gift officers, what stage of campaign you are in, etc.) will impact your number.  However, what is important are the trends.  Increasing this number year over year would be the evidence you would want to show.

This easy to understand (and easy to calculate) metric is one that development leaders should be producing annually.  If Warren Buffett was on your Board he just might ask for it.