How much does it really cost to do what we do?

Undertaking a costing analysis is an opportunity for those in the nonprofit sector to tell the truth to ourselves about how much it actually costs to achieve our mission. The process of analyzing cost asks us to set aside traditional approaches to tracking dollars and instead think critically and in depth about the investments needed to serve our clients. NFF had the opportunity to work with six settlement houses that are members of United Neighborhood Houses (UNH), a network of 44 settlement houses in New York. The settlement houses provide a variety of wraparound services focused on social determinants of health. Leaders from the settlement houses set out to explore their costs, believing that a fuller understanding could be a useful tool in managing their complicated service offerings. Although it didn’t provide answers to all the most vexing questions like, “How can my clinic run profitably with the abysmal reimbursement rates provided?” it did generate meaningful conversations around priorities and deepen relationships across departments. UNH cohort leaders shared that costing analysis helped “make visible what was invisible” and “encourage a culture where people are empowered by numbers.” Here’s a look at how this group grappled with questions that all of us face when embarking on a costing analysis.

The very first step in a costing exercise is to identify the team that has the capacity and interest to dig in, as it is not for the faint of heart. Those involved will be knee-deep in gathering and synthesizing data from across the organization. Members of the program departments took the lead in most settlement houses, with important support from those with a financial perspective. For some, this was a great opportunity to collaborate across departments, which heightened an appreciation for each other’s view on the agency’s work. Together, the team formulated a question specific to their organization that they believed this analysis could help to shed light on.

The next step to costing is to identify what the organization actually does to serve its clients, a task that sounds deceptively easy. For the UNH cohort, translating program elements like holistic care and connection with clients into the agnostic rows and columns of a spreadsheet so that they could identify meaningful units of analysis resulted in more debate than one might have expected. And when our NFF team stepped in to look at everything with the settlement house leaders, Goldilocks had nothing on us as we saw how analyzing too many activities left us lost in the details and analyzing too few meant that no meaningful data was generated. Ultimately the cohort mostly settled on separating tasks into those activities that are related to direct client service and those activities that support service delivery. Taking time to think through the activities that comprise good client care, versus focusing on the activities that led to direct reimbursement, provided settlement house leaders a moment to think with clear eyes about their work. Critical to the process was centering the question they were trying to get an answer to, and then re-centering that question when everyone inevitably got lost in all the decisions and assumptions that needed to be made.

Tracking where all the time goes is a critical element of a costing analysis, as most of us are in a service business and most of our expenses are salary expenses. However, it is certainly easier said than done. For the UNH cohort members, understanding time commitments turned out to be interesting across the board, despite the onerous work of tracking and inputting.

Among settlement house leaders the “a ha” moments were many and included: 

• How shockingly little time is left to actually provide services to clients (and generate revenue) when you take into account all the things you have to do to keep the trains moving.
• How inadequate reimbursement rates are, given all this supporting work, to generate a positive bottom line. 
• The time and expense of providing evidence-based programming. A cohort member shared that she knew this intuitively but the process really proved “how expensive it is to do what the market and funders now require.” 
• The hidden unfunded salary expense.  Managers could now see the evidence that budget shortfalls were often managed on the backs of staff, resulting in unsurprising burnout. 

Admittedly, it was everyone’s first instinct to look at the time analysis and ask questions like:  

• Do we have the right staff in the right roles to meet the budget?  
• How can we make employees more productive and help them to perform better?  

And these are reasonable questions.  However, with an understanding that most staff are working as hard as they can in the best way they can, a second set of questions included: 

• Do we have the right systems in place to support staff to do their jobs efficiently and well?  
• Does our culture support performance?
• Do we need to invest in new roles and staff members to better support client facing staff? 

In truth, the time study and even the full costing analysis can’t fully answer these questions – though they do help get the gears moving by getting available data all in one place.

NFF was initially brought in to help this cohort of settlement houses determine their full cost of providing critical social services as a step toward preparing for potential partnerships with healthcare. For those who are interested in being in the forefront of the (sloooow) movement to values-based care, understanding costs remains a critical element of negotiating price.  In fact, costing is one of the fundamental building blocks of pricing, which will be further influenced by the appetites of potential “buyers” and the availability of competitive services in the market. Cohort leaders were reminded that what something costs may or may not have any relationship to what can be charged for it, or how much they could get paid for a service.

Costing can also be used to create a compelling story for fundraising. Better understanding what revenue is covering and what it isn’t, plus whatever else is needed to deliver the services to best meet community need, helps to make the case for philanthropic support of the full costs of providing the services. In addition, leaders confidently “owning” the detail around the finances indicates a depth of understanding that might make their story and approach stand out. Proposal writing will never be the same for this group, now that they have data about their full program costs at their fingertips.

Some cohort members were interested in understanding client utilization of services, another important element of contract negotiation, though capturing this programmatic data would require prioritizing further investment in systems to do so. Others were interested in sharing this strategic financial management approach with other program managers in their organizations who were not a part of the cohort, knowing that they are the ones responsible for making “in the field decisions” about the best way to serve clients.

Finally, others noted that this analysis provides “proof in black and white” that typical reimbursement rates do not cover the full costs of providing critical services, and that a change in funding policy and priorities is needed so that organizations like theirs can continue to do the work that they do in providing our nation’s social safety net.

There’s no doubt that undertaking a costing analysis is an investment of time, energy, and thoughtful consideration of how an organization’s data aligns with its mission goals. But the powerful insights this type of analysis can yield are vital to making sure that everyone – nonprofit leaders, funders, government, investors, and other stakeholders – can see what it costs to deliver the programs and services that are sorely needed across the US.

Support for this work was provided by the New York State Health Foundation (NYSHealth). The mission of NYSHealth is to expand health insurance coverage, increase access to high-quality health care services, and improve public and community health. The views presented here are those of the authors and not necessarily those of the New York State Health Foundation or its directors, officers, and staff.

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