A low-cost strategy has paved the road to success for many political action committees. The key to success using a low-cost strategy is to deliver the expected level of value to members and employees at a cost that assumes an adequate level of continued receipt growth.
Consider Figure 1.1, which is adapted from an economic model advanced by Adam Branderburger and Harborne Stuart. The vertical distance between the willingness of donors to give (top line) and the cost of providing service itself (bottom line) represents the range of giving opportunities within which every organization operates. It also represents the value of PAC services, such as benefits and accomplishments, as perceived by donors. For PACs, the spread between these lines is narrow. And the top line – what donors are willing to give – is generally fixed, either by government rules or the market within which your PAC operates. For example, if your average PAC contribution has been culturally fixed for two decades at $10 per month or $120 per year, the donors’ willingness to give more than that amount is very limited. Much time and attention – including added resources – will be required to grow the top line.
To establish greater return on investment, PAC professionals must push the cost-of-providing line lower. Generally, this is accomplished through operational efficiency, pressuring vendors for low prices, and other means. This is a game the National Beer Wholesalers Association (NBWA) has been playing and winning for many years in the PAC market. It has squeezed more costs out of its operations than has any other major PAC. What sets NBWA apart from other PACs is the fact that it has the lowest average expense ratio in the business political action community. NBWA PAC raises nearly all of its money through one annual solicitation and simple targeted letters to company owners and suppliers. In 2008, for example, NBWA’s PAC expense ratio was 12 percent including labor, overhead and direct expenses. That’s less than one-half the business PAC community’s average expense ratio of 26 percent. That has the effect of giving NBWA PAC donors and members a 54 percent greater return on treasury dollars used to support PAC operations than others. By keeping management and fundraising costs low, NBWA invests and reinvests more of a member’s money into other essential association operations such as lobbying.
A low-cost strategy can be achieved through several means. Consider these three:
Improve operating efficiency: Seek out ways to incrementally improve what you are doing. A one percent improvement here and five percent improvement there quickly add up, giving you noticeable time and resource savings as seen in Figure 1.2. Process-driven fundraising focusing on qualitative results provides a consistent return on investment, as you find better and better ways to accomplish the same objectives through testing markets and ideas. For example, many groups send direct mail solicitations to entire restricted classes hoping for response rates of 20 – 30 percent, when in fact less than five percent of any affiliated class typically responds to a direct mail appeal. Spending time identifying the active five percent (B) of your membership or employee base who respond 95 percent of the time, and delivering your appeal to this qualitative audience, rather than a quantitative audience (A), is a much more efficient use of resources.
Exploit experience: People learn to do the same job more quickly and with fewer errors the more frequently they do the job. A heart operation that took eight hours to complete the first time, can be done in three with an experienced surgical team. The same is true for PAC operations that focus on learning. The experience concept holds that the cost of doing a repetitive task decreases by some percentage each time the volume of work doubles. Thus, an organization that learns quickly or leverages experience will see larger gains at a much lower cost than those that make every solicitation a unique appeal or grow knowledge internally through trial and error. Consider the two curves in Figure 1.3. Both began at the same cost level but learn at different rates. A is further down the cost curve than B. Based on time to learn (T) the advantage is cost (C). Organization B must either learn at a faster rate or accept higher operational costs for its members and employees.
One example of exploiting experience is found in the Associated Builders and Contractors’ (ABC) 2008 prior authorization campaign. For years, ABC PAC struggled to secure prior authorization forms from its 25,000 member-companies with very little response. So little, that almost every attempt to talk about the PAC at meetings and conventions included sanitized information with watermarks that read: sample PAC materials. ABC sought a solution to the challenge of expanding its restricted class and found it. They recruited advice from outside PAC professionals. These professionals allowed ABC to expedite the learning curve, lowering costs of implementing new programs through trial and error, because they had repeatedly implemented successful prior authorization efforts. By exploiting the experience, tactics and methods of others in the market that were successful, ABC saw nearly 11,000 authorization forms returned to them during the effort. This represented a 340 percent increase in qualified prospects for their PAC. Most importantly, ABC staff gained immediate knowledge of how to execute future campaigns using similar tactics in an efficient manner.
Reengineer services: Huge cost reductions are often achieved through reengineering. When costs change for a given output, such as labor, the supply curve shifts in the same direction. For example, assume that your organization cuts internal operational costs by reengineering or reprioritizing services you offer through your PAC, so that the cost of performing some tasks decrease. Otherwise stated, you free up more time and resources to other activities specifically directed at raising money, rather than spending money and time on internal operations like compliance or bookkeeping. This situation shifts your supply of labor S1 outward, to S2—an increase in time and resources. This increase in supply of labor causes the cost associated with running your operation to decrease from C1 to C2. In this case the quantity of donors (D) increases from Q1 to Q2. In a supply curve shift, the cost and the quantity move in opposite directions.
Back in 1994, the National Association of Realtors (NAR) found itself in a declining economy and membership losses as a result of the housing recession. Further, it had a serious cost liability in staff time and direct expense that could not be cured by simply being more thrifty and efficient. Something more dramatic was required. The association responded by working with its state and local associations to redesign the entire PAC from operations and communications, to governance and benefits programming. A key component of the makeover was an agreement that state and local associations would administer PAC recognition and benefits for more than 150,000 donors under $1,000. NAR standardized and supported major donor giving levels, while state and local associations were free to offer unique donor clubs and benefits at their own expense to low-dollar donors. To offset the new expenses state and local associations would bear by having to provide these benefits to donors, NAR gave back an extra five percent of the PAC funds raised to the states. The result was a net savings to the national association of hundreds of thousands of dollars in operational expenses over just a few years. This eliminated any number of fulfillment items, such as pins and ribbons, as well as the need to have staff resources focused on data management and fulfillment of low-dollar donor clubs. The association’s redesign made it possible to cut 60 percent of direct and indirect costs for PAC recognition in the first year of implementation. Money that was freed to use in more efficient revenue-growth activities such as aggressive grassroots fundraising assistance, major donor programs, and communications efforts.
As a strategy, implementing low-cost initiatives are most appropriate and effective among PACs with large audiences where economies of scale exist. Continuous improvement in operating efficiency, exploitation of the experience curve and service redesign are among the best methods for your PAC to lower its costs of operations while raising dollars and remaining competitive.
Trey Richardson is principal of Sagac Public Affairs, a national company providing communications, research, fundraising and management solutions to hundreds of political, non-profit and corporate organizations. Sagac is the leader in the political community for strategy and implementation of candidate, committee and PAC finance operations.