Rules of Thumb for Nonprofit Software Investments

For Nonprofits, investing in new technology can feel like shopping for a car – nothing prepares you for the sticker shock. We encourage our nonprofit clients and friends to use two rules of thumb when embarking on software change. The first rule – The 3 Times Rule – says that the total project will be approximately 3 times the base software price. This total budget would include the software investment, the first year of technical support and enhancements, and professional training and implementation assistance. First, configure the software that you believe will do what you need done, and then look at the software investment. If $10,000 covers the software options you want, then the total budget for the implementation of the new system would be about $30,000.

The second rule of thumb is the 1½ % Rule. We believe that no project should consume more than 1½ % of the organization’s annual budget. While there are cases to go beyond that, we strongly believe that nonprofit’s should focus their resources on providing services and support for the communities they serve. Under this rule, a $30,000 project budget would need an annual budget in the range of at least $2,000,000 in order to appropriately support the investment.

Now let’s restate these rules a couple of different ways:

  • First, if your annual budget is $3,000,000, what should you be ready to afford in the nonprofit software realm? Be ready for a $45,000 project, of which $15,000 is direct software cost.
  • Next, let’s say you have a $25,000 budget limit for the project. What can you afford? First make sure that your overall annual budget is at least $1,700,000 to fit inside the 1½ % rule. If it is, the next step is to choose a software package that costs around $8,300. If not, evaluate the investment’s economic sense before making a commitment.
  • Last, imagine your board approves a new software purchase of $15,000. They expect this amount to include both the software and the 1st year of support. You can estimate that the technical support will be about 25% annually – a common rate in this market. Therefore, the software cost should be around $12,000. Next, find out how your organization plans to implement the software? The board needs to consider professional services or the staff needs in order to avoid the work falling entirely on them.

Often nonprofit organizations do not recognize the complexity of options in today’s software packages and are not prepared for the actual investment to make them fully functional. We actively support nonprofits in obtaining professional implementation assistance. This will minimize down time during implementation and avoid pitfalls the new user might build into the software by accident. We have worked with some who have called us to help them after they have been running the new product for some time, incorrectly, and ask us to help fix it. It is much easier – and less costly – to implement your new software correctly the first time than it is to fix the system after the fact.