Why would an institution with a multi-billion-dollar endowment worry about maximizing efficiency and pinching pennies? In the case of the Milton Hershey School, the short answer is that all institutions, even wealthy ones, can do more with a healthier cash flow.
Moreover, as everyone but “day traders” now understands, no sustained economic expansion occurs without attendant improvements in productivity. During the past 17 years of unparalleled economic growth, those improvements have come mostly from the private sector. It is time for America’s philanthropies to catch up, if only for reasons of self-preservation. One need look no farther than Wisconsin’s experience with welfare reform to see the private sector eyeing an opportunity to provide the same results as nonprofits—at lower cost.
What We Accomplished
Formed some 90 years ago as a home and school for financially and socially needy boys, the Milton Hershey School takes its name and its endowment from the legendary chocolate maker, Milton S. Hershey.
The past nine decades have brought many changes; not only has our endowment grown from $60 million to more than $5 billion, but we now serve some 1,050 boys and girls from diverse social, cultural, geographic, and ethnic backgrounds.
In 1993, led by our board and newly appointed president, Dr. William L. Lepley, the Hershey School began an exhaustive effort to develop a strategic plan to guide our future work. Along the way, we hired management consultants to help us identify “best practices” and “benchmark” our performance against the best practices of other nonprofit (and some for-profit) organizations.
Here’s how it works. Arthur Andersen has identified Intel Corp. as the “best practice standard” for processing purchase orders (Intel processes 95 percent of purchase orders electronically). So when the Hershey School achieved a level of 99 percent orders by electronic means, we knew we were really getting somewhere. Electronic purchase orders are received by vendors almost immediately, saving on postage and handling costs.
Similarly, we are saving a tidy sum by moving to electronic funds transfer (EFT) for all employee, vendor, and outside contractor payments. EFT payments provide an average cost savings per transaction of $0.27 over the standard mailing process.
Early on, we decided that all those we served, internally and externally, would be designated as “customers” and that “total customer satisfaction” would become our primary objective. We established a customer service center for teachers, houseparents, administrators, and students, as well as for vendors and suppliers. Since its opening in October 1996, the center has fielded more than 34,000 service calls.
The results of that decision speak for themselves—we have met or exceeded our targets in 86 percent of the categories measured. In just one area, the custodial services department, for example, we successfully improved our productivity to 31,500 square feet per custodian, more than 50 percent higher than the national average. This has been accomplished while simultaneously reducing our cleaning costs by some $0.54 per gross square foot compared to those of a prominent “best practice” Midwestern university. Meanwhile, our latest customer service center survey is receiving satisfaction ratings above 94 percent in eight out of the ten different operations.
Some of this may sound like penny pinching, but all those pennies add up. As a result of these and other efforts, we are realizing total cost reductions and cost avoidance of some $2.2 million per year, or almost $7 million since we started. And that’s $7 million more to spend on the programs that made the Hershey School great.
Dr. Lawrence F. Davenport is vice president of finance and operations and chief financial officer of the Milton Hershey School in Hershey, Pennsylvania.