Check it out: caging processes have pros and cons. (Cash Flow).

Many executives view the outsourcing of their organization's check-processing duties as a beneficial way to alleviate the cumbersome need to key in necessary information. Some nonprofits are proving that in-house processing can be not only cost-effective but also a valuable way to solidify a relationship with donors.

"We keep (our check-processing) in-house because we feel like we have a bond with the customer," explained Mike Vcelik, lock box service manager for Girls and Boys Town, located in a town named after it in Nebraska. "We control our communications with our customers. When you keep it in-house you have a better handle of when your donor writes to you or a change of address. I would say between 5 and 10 percent of our donors correspond with us and we can read and respond to them more effectively and better develop a bond and relationship with them."

Vcelik would not disclose exact figures but chose to describe the organization as "a medium-sized operation" as far as processing goes. When the -procedure was initially brought in-house, Girls and Boys Town employed a staff of 64 part-time, temporary people who opened and keyed gifts almost entirely manually. The organization then added 10 mail-extracting machines that increased productivity three-to-one. That kind of production, coupled with a minimum wage increase at the time, was when it first became apparent it was profitable to buy more equipment. So, remittance processors were added, Vcelik said.

Girls and Boys Town conducted a cost analysis study almost five years ago that confirmed that its in-house system was less expensive than outsourcing. When a. lock box service comes in and bids on an organization's process what they are going to bid is a plain document check, Vceli said.

With Girls and Boys Town's current system, approximately 15 percent of the volume that comes in is not conducive to automation. It's difficult to process and that is the mail that rings up additional fees. An operation that is outsourced may have to copy checks, read letters, make notes, segment it out and then send it back to the non-profit so that it may correspond with donors, if the nonprofit chooses to do so.

The organization prefers to handle matters as quickly as possible in dealing with donors who know of children in crisis. Having the operation in-house allows employees to identify high priority correspondence and deal with it immediately. It also provides a quicker turn-around on acknowledgements, which are consistently utilized by the nonprofit.

For those bottom-liners in the organization, Vcelik said that the move has also made cents. "We bid our check processing out to the banks and said we're going to encode our checks, bundle them for you, what will you charge us to send them through the Federal Reserve System? The prices we got back were anywhere from four to nine cents," he recalled. "Often times, encoding a check internally is worth two cents an item. That in and of itself is probably not enough of a cost savings to bring the process in-house. But when you put together the added value features of developing relationships with your customer and having quality control over that process then all of a sudden it becomes an option."

Lock down

Assembling this type of system is hardly a whiz-bang process. Storage and security must be considered for housing sacks filled with money. Being an incorporated village certainly doesn't hurt Girls and Boys Town. Most nonprofits do not have the luxury of placing a processing operation on the top floor of its own police station. Even with the police presence downstairs security cameras have been installed along with the enforcement of limited access areas.

The entire system will last anywhere from seven to 10 years, Vcelik explained. Nonprofits considering a switch to in-house check processing would be wise to start researching their local communities.

"One of the things that nonprofits have to do, that we did when I came in, is to develop relationships with other companies in their immediate area that are processors. For instance, you go out to your utility companies. We have quite a few insurance companies here. You're basically processing the same way. You're using a document and a check and the utility companies don't have the customer relationship aspect that you do. They're pretty much straight. So you need to see how that 85 percent of your process is done. Then from there you can work into some other nonprofits and find out how they are processing the remainder of it."

The type of system employed is also dependent upon the size of the mailer. For example, Disabled American Veterans (DAV) in Cincinnati processes more than 9 million envelopes a year. During peak periods it has processed more than 60,000 returns a day. To more rapidly handle the high volume DAY converted its system approximately two-and-a-half years ago.

According to Max Hart, DAV's director of fundraising, "It's pretty much state of the art." The backside of the reply envelope contains the account number, or reference number, that accesses the individual account and there's also a mail code included.

Both a technology upgrade and a need for speed dictated the change. For 20-plus years the nonprofit had been using an IBM document scanner that eventually became antiquated. The old system was no longer being supported, and DAY decided it wanted to buy into modern technology to raise it's productivity.

The old system peaked at around 20,000 pieces a day and during peak periods would suffer a backlog. That would delay the reporting system, which led to occasions of "flying blind," as Hart put it.

The new automated system starts by sorting the reply envelopes based on contents, including those with checks, reply forms and currency only. DAY also utilizes gift-type envelopes in some of its mailings and along with those that contain metal, such as paper clips and staples, is separated. Once the replies are divided and fairly uniform on content it moves on to the extractor, which cuts all four sides of the envelope.

"That's a little bit unique because in most return processing they'll cut three sides and then lay the envelope open so that an operator can pull the guts out of it," Hart explained. "We cut it four sides because if we don't get a reply form back, which we can optically scan, then the back panel of the reply envelope becomes a scanner document for us, a remittance form if you will."

If the contents reveal simply a check, the extractor dumps the front panel of the envelope with the return address and retains the check and the backside of the reply envelope. If it has a reply form in it and a check, the form is pulled and the contents extracted.

The materials move on to what is known as a compass, a machine that orients the check. if the check arrives along with the remittance form, either the reply form of the backside of the envelope, it orients that check face-up and then right-side up so that everything is ready for transport to the scanner. The reply form is then optically scanned and the account number and the mail code are picked up.

DAV also optically scans checks. Up to 65 percent of the scanned checks read the handwritten amount on the check, Hart said. If the amount written on the check can be read and if it agrees with one of the suggested contribution amounts on the reply form, it is accepted and verified. If the check is read and it doesn't agree with any of the suggested contribution amounts the system then captures the check's image. An operator calls up that image and keys in the amount of that check. If the check reads $50, and is keyed in by an operator as $50, it is verified.

Roughly 35 percent of the time the amount can't be read off the check and if there is no reply form used for validation. According to Hart, the system images than both the check and the reply form.

"On a lot of what we do we don't have to key anything to capture the data," Hart added. "On a percentage of it we have to make one key and on a very small percentage we have to key twice. We've pretty much automated this as far as we can."

Currency is handled a bit differently in that it is pulled and a "dummy check" is substituted in its place. From the dummy check the system is able to pick up an account number and a mail order code in its data capture. Approximately 5 percent of DAV's returns contain cash.

Standard check processing procedures continue following the balancing process as the checks are run back through the transport where they encode.

The new automated system has provided two much needed benefits. While operating within an end of the year accounting basis it has enabled the organization to process its receipts by the first of the year including the traditional heavy season during the autumn months. It has also reduced DAV's cost per return process although Hart was not able to cite exact figures.

The pleasure of modern automation did not come without the price of a little discomfort according to Hart.

"The conversion was quite painful -- we literally went cold turkey. We had all new equipment coming in. We cleared our caging area and put in all new equipment, debugged the equipment, trained our people and got back up running. For a while nothing was moving. That's not the way to make a conversion," he laughed. It took less than a week to put in the equipment but to debug the equipment and train the people it took over a year, Hart added.

Matters of security were also attended with the caging area becoming a high security location containing a walk-in vault. During the conversion process it got to the point where we were leaving the sealed and locked hampers that you received from the Postal Service out on the floor in the caging area, Hart said. Additional overflow was stored in what used to be its old printing shop where the doors were locked and a guard posted.

What can take the sting out of any conversion is a gradual upgrading process. The in-house caging operation at Christian Appalachian Project (CAP) was instituted years ago as a means of providing jobs in Lancaster, Ky., and surrounding areas. Its success in providing jobs was followed by a system marked by efficiency and comfort that continues to this day.

Headquartered in a rural area, CAP is very familiar with its bank and how it handles business but made the decision to take operations a little further. Just this year it purchased a check-processing machine to encode its checks, process them and upload the information to the database. The upgrade has worked out nicely for Sue Sword, vice president of direct response and gifts in kind at CAP.

"The encoding of the checks is probably going to pay for the machine within a year and a half," Sword explained. "With the check-processing machine, the chances of having mistakes made that you might have with keying, the margin of error is reduced to almost zero because everything is done automatically."

While smaller than DAV, CAP still whisks about 2,200 replies per day through its system. On a good day operators will key in 700 by hand, Sword added. All told, it works out to involve one operator to run the machine with that 2,200 per day average versus three-to-five operators who previously keyed in that information.

For a system that was instituted to create jobs, CAP's semi-automation has led to a reduction of three people, while utilizing a machine that is capable of handling much more than is fed it now.

In the beginning...

CAP's process of sorting is its first matter at hand and differs slightly from that at DAV. "We separate our mail into what we call direct mail, white mail and of course your normal bills that have to be processed," Sword mapped out. "That's done on a daily basis. We're also very cautious in watching for any mail that comes into the planned giving department. Any estate checks and things like that, we don't want those lying in the vault for a week. Anything that comes into the planned giving department is handled that day."

The processing machine is quick but CAP still cannot get through all of its replies in one day. In most cases the organization can close out a month about 10 days into the following month.

CAP doesn't hide the fact that it would love to purchase a sorting machine to add to the operation but such machines are not readily available on the market unless you have one custom-built. The level of investment is too high at this point in time but Sword acknowledge that it is "probably the next step for us."

As for other nonprofits considering switching to an in-house caging operation she stressed two things: Make sure that you have the appropriate number of people to process the information and that controls are put into place before you start.

It's just a matter of keeping yourself abreast of the times, Sword said. "Throughout the years CAP has evolved and handled things differently. As the organization grew the controls and security grew. We feel now that we don't have any need whatsoever to take it out of house."