How do you know if your chosen fabulous looking charity is providing good value for your money? Charities frequently report percentages of money spent on “Programs”, “Administration” and “Fundraising” or some similar ensemble. While I understand the motivation for this approach, I think it is the wrong way to go about finding out if your charity is wasting money, for these three reasons:
- It puts the focus pointlessly on inputs rather than what matters – outputs and results.
- It doesn’t really tell the donor anything, as there rarely is any accompanying information about what is hidden underneath each label.
- It lets charities off too easily.
Quick aside – when considering charity value for money, a useful analogy is to think of your chosen charity as a business you might invest in. After careful consideration you invest your money in a business and expect the business to make a profit. Profit is the very simple metric by which we can judge a business and compare disparate businesses against one another. Similarly, after careful consideration you “invest” money in a charity and expect the charity to go off and do what you have “invested” in them to do – save pandas, clothe the needy, grow better crops. That is their output – the “profit” if you will. For the sake of this post let’s use a sample business and a sample charity: Apple and Seed Change. Leaders in their fields both!
So back to the three reasons. Firstly, the focus on inputs. How much should Apple be spending on HR or staff? I don’t know and I don’t really have any way of knowing what’s appropriate. And I don’t think Apple’s shareholders are really that bothered either. The proportion of money Apple spends on HR or staff retreats or fancy offices is not scrutinised because Apple has a clear and measurable output – profit. Keep making healthy profits and you can decide for yourself how much you want to spend on the staff canteen. For various reasons the same attitude is not applied to the non-profit sector. With Apple we look almost exclusively at output. For charities people often want to know just the inputs.
Secondly, how can you know if an admin expenditure of 5% is appropriate? Maybe if Seed Change spent more money on a dedicated human resources team our other staff would be more available to deliver more results and move more farmers out of poverty. But if our goal is to keep our admin expenditure under 5% of total spending, we will shovel more paperwork onto program staff and book their salary as a program expense. The work doesn’t go away; it just gets done by the another person. And we are praised by donors because of it.
Finally, if Apple loses money, investors go elsewhere. No one says “Ah well, they are trying. Look how low their overhead number is.” Maybe that was the problem. Or maybe the problem was elsewhere. It doesn’t matter. No profit, no investors. Similarly, donors should be that critical of charities. Charities need to be absolutely laser focused in their goals and their proposed outputs (it’s livelihood improvements for the farmers of Kigoma, for those playing along at home). No one would invest in a company with confused goals, conflicted internal incentives, and no reporting of profit or loss. So you shouldn’t be asked to invest in charities that are similarly poorly defined. Don’t ask “what proportion of your funds was spent on admin?” ask “please send me your evidence of impact and cost effectiveness”. As a free floating number, I have no interest in the amount of money Oxfam invests in fundraising. I want results. No one told Apple that their advertising budget was too high when they posted a quarterly profit of $18 billion. Reporting a “good” admin percentage of under 4% lets charities get away with not delivering any results. Remember no profit, no investors.
I understand what donors are driving at when they want to know how much money is spent on overheads. No one wants to feel like a sucker. No one wants to give money to help kids, cure cancer, or clean up the great big masses of plastic floating in the oceans only to find out that their money hasn’t gone where it was meant to go. This desire for transparency is to be encouraged. Sunlight is the best disinfectant and people do need to have a high level of trust to part with their hard earned cash. But simply looking at percentages is not the way to do it. Let’s demand more from our charities and find out what’s really going on. If they can’t or won’t tell you, don’t invest. And most importantly let’s focus on what matters – results – and not just what is easy to make into a pie chart.