Which of these boasts is not like the others?

1. “90c of your dollar goes directly to building cars. Only 10% of our expenses go into planning and designing them.”

2. “We’re using a volunteer director and no advertising, so we can spend 100% of the movie’s budget on shooting expenses. It’ll be a hit!”

3. “90% of our military budget goes directly to soldiers and weapons. We don’t waste your tax dollars on administrative costs.”

4. “More than 90 percent of our expended resources … support our poverty-fighting projects around the world. Less than 10 percent of expended resources go toward administrative and fund-raising costs.”

The answer, of course, is #4, because it’s real. But to hear me tell it, it’s as silly a “selling point” as the others.

Efficiency is great, but who the heck came up with the idea that efficiency means low “administrative expenses”? When I think of what’s included in administrative expenses, the following jump to mind:

  • Salaries for executives
  • Technology infrastructure
  • Self-tracking and -evaluation

For-profit companies spend boatloads on all of these things, and it isn’t because they’re being extravagant–it’s because these things are cost-effective. When you’re doing something complex and difficult (like, say, trying to improve the lives of Africans who suffer from a host of interrelated problems), you need to get great people and keep them happily employed, you need to have good tools to leverage their skills, and you need to be stepping back and looking at what you’re doing and how you can improve it.

A theme we have already hammered on ad nauseam, and don’t intend to stop, is that in giving as in everything else, It isn’t just how much you spend–it’s how you spend it. And that means that the people, tools and processes that can help you spend more intelligently are worth quite a bit of expense themselves.

This isn’t just a hypothetical/abstract argument about how the Straw Ratio can mislead you. This is the product of our experiences and frustrations with organizations that we find to be disorganized, technologically behind, and incapable of producing any details about what they do and whether it’s working. The obsession with the Straw Ratio goes beyond Charity Navigator: there is a pervasive attitude that nonprofits need to get all their money right to the needy, and do all their administration on the cheap. No one thinks a business should be run this way, but it’s conventional wisdom in the nonprofit sector, and the result is that the groups you’re paying to accomplish great things are trying to do them without good technology or good people. Examples of both to come.

Comments

Which of these boasts is not like the others? — 10 Comments

  1. my friend grant just pointed me to your blog after i brought up charitable giving on my own blog.

    i’m glad you’re really going at the straw ratio. i’ve had many discussions with people who bring up this ratio and i ask them if they would like to stop investing most of the companies they have stock in because their straw ratio’s will be quite “bad.” not to mention government! but of course, we probably have some good complaints about wasteful government spending.

    on a sidenote, despite not valuing the straw ratio, i have used charity navigator to help me find various charities, which i then explore via their own websites or by other means. it’s a shame that there aren’t better sites for navigating through the myriad of possibilities.

    finally, although not exactly related to what you’re doing here, have you guys read the arthur brooks book on charitable giving? it’d be interesting to have your opinions.

  2. A better measurement than the “straw ratio” for deciding which charity to donate to is the total cost, including inferstructure and administration, of providing a certain service, e.g. vaccinating one child in Nigeria against polio.

  3. Holden, the true administrative expenses are those that are non-program related. Executive salaries, technology infrastructure, and evaluation can have “program components.” Good charities will examine their programs and allocate whatever portion of those costs you mentioned (and any others) to the program budget. If they are furthering the program, then they are NOT, by definition, overhead. There’s more at this post: http://www.themonblog.com/2007/01/overhead_and_pr.html

  4. Matthew – then what expenses are administrative? Presumably all the money an organization spends is furthering its program in the broad sense you mention … so what counts as overhead?

  5. Every nonprofit has both direct and indirect costs. Direct costs are 100 percent attributable to the program. If the program didn’t exist, you wouldn’t incur that expense. For example, if you provide mosquito nets for African children to prevent the spread of malaria. The cost of the nets is direct. However, there are many indirect costs keeping this program running that the program only uses a part of (like IT or Executive Salaries). The art of allocating indirect expenses to programs is determining a fair and accurate way to spread the indirect costs to the programs. For example, if the mosquito net program takes up 10 percent of your office, you might consider allocating 10 percent of the monthly rent to the program. Rent is a real cost incurred by most nonprofits, and to not fairly assign costs where they belong is bad financial management. You would have a similar exercise for things like IT infrastructure, evaluation, and executive salaries. If you didn’t, you’d have to go out and raise more unrestricted funds to fill in the holes in your program budgets. It isn’t logical to leave a program budget incomplete—if they use 10 percent of the IT infrastructure, those costs should be allocated to the program and built into the program’s funding budget. This is a standard nonprofit financial management practice, and I have colleagues at very large nonprofits who spend a considerable amount of time on this question. At Children’s HopeChest, we’ve been working for years to make sure that all of our costs are properly allocated to programs, based on their cost to the organization. We work closely with our external auditors to make sure that those follow best practices. From this standpoint, any expense that isn’t fairly and accurately allocated to a program would be considered “overhead.” The two main categories of overhead are fundraising expenses and administrative/general. A great description of this practice at the Alliance for Nonprofit Management: http://www.allianceonline.org/FAQ/financial_management/how_can_we_allocate_indirect.faq

  6. Matthew – if I read your response right, you’re saying that any expenses that can be attributed to a specific program activity (in the sense that they wouldn’t exist if not for that activity) can go under “program expenses.” Expenses that are necessary for the operation as a whole, but that would still be there if any particular activity were eliminated, are “administrative” (or fundraising).

    If that’s right, I stand by my rant. A nonprofit should be ready to hire a new, more expensive CEO to do a better job with the overall coordination of the organization. It may invest in a new technology infrastructure that isn’t necessary for any particular project, but for the overall running of the organization. Same with an internal/managerial project. Even if part of these expenses can be attributed to programs, the net effect is still generally going to be bad for the Charity Navigator rating. Yet these things can be enormously beneficial for nonprofits, as for for-profits.

    Your thoughts?

  7. All expenses should be allocated to their relevant budget departments–like fundraising, programs, and administrative (a huge simplification for thise discussion. Assuming that the CEO spends 1/3 of his/her time in each of those areas, then you would allocate 1/3 of the salary to each of those areas. Only 2/3 would be considered administrative and fundraising. But the time a CEO devotes to “programs” should not be classified as overhead.

    An expensive CEO would only change the dollar amount allocated to programs–not the percentage. The same would be true for the high cost of any IT infrastructure (which could be capitalized as a fixed asset.)

    If the organization properly allocates expenses where they belong, it should not negatively affect their overhead. The idea here is to think about the share of the “overall running” that belongs to the programs. Almost every expense incurred by a nonprofit has a portion that can and should be allocated to the programs it runs.

  8. Pingback: The GiveWell Blog - Exploring how to get real change for your dollar. » BRB

  9. Thank you for this. I run a very small non-profit and get this question frequently. Honestly, I donate the tiny amount required for our infrastructure myself. When donors who have asked the question hear that they give right away, which is great and all, but I have two issues with it. One, it tells them nothing about my program except that I believe in it, which they could have gleaned from the fact that I started it, donate 80 hours a week to running it, and am currently fundraising for it right in front of them. Two, I find it mildly offensive in the microdonation arena. Do my Vistaprint free business cards seem that extravagant to them? What percentage of their quarter do they feel would be appropriately spent on such things?

    I love to talk about the lives we impact. We don’t do studies I will admit (one good basic study would probably triple our annual budget), but I do keep track of our recipients over the long term as well as keep track of simple statistics such as our divorce and mental health rates in both the short and long term as compared with the population we draw from. While I love to talk all day about such things, I have learned it is not worth my while. Waving a flag and telling people how we pay for our paper clips yields me more funds faster so that I can get back to doing what I really am called to do with my life. Someday maybe people like you and people like me can educate donors enough to help them make good decisions.

  10. Just wanted to say thanks for this post and the whole Straw Man series. I found it a few years ago and seem to return to it once or twice a year to grab the URL to paste into an conversation I’m having with someone. Really well articulated.