The worst way to pick a charity

Today, the most common way that donors evaluate charities – when they evaluate them at all – is by asking questions about financials, such as “How much of my donation goes to programs vs. salaries?” This approach makes no sense.

We’ve argued this point before at length. Picking charities based on the “overhead ratio” is like picking your doctor by the percentage of revenue spent on medicine (more absurdity-highlighting analogies here). The actual reported “overhead ratio” is vaguely defined and generally up to the charities reporting it; the concept of “minimal money on overhead” discourages a lot of good and necessary spending, and is ultimately irrelevant to the question of whether a charity is changing lives.

What today’s press release (PDF) makes clear is just how much agreement there is on these points. Today’s two most prominent sources of financial metrics – GuideStar and Charity Navigator – agree that there needs to be more to the picture, and are working toward more meaningful metrics.

It’s scary to think about how commonly this metric is touted, when it’s recognized as a red herring. It seems to us that people have responded to the extreme scarcity of information on charities by using whatever information is available, whether or not it’s meaningful. Fortunately, alternative ways of evaluating charities are emerging.

GiveWell, Great Nonprofits and Philanthropedia are all new, small organizations. None of us have perfected a methodology yet – no one has – and all of us would benefit from more input. If more donors took a look at these resources, we would finally see the conversation around “Where should I give?” move beyond the distracting and unhelpful question of “Who has the lowest ‘overhead?’”

That would be a huge step toward a world in which donors reward charities for effectiveness in improving lives.

Comments

The worst way to pick a charity — 5 Comments

  1. Holden —

    I love where this is going, thank you (and the others) for your leadership on this. Everything should be under impact and providing impact at a value.

    Something else I think is necessary: “industry” based groups that help us to compare impact across non-profits (and also may help us deliver it at value).

    Rather than asking each non-profit to do their own impact analysis, for established industries (like say closing the achievement gap in children ages 6-9 [I'm not an education guru, so that might not make sense, but you get my point]) could be especially useful for foundations and major donors to see real ways that they can get more impact for their money.

  2. Sort of. In this post I was thinking of a clearinghouse for non-profits in specific industries. In that case, they would develop the expertise in “auditing” a specific kind of charity and hopefully bring the cost of tracking impact down. They would also give us standard metrics across non-profits that perform within an already established industry.

    Furthermore, they’d be of great value to institutional funders, who could begin rewarding non-profits that are producing more impact per dollar with more dollars. Perhaps even one or two ambitious institutional funders offer to pay groups purely based on performance (setting a “market price” for impacts). Perhaps that institutional funder is ambitious and uses the internet and new media to allow private givers to make “guaranteed impact” donations — gifts that are only released to a non-profit after that group has achieved a certain impact.

    Obviously, clearinghouses like these would have to be industry (and to some extent locationaly) specific. And they wouldn’t solve all of the problems (after all, some services are not profitable and don’t have impact measurements but are invaluable)… but they’d be a great start (and if you know of anything like this, please let me know, I’d like to study them).

    From my understanding, PAL and IPA are more like think tanks than anything else (but still awesome… my day job non-profit co-hosted a Poverty Action Conference designed to expose college students to impact first principles).

  3. James, there are some attempts to standardize nonprofit metrics (for example, one at the Urban Institute). I personally am not terribly optimistic about standardizing metrics. I think the biggest problem we face now is that there is so little information of any kind, and that will have to change before (if) we can make any headway on standardization.

  4. partly agree, some overheads such wages can be compared. Some charity directors are paid a lot of money and some are not. This is a key indicator of the overall approach a charity has towards the way it spends money.