For an organization focused on financial metrics, the American Institute of Philanthropy can be very interesting. I can’t do justice to this excellent article on Smile Train with an excerpt, and I urge you to read it all.
It thoroughly debunks an alleged claim by Smile Train that “100% of your donation goes toward programs — 0% goes toward overhead.” Smile Train currently seems to have backed off this claim at least somewhat, although Steven Levitt of Freakonomics appears to have been sold this story (and to have bought it) in 2006.
If identifying effectiveness with “low overhead” is silly, the idea of “0% overhead” simply seems absurd. As the article shows, it doesn’t (and can’t) mean that there are no operating costs affecting the total costs of the program. Rather, it’s another case of zooming in on “your” money, rather than discussing the true total costs of the program you’re supporting the existence of. It makes no sense in an analytical framework; it’s a feel-good gimmick.
That’s why we were surprised when we first saw this gimmick prominently displayed by a group that many consider to be the epitome of hard-nosed, analytical giving: Robin Hood.
Robin Hood’s financials make the situation look similar to Smile Train’s (minus the questionable reclassification of funds that AIP attributes to the latter). About 11% of Robin Hood’s total expenses are “Administration salaries and overhead” or “Fundraising and Public Information,” but because Board member donations are earmarked to those expenses, everyone else can be told their donations are “overhead-free.”
If your goal were to minimize overhead, the fact that Robin Hood tags funds this way shouldn’t be very relevant to you. Robin Hood could allocate more of those Board donations to programs if it spent less on overhead. If you gave to another organization, you could be scaling up an overall lower-overhead operation.
Bottom line: The “0% overhead” claim is promoting the wrong metric (low overhead) and offering a false way to accomplish it.
Why do charities, even impactful charities, use gimmicks like this? Because it works. Claiming 0% administrative expenses is a perfectly reasonable response to donors who are looking for a good Straw ratio — You can offer a perfect score. And there are plenty such donors out there, whether we like it or not.
Another gimmick often seen out there is the “matching gift”, which is often implicitly guaranteed: Sometimes there is no question about whether the match will be met, so it’s just a question of whose money is matched. Other times, the matching donor can promise (verbally or sotto voce) to give the full amount even if the matching threshold is not reached. Of course, you’ll have a hard time making a strong indictment for this sort of gimmick.
Can’t fault the non-profit here. Overhead is a silly, silly metric which begs to be taken advantage of by anyone with a brain.
You clearly didn’t do any research for this. There is no claim of 0% overhead, it is 0% TO overhead.
Tim, I thought our post accurately stated what Robin Hood’s claim does and doesn’t mean and why it isn’t ultimately helpful to a donor interested in minimizing overhead. Can you clarify your statement?
The goal of telling donors you have “0% overhead” isn’t to reduce overhead. It’s to increase revenue. And it works. Why is it wrong to promote a metric people care about?
Jeff, you’re describing the goal from the charity’s perspective, whereas we’re focused on the meaning from the donor’s perspective.
We agree with your take on why Robin Hood makes this claim – because it results in more funds raised. But we don’t believe in an equivalency between “funds raised” and “good accomplished.” We see value in donors’ having real and meaningful information and using it to hold charities accountable.
We think it’s wrong to promote a metric donors care about when the metric doesn’t tell them what they think it does.
I’ve always had a position similar to the one expressed by Holden, above. These low/zero-overhead claims are clearly misleading… there are overhead costs in the budget, so (overhead)/(total costs)>0. If you ignore the accounting gimmicks (since money is fungible, it can be seen as coming from a single pool of donated funds), an average donor is “paying” overhead costs with some non-negligible fraction of his/her donation.
However there is a more interesting angle to this, as these discussion mostly ignore the difference between AVERAGE and MARGINAL costs.
From the “MARGINAL donor” (the very last donor–the one who wouldn’t have made the donation without the “0 overhead costs” advertisement), perhaps the overhead costs can be taken as fixed. Conditional on all past donations, the charity’s overhead cost of distributing $1 more in donations is approximately zero due to economies of scale. In that case, the MARGINAL dollar may have very low overhead costs, and the advertised claim is not so misleading after all…
I would bet that the advertising crew at a large charity thinks they are talking about a marginal dollar, not an average dollar. Holden is probably right, however, in pointing out that an “average” donor does pay for overhead.
P.S. I know this post is over 1 year old, but I was poking around the blog an a link brought me here…
As a frequent donor, the “overhead” metric isn’t that important to me. If I feel the program is worthwhile — actually doing some good for ordinary people in need — I will donate, period. That being said, though, if I find out that a non-profit pays its top executives huge salaries (I won’t name any specific organizations… they know who they are) it does turn me off to giving anything at all.
Keith, thanks for the thoughts. I think the distinction between “average” and “marginal” is vital and usually underappreciated (we’ve written about it in our discussions of “room for more funding”).
It is true that “0% of marginal dollar goes to overhead” is possible. However, I doubt it is what the marketers have in mind here.
In order for “0% of marginal dollar goes to overhead” to be true, one of the following would have to be true: (a) the charity’s structure is such that its overhead operations are already at “maximum size”; (b) Board members are willing to give more if *and only if* the need for overhead costs increases, i.e., they have a preference (at least behaviorally) for funding overhead over funding programs/grants.
Both (a) and (b) seem fairly unlikely, and the explanation that is given for the “0% overhead” claim doesn’t seem in line with either.
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