Sunday, December 30, 2012

I couldn't do it cheaper on my own

I want to push back against an ever-present charity evaluation metric: the percent of total expenses spent on programs versus general/administrative/fundraising (G&A). Its a popular measurement tool that makes intuitive sense: If I give $100 to a charity that feeds hungry families, shouldn't I expect my $100 will feed a hungry family? If only $75 or $50 or $15 of my money fed a hungry family, then what on earth happened to the rest!? Something must have gone horribly wrong. My money was misused!!

Every major charity evaluator - Charity NavigatorGiveWellGuideStar - use percent of total expenses spent on programs as part of their ranking system. The general wisdom is, the more money spent on programs, the better - 90% or higher is the gold standard, fall below 80% and suspicions about effectiveness abound.

We know that nonprofits must have some overhead expenses. The most effective charities have some paid staff - people who actually carry out the programs like identifying families that need food, then purchasing the food, then delivering the food, then filling out some paperwork to prove the food was purchased and delivered. There are paid staff who collect and organize the paperwork, compile data from that paperwork and create reports to determine how many families were fed, then present the reports to the board of directors and the public. There are staff who solicited your donation by carefully crafting the language of emails, interviewing clients to get compelling stories to share with you, taking photographs of happy recipients to drive home the meaning your gift can have. Someone had to receive your check or credit card donation, properly account for it, send you a tax receipt, and follow-up with a thank you note so, hopefully, you will give again. And the bank or credit card processing company charged that charity some fees for your transaction. Someone had to run payroll to compensate these employees, and pay payroll taxes on their behalf. Someone had to file a tax return with the IRS and the state, and be sure the charity is in compliance with labor laws. Someone had to create and update the website. Someone had to think, hard, about the best way the organization could feed more families. And the staff need office space, computers, perhaps delivery vans and other property and equipment to help carry out their work - and all of that needs to be properly insured.

Lots of these expenses are clearly not program expenses. And that makes us uncomfortable. "I don't want to pay someone's payroll taxes. I don't want to pay for that data entry person. I'm giving money to make a difference for hungry families, so all my money should go to buying and delivering food."

But those payroll taxes and that data entry person is essential to the nonprofit. Someone has to pay for them, or the nonprofit shuts down and there are no programs to speak of.

We create a false dichotomy when we separate the expenses of a nonprofit, classifying program expenses as "good" and G&A expenses as "bad". G&A is not separate from program: it is the delivery system that allows services to reach people in need. Without the delivery system in place - the measurement, the payroll, the legal compliance - hungry families would not be fed, because the nonprofit that feeds them would not exist.

Each nonprofit will have a different delivery system - some may be cheaper than others depending on the type of services they are offering, to whom, and where. Rather than using an arbitrary percentage to determine whether the delivery of services is efficient, ask yourself: could I do it cheaper on my own? Could I get food in the hands of a hungry family for less then $25 or $50 or $85? Maybe if I know the hungry family. Maybe if they are right down the street from me. Maybe if my hourly wage is low. Then yes. I could stop by and see the family to ensure someone will be home (food left on their door-step will likely get stolen, then don't have a phone so I must visit in person), then head to the grocery store and buy $70 worth of food, drive it to the family and drive home, spending $5 on gas, and a total of one hour of my time at $25/hr. Seventy percent on my $100 directly helped the family. But what if that family wasn't home when I dropped by? What if I hit traffic? What if the local grocery store doesn't have fresh fruits or vegetables? The cost for my delivery system can quickly rise. And if the family I'm trying to help is in Kenya, it would cost me thousands of dollars to deliver any help on my own.

G&A expenses are really a societal efficiency - not a waste of charitable gifts. Individuals acting on their own to do good work face high costs. But through a nonprofit vehicle, we can pool our resources to create a streamlined delivery system that lets more of our money do good. I'm happy to pay for the existence of that system, and I think you should be too. The charity delivery system, even if it seems inefficient, is vastly more efficient than what any of us could do on our own.

I hope it goes without saying that I think charities should spend only what they need on delivery systems, not more. I am not suggesting they ignore opportunities for improvement. Instead, I am suggesting that we, as donors, stop ignoring the fact that delivering services costs money. We should recognize that delivery systems are not free, and we should be willing to pay for them.

-Selfish Blogger

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