May 22, 2009
The Costs of Rating Charities on Overhead Expenses
Saundra Schimmelpfennig, a former aid official, takes aim at a popular target: the fixation in the charity world on administrative costs.
Ms. Schimmelpfennig, who is writing a book on how aid can sometimes cause more harm than good, describes some of the ways that rating charities based on their overhead costs hurts aid work.
Doing a study to investigate a community’s needs before beginning work is expensive — and increases a charity’s administration costs. So charities are reluctant to share needs assessments, because they don’t want to take a financial hit while their competitors do not.
As a result, charities after the 2004 tsunamis either had to pay for their own, duplicative assessments or begin work without determining needs. The consequences? An aid group built an orphanage in a town that had virtually no homeless orphans, whereas in another town four charities competed to serve just 23 families. A village a few miles down the road had no charities serving children, despite the need.
The way administrative costs are counted is squishy and often doesn’t make sense, says Ms. Schimmelpfennig. She worked on a project with the American Red Cross that supported four programs in six provinces. To improve coordination and save costs, the charity rented an office in each province and hired employees that the different programs would share.
Because the charity paid for those staff members directly, the money was counted as administrative costs. But if the organization had given the money to each program so it could rent its own office and hire staff members — something that would have cost much more — it would have counted as a program cost and not overhead.
What’s more, beneficiaries of aid sometimes take advantage of the lack of communication among aid groups, Ms. Schimmelpfennig writes. Charities often give “scholarships,” or annual stipends they put into a bank account, for students. It’s a cost-effective thing to do, she says, but it also means students can receive multiple scholarships from a number of organizations, because charities don’t devote the time or money to ensure that students are receiving money only once.
Instead of rating charities on overhead costs, Ms. Schimmelpfennig says, they should be assessed based on the quality and quantity of financial information they provide. What do you think?
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We believe that for people to become good social investors (donors with their eyes opened) charities should be evaluated based on three components – financial health, accountability & transparency and outcomes. We are working to expand our rating system to encompass all of these elements. In addition, we will be also considering our current measures of financial health to see if changes should be made. We are engaging in conversations with a number of experts to make this happen. We welcome your feedback too!
— Ken Berger May 22, 02:05 PM #
To understand “overhead”, one would need to understand what that entails and to know something about the industry. Simply picking a number out of thin air and saying “… no more than this” is short sided. I doubt that’s how the government makes grants to build highways and bridges (or maybe they do — given the deplorable condition of many roads and bridges in this country). Plus, I wonder why there aren’t watchdog groups looking at defense contractors and other providers that consume public dollars?
Seems to me that the IU Center for Philanthropy once did a credible study on what actual management and general costs included for a range of nonprofit organizations. Maybe that study (and others like it) should factor into evaluating effectiveness and efficiency?
— David Zemel May 22, 02:37 PM #
Ken Berger’s efforts to change Charity Navigator’s rating system have to be applauded. Let’s hope it’s a sign that times are changing and that program performance management will become a central criterion for grantee selection AND funding, so donors allow and help organizations be effective. The people we serve deserve services that make a real difference, and it’s our obligation to make sure we do no harm. That’s worth the cost.
— Ingvild Bjornvold, Social Solutions May 22, 02:40 PM #
As someone who agrees with this article and also knows and deeply admires Ken Berger, I can tell you that when Ken says that Charity Navigator is committed to addressing this issue, you can take that to the bank. I deeply admire Ken as a person, his willingness to look at the situation described with a critical eye, and make it his commitment to making it his mission to address the real problems.
Unfortunately, my impression is that many charities are not jumping at the opportunity to engage in this conversation of measurement. There are many nonprofits that have become comfortable with the status quo, lack of accountability, and are resistant to engage in the conversation of outcomes measurement. If your boss just kept paying you because he liked you, then said we are going to start evaluating your job performance, you might be uncomfortable with that. Put another way, if your boss was evaluating you based on a system that didn’t recognize what your true talents were, then said we were going to measure you based on your actual talents, that might be something interesting to talk about. To be honest though, there are far too many nonprofits that are resistant to the entire conversation of evaluation. To them, I say wake up! The second you can start showing your donors the real difference you are making with their dollars, will be the day you don’t have to worry where your next dollar is coming from. Your donors are eager for measurement. Show them the difference you make.
— Richard J. Krasney, CFP(r) May 22, 03:22 PM #
I truly believe charities need to be cause-driven, making sure, as much as humanly possible, contributions are used to meet the needs and a marked difference is made. I work for a foundation committed to bringing dental care to children with special needs across the US and Canada. We work with volunteers and have only one office in Ohio with two staff members. I find foundations turning us down because we don’t have an office in their state. What’s the value of four walls with some warm buddies in them when the lack of it does not prevent you from serving nearly four hundred children in that very same state? Substance should not be sacrificed for form. Dont you think? Hikmet Kutlu
— Hikmet Kutlu May 22, 03:55 PM #
This predates Ken Berger but seems applicable today as it did 1.5 years ago.
http://www.ncrp.org/blog/2007/12/watching-watchdogs-gary-r.html
— Gary Snyder May 22, 04:46 PM #
Whether in the corporate or non-profit world integrity/openness begins with the board of directors. Without accountability at that level CEO’s/Presidents will eventually need to/want to “find a way” to disguise/distort the facts. While charity ratings are certainly necessary these rating often reflect facts that are history similar to trying to close the barn door after the horse is gone. I would suggest that some method be devised to “rate” the respective boards of directors-concepts such as independence, experience and appropriate education are a few of the factors that might be included and are available publicly or by request from the individual non-profit being evaluated.
— Bill Robberon May 25, 02:18 PM #
I agree that multiple factors have to be considered when evaluating the effectiveness of nonprofits. And that the overemphasis on the percentage of administrative costs is misguided, mainly because it is often poorly understood and inaccurately defined. Taking as a given that all donors want as much of their money as possible go directly to support the core mission of the organization, consider the following:
a. A professional, high quality financial operation provides the means for for good donor stewardship and making sure that the bulk of the money goes toward client service b. A competent human resources department assures that the best possible staff members will be hired to directly serve clients.
c. Adequate investment in competent, professional fundraising assures the organization’s future viability so that it can provide the best possible client service over the long run. Most fundraising activities – grant solicitations, direct mail, planned giving – require an investment that does not pay off in the same year that the costs are incurred.
c. etc. – I invite readers to come up with more, perhaps better, examples.
— Bonnie Osinski May 26, 12:23 PM #
Yes, the end result and the ethical path to it are the most important things, not necessarily how much it cost to succeed. Some programs require more overhead than others, and financial statements can be misleading as well. The critical questions are: how much good is the charity doing, and is it operating efficiently and ethically (i.e. now huge salaries and benefits, no benefits accruing to board and staff, etc.).
— susan May 26, 05:31 PM #