The Economist this week has an article and data showing the folly of the popular affection for small companies. It shows that productivity* per employee is markedly higher in large companies than small ones for two reasons: employees in large companies get less distracted by being ‘asked to fix the boss’s laptop’ so can better focus on their actual job; and larger companies get economies of scale. Countries which encourage larger companies do better: Greece has loads more ‘micro’ firms (<10 employees) than does Germany. So, it argues, the public should shelve what it calls ‘the popular fetish of the small’.
Much of the logic applies to charities too. Larger charities get economies of scale: two charities of £500k revenue will pay two audit fees, whereas one of £1m will only pay one. And larger charities’ employees are (probably) better able to focus, making them better at their roles.
And yet donors of all types often prefer small charities. (Caroline has a letter in The Economist about this.) In England and Wales for example, fully 99.5% of charities have revenue below £10m; for companies, the definition of ‘large’ (i.e., bigger than SMEs) only starts at more than four times that, at £44m. Is that donor preference wrong?
Well, to have high impact, charities need good ideas and good implementation (which we could write as a formula: Impact = Idea x Implementation). Would you expect small (or large) charities to have a monopoly on good ideas? No. Some ideas are impossible without huge resources – managing chunks of coastline as the National Trust does might be an example – but not all: a local lunch club for elderly people or supporting people with a rare medical condition may not take much resource and can perfectly well be done by small organisations. Would you expect large (or small) charities to have consistently better implementation? No. Sometimes larger ones will be better, perhaps by deploying a large network of people, or getting economies of scale in purchasing, logistics and learning. But on the other hand, small charities may perform better by being more responsive and personal.
So what is wrong is to have a predilection based on organisational size, in the absence of any data about actual effectiveness.
Of course, analysing performance is much easier for companies than for charities. The Economist has a graph of employee productivity against company size. In the corporate world, measuring productivity is easy-peasy, but it’s harder/impossible for charities because their outputs aren’t financial. They’re often not quantifiable at all, and even where they are, they’re rarely readily interchangeable: the ‘units’ of education would be pretty different from those of preserved heritage. Revenue is no proxy for umpteen reasons including that charities legitimate use free labour which doesn’t need to be covered by revenue.
Nonetheless, donors can do better than make decision based on fetish. A good start is to check whether a charity has a clear and important goal (=’idea’), clear theory of change which connects the charity’s activities with that goal, and growing set of data showing that it’s implementing it well.
Since charities address problems which, as Warren Buffett noted, have already ‘resisted great intellects and often great money,’ we owe it to beneficiaries to abandon childish tastes and fetishes and prejudices, and focus ruthlessly on what actually works – however surprising, small or large that might be.