This article first published in the Financial Times. It describes three methods for assessing the effectiveness of giving. If many donors did this, and published the results with descriptions of how they give, we could build up a picture of how best to give in various circumstances. This ‘science of philanthropy’ is described in Caroline’s article in the scientific journal Nature. Giving Evidence recently published analysis of one of the types described below, with the ADM Capital Foundation, based in Hong Kong, published here.

Analyses to check that your donations have the maximum impact

Warren Buffett notices a feature of philanthropy that makes it more difficult than running a business. With philanthropy, he says, “you can keep doing something that doesn’t make any sense and there’s no playback from the market”. So how do you know if you are giving well?

In my work, I’ve found that foundations and major donors can gain useful insights by analysing three fairly simple types of information.

Firstly, by inviting that “playback from the market” by soliciting views from the organisations that you support.

One example I’m aware of involved a wealthy donor who made a substantial grant to a charity. When I talked to that charity, it turned out that they couldn’t plan properly because they didn’t know when the grant instalments were coming. This was astonishing — there was a schedule — but somehow this hadn’t been communicated to the charity.

Another example here is the practice of “restricted donations”. Many donors only want to fund the glamorous stuff, and attach conditions to their donations. But if those donors listened to the organisations that they fund, they’d hear that this creates a costly administrative nightmare for the charity. I’ve heard of a donor who specifically funds loo rolls in London museums and galleries on the simple grounds that it is what they said they really need.

The second analysis looks at how many of your grants succeed, and what affects that success. Do large grants work better than small ones? Do long grants work better than short ones? Every donor makes decisions about size, duration, and so on, and data can reveal which decisions are best in particular circumstances.

My company, Giving Evidence, recently did this analysis for the ADM Capital Foundation, a Hong-Kong-based corporate foundation. We looked through all their grants for the past 10 years, and scored the success of each one, and then looked at how that success was affected by the amount of money given, the duration of the relationship, and the extent to which the foundation was involved in the work. This provided some valuable insights — yet surprisingly few donors or foundations keep records of whether their grants basically worked (or basically didn’t).

Any foundation can do this analysis, and it will show — very usefully — how the funder’s choices can affect the success of the work it supports.

The third analysis looks at the transaction costs created by your processes — both for you and (more crucially) the organisations you choose to help.

As I have previously written in this column, the administrative costs of obtaining a grant can be so high, that they consume most of what the donor is giving (and in some cases, wipe it out). These costs arise from application or selection processes, plus the cost of reporting back on their activities and results. More broadly, you should also consider the costs borne by applicants who don’t eventually get funding.

To understand these costs, find some organisations which failed at the first stage of your grant application process. Ask each one how much time they spent dealing with you and the fully-loaded cost of the various staff members involved. This should give you an idea of the average costs to get to that stage — which you should multiply by the total number of organisations who applied.

Repeat for the other stages of the application process, and for organisations which eventually succeeded. Add those together and, voilà, that shows the total transaction cost created by your foundation for other organisations.

This doesn’t mean that all donation processes should be cheap — but it is well worth understanding how much they cost, and whether you really intend that cost and can justify it, or can identify bits of the process could be cheaper.

Foundations and donors are often curious about the performance of those they award grants to, but they can also improve by being curious about their own performance.

If you are a donor or foundation, and want to understand your performance, contact us.