Try not to judge a charity by its admin costs alone

Producing the kind of data donors would like is hard and expensive, but not impossible

This article first published in the Financial Times in October 2017.

We kept overheads low, boasts Camila Batmanghelidjh in her book published last week  about how and why Kids Company, the charity she founded, collapsed in 2015.

Perhaps skimping on administrative costs was a false economy. In the book she also says the charity kept paper records for the 36,000 children and young adults it claimed to support, which were “stored in 80 cabinets”. It hardly sounds ideal.

Poor record-keeping was a significant factor in the charity’s collapse, according to a report by a committee of MPs last year, which decried “negligent” trustees who ignored repeated warnings about the organisation’s financial health. The trustees condemned the report as “inaccurate”.

Now Ms Batmanghelidjh has told her side of the story and her stance illustrates the thorny issue of charities and admin costs. A lot of pressure comes from donors who often judge charities on how little they spend on administration. There are important reasons why donors should not do this.

First, in a good charity, all the money, including admin costs, is ultimately spent on charitable activities.

Second, composition of a charity’s cost base is no indicator of its effectiveness. Charities in England and Wales must split their costs into three categories in their accounts: charitable activities, costs of raising funds and governance costs. This unhelpfully implies that managing oversight and raising funds are somehow separate from charitable activities. They are not. All charitable activities rely on someone having raised funds for them, while good governance ensures those funds are spent wisely. The costs in all three categories should ultimately support charitable activities.

On governance, donors I meet often think a low spend on administration is desirable because it denotes efficiency, and that efficiency is positive. Neither is true.

Suppose the charity runs an intervention that does not work. In my last column, I talked about how distributing more textbooks to schools in less developed countries sometimes achieves nothing because children are already so far behind they cannot understand them. In that case, it would not matter how efficiently those books had been distributed: they will not help children to learn.

By the same token, if a programme creates harm, which some do, then the more efficiently it is run, the more harm it will create.

We should also consider the effect of volunteers. A charity whose workforce is mainly volunteers has an oddly small cost base. Nevertheless, it will pay for accounting services and identifying where its services are most needed. Precisely because the labour is free, the other costs (such as governance) dominate the cost base.

Similarly, if a charity receives free equipment or other inputs, this reduces what it is spending on charitable activities and so increases the proportion it spends on governance. Conversely, needlessly overpaying for equipment or supplies can make it look efficient.

In other words, looking at the proportion of a charity’s costs that go on indirect costs can penalise the charity for savvy procurement and for recruiting volunteers. This matters because more than 90 per cent of the UK’s charities are run entirely by volunteers.

I am not saying that there is no waste. There is. It just is not clearly labelled in the accounts.

Importantly, as far as we can tell, good charities spend more on administration and governance than those that are less good. Giving Evidence, my organisation, found that charities whose effectiveness is ranked highly by GiveWell, the US charity evaluator, spent more on administration than their peers.

In Australia, two-thirds of non-profits thought their sector spends far too little on administration, according to a recent survey. Hopefully, donors trying to assess a charity can now see that administrative costs are not the answer. The problem is that there is rarely an alternative.

Ideally, donors would be able to use information on two factors that are much more important. These are the effectiveness of a charity’s programmes and how their effectiveness compares with other charities, and the views of the intended beneficiaries. I for one would love to see a TripAdvisor-type website for charities so that the people they try to help could give feedback, good or bad.

Ideally, both types of data would be produced independently to lend credibility. But neither exists . . . yet. There are normally no comparators apart from the current cost structure. Producing the kind of data that I, and many donors, would like to see is hard and expensive. But neither is impossible.

The fact that so many donors use administrative costs as a measure shows that many want a way to compare charities. If someone produced decent comparators they would probably be used widely and act as great leverage for whoever funded them. It is a huge opportunity for a dedicated philanthropist to consider.

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