Wednesday, May 9, 2012

Charity Wednesdays - Why Administrative Costs Don't Tell a Whole Story


This recent Op-Ed piece in the Los Angeles Times touches on an issue we see a lot in charity review work.  People want to give to a charity that will put all of its money toward programs, and not 'waste' it on administrative expenses.  There is a popular myth that the less money a charity spends on its own management, the better it is. 

But do successful businesses 'waste' their money when they pay high salaries to talented executives who know how to churn out profits, instead of settling for the guy who barely completed business school and just wants enough money to move out of his parents' basement?  Do corporations waste resources if they take time to re brand and adjust to a changing market? Is investment in technology and infrastructure pouring money down the drain or creating a platform for growth and new services? We would never ask for-profit companies to constrain their own growth to fit the ideals of people who don't know their business.  Why do we ask that of charities?  To quote the article:
[B]ecause we are intuitively inclined to believe that the nonprofit sector is filled with soft, amateurish executives, we latch on to the pseudo-science of administrative costs as a measure of excellence. It's hogwash; there is absolutely no way of telling that an organization with 5% administrative costs is superior to one with 20% costs based on that criterion alone. In fact, the exact opposite may be true.
The truth is, you can't judge an organization based on what it claims to not spend on administrative costs.  Nonprofits and businesses compete for the same pool of managers and while it's nice to think that people who work for charities should be satisfied in being paid in 'good vibes,'  the fact is that we have student loans, mortgages, and kids who need braces just like everyone else. If we can't meet those needs alleviating hunger or saving the environment, we can just as easily peddle information technology, financial services, and anything that comes from a factory in China.  And if you want us to do our jobs well, and actually meet the needs of those we've pledged to serve, you won't mind if we invest in technology, good HR programs, and clean facilities.

For the BBB's part, we don't focus on one number.  Of  the 20 Standards For Charity Accountability, one - Standard 8 - addresses what percentage of total expenses is allocated to programs (to meet, it must be at least 65%).  And we do not directly address what an organization spends of administration.  More importantly, our reports on charities provide a balanced look that encourages donors to consider all aspects of a charity's operations. 

Charities, like people, are complex and have unique stories to tell.  Donors do best when they look at multiple aspects of a charity's operations and appreciate that good management and effective program implementation is an art.  What's spent on administration simply doesn't tell you everything you should know.

1 comment:

  1. What a great illustration of why we need to look beyond financial metrics when deciding which nonprofits deserve our time, money, and public support. In fact, I intern at GreatNonprofits.org (www.greatnonprofits.org), which is a site that shares your perspective. It's the largest online database of user-generated reviews of nonprofits. On the site, donors can see a new dimension of the impact of the nonprofit - through the eyes of a parent whose child received tutoring, or the ex-felon who got job training, or the volunteer who helped write advocacy newsletters. These first-hand experiences help donors see the on-the-ground work of the nonprofit.
    Don’t hesitate to contact me – elizabeth@greatnonprofits.org – if you have any questions about the site, or just want to talk more!
    Best Regards,
    Elizabeth Rosen
    Online Marketing Intern
    GreatNonprofits.org

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