It’s that giving time of year again. And whether you donate to charities or you are a philanthropist that gives grants to nonprofits, you should care about organizational effectiveness and efficiency.
One commonly used indicator of effective management in organizations that do-good is the percentage of their budgets that goes to administrative costs. The rule of thumb is between 11% and 13%. This is a simple and easily calculated and understandable measure. Unfortunately, it’s not the best indicator. Overhead matters, but effectiveness matters more.
Tina Rosenberg, in a New York Times opinion piece, identifies additional criteria that should be used in judging charitable organizations. She writes that the best organizations…
- Aim to solve the most serious problems (in the normal calculus, this means that providing bed nets to save children from malaria ranks above helping public radio stations or art museums).
- Use interventions that work.
- Employ cost-effective strategies (trachoma surgeries, rather than training guide dogs, to help the blind).
- Are competent and honest. The percentage of donations spent on overhead is one measure of these qualities.
- Can make good use of each additional dollar. This is the hardest point to assess, but it asks whether the group has the program on the ground to use your money well, and whether your donation will make something happen that otherwise wouldn’t.
I would also ask these questions:
- Is the program and the organization sustainable? Assuming the problem being addressed requires a long-term solution, I would want to know if the nonprofit has the leadership, infrastructure, and funding from other sources to stay with the solution as long as is necessary.
- Does the nonprofit have a culture that is consistent with my values? The leaders might have the best of intentions, but if they treat their staff and volunteers poorly, if they don’t pay their vendors, if they relate to low-income and minorities in a disparaging and condescending way, then I want to know this.
- Are they using the best interventions available? Maybe they are using interventions that work but maybe there are other interventions that are more effective and less costly. And maybe there are other interventions that should be tried to test their efficacy.
Toby Ord, in the blog Giving What We Can, argues that we should mainly be looking at cost-effectiveness. He believes that we have a moral imperative, especially when it comes to global health, to support programs that get the most bang for the buck. Ord writes:
…merely moving funding from one intervention to a more cost-effective one can produce almost as much benefit as adding an equal amount of additional funding. This is unintuitive since it isn’t the case when one option is merely 10% or 30% better than another. However, when one option is 10 times or 100 times better, as is often the case in global health, redirecting funding is so important that it is almost as good as adding new funding directly towards the superior intervention. In times of global austerity and shrinking budgets, it is good to know how much more can be done within existing ones.
People give to charities and other nonprofits for all kinds of reasons. Some because of a religious calling; some for the prestige; some because of a personal connection to the agency or the cause; some for a tax deduction; some because of peer pressure (for example, they serve on the board of the agency); some to honor a relative by making a donation in that person’s name; and some to make a difference in society. Regardless of the reason, we should be concerned about effectiveness and what it costs to be effective. No one wants to throw their money away and people receiving the money want to be proud of what they do.