Ratings, ratios and overhead: finally, we’re pushing back

publication date: May 22, 2012
author/source: Janet Gadeski

Low administrative costs could indicate prudence and sound judgment at a charity, but they could just as easily indicate inadequate staffing, insufficient salaries or fudging, says California Community Foundation president emeritus Jack Shakely, writing in the L.A. Times.Janet Gadeski photo

And at last November's National Summit sponsored by Imagine Canada, delegates agreed it was time to tell a loud, proud story of charities' impact, and stop apologizing for spending money on people, systems and facilities that underpin results.

Why we stay boneheaded

"Why then," Shakely wonders, "do we continue to buy such a boneheaded yardstick to measure nonprofit organizations?"

He finds an answer in the work of Nobel Prize-winning economist Daniel Kahneman. Kahneman says each of us has two thinking systems. An intuitive system leads us to quick answers, hunches and gut reactions when we need them, and a rational, intellectual system relies on facts and statistics.

The rational system has one huge flaw: it's lazy. It defers to the intuitive system whenever possible. It doesn't question the supposed scientific justification that sometimes comes with an intuitive answer. And it's so averse to hard work that even without being aware of it, we sometimes substitute a different, easier answer when the better solution looks too difficult or complex to figure out.

That means that when it comes to charities, most people very quickly decide it's too hard to evaluate the impact of an organization's work.  If they're considering small donations, most people want to make their choice with a relatively low level of work. As they wonder where to donate to further a cause, or which charities' mail appeals to toss away, they want simple answers.

And that's how what Shakely calls "the pseudoscience of administrative costs as a measure of excellence" takes hold.

Stop shooting ourselves in the foot

Shakely describes a US charity that purchased drugs at a much lower price in Canada, then booked the difference between that and the higher US price as an in-kind contribution. They did it, he says, to inflate their program-to-admin ratios.

Charity:Water proclaims that every dollar of public donations goes straight to a well-building project-but behind the scenes, sponsors and sophisticated donors fund its operating costs. (Founder Scott Harrison was unavailable for comment due to international travel commitments.)

Charities that tout their low administrative costs feed a race to the bottom in which everyone loses. When we're afraid to spend money or to be seen spending money on highly effective staff, when communication depends on outdated technology, when programs take place in ugly  spaces, clients and service users suffer just as much as staff. And mission suffers most of all.

Fortunately, not everyone thinks that way. When Brad Offman, VP strategic philanthropy at Mackenzie Investments, challenged some in-house portfolio managers to evaluate sample charities, they spent nary a minute on the shallow, popularized approach to overhead costs in isolation, but quite a lot of time on qualitative questions like uniqueness and long-term transformation.

I'm delighted to see a growing chorus challenging the perception that vital work can take place without talented people, up-to-date equipment and inviting facilities.  We know that every dollar we spend in the right ways, including operations, furthers our mission. All we need is the courage and persistence to keep saying so.

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