January 27, 2011

Low Overhead Doesn't Equal High-Quality Philanthropy

A series of posts about the misconceptions created by charity Web sites continues today.

Misconception No. 4: Low administrative costs are a good indicator of the quality of the organization

According to Money for Good, the amount spent on administration costs is the number one item that donors look for when deciding whether or not to give. The problems caused by the incessant need to keep overhead at a minimum are well laid out in the Stanford Social Innovation Review’s article “The Nonprofit Starvation Cycle.”

This misconception is probably the hardest one to break for two reasons. First, many charity rating systems use overhead costs as one of the primary factors in determining nonprofit scores.

I hope with the pending release of Charity Navigator 2.0, which uses indicators of effectiveness and results, more rating systems will decrease their emphasis on administration costs in determining nonprofit scores. Administrative costs are used because the Form 990, the informational tax form charities submit to the Internal Revenue Service, is the only paperwork that nonprofits are required to submit annually, thus it is the only standardized information available on charities.

Second, nonprofit groups actively reinforce the misconceptions when their Web sites tout their low administrative costs. Most have spending pie charts or administrative-expense percentages placed prominently on their home page. If charities want donors to stop putting so much emphasis on administrative costs, they need to stop using it as a marketing tool.

The misperception about the importance of administrative costs is another factor leading to the proliferation of new nonprofits and people flying to another country to help directly. Giving money or used clothing to your friend, neighbor, or church to fly to another country and hand out his or herself appears to be far more effective than donating to an established charity.

What message is your organization’s Web site giving donors?

Instead of focusing on low administrative costs, share information on the importance of those costs. Here’s a great quote from the joint statement issued last year by several charity watchdogs:

“While the idea of sending money ‘straight to the beneficiaries’ is tempting, nonprofit experts agree that judging charities by how much of their money goes to ‘programs’ is counterproductive. ‘Achieving a low overhead ratio drives many charities to behaviors that make them less effective and means more, not less, wasted dollars,’ says Paul Brest, President of the Hewlett Foundation, and co-author of Money Well Spent.”

Another good resource to share with donors is the Stanford Social Innovation Review article, “The Nonprofit Starvation Cycle."

What sort of information does your organization share with supporters about its overhead costs? Share your approach in the comments space below.