May 22, 2009

The Costs of Rating Charities on Overhead Expenses

Saundra Schimmelpfennig, a former aid official, takes aim at a popular target: the fixation in the charity world on administrative costs.

Ms. Schimmelpfennig, who is writing a book on how aid can sometimes cause more harm than good, describes some of the ways that rating charities based on their overhead costs hurts aid work.

Doing a study to investigate a community’s needs before beginning work is expensive — and increases a charity’s administration costs. So charities are reluctant to share needs assessments, because they don’t want to take a financial hit while their competitors do not.

As a result, charities after the 2004 tsunamis either had to pay for their own, duplicative assessments or begin work without determining needs. The consequences? An aid group built an orphanage in a town that had virtually no homeless orphans, whereas in another town four charities competed to serve just 23 families. A village a few miles down the road had no charities serving children, despite the need.

The way administrative costs are counted is squishy and often doesn’t make sense, says Ms. Schimmelpfennig. She worked on a project with the American Red Cross that supported four programs in six provinces. To improve coordination and save costs, the charity rented an office in each province and hired employees that the different programs would share.

Because the charity paid for those staff members directly, the money was counted as administrative costs. But if the organization had given the money to each program so it could rent its own office and hire staff members — something that would have cost much more — it would have counted as a program cost and not overhead.

What’s more, beneficiaries of aid sometimes take advantage of the lack of communication among aid groups, Ms. Schimmelpfennig writes. Charities often give “scholarships,” or annual stipends they put into a bank account, for students. It’s a cost-effective thing to do, she says, but it also means students can receive multiple scholarships from a number of organizations, because charities don’t devote the time or money to ensure that students are receiving money only once.

Instead of rating charities on overhead costs, Ms. Schimmelpfennig says, they should be assessed based on the quality and quantity of financial information they provide. What do you think?