Saturday, October 14, 2006

The Efficiency Debate

One concern that has been shared with me on several occasions is that "many organizations are so inefficient that only a small percentage of my donation actually goes to support the cause." I've mentioned in my recent postings about hunger charities and poverty charities that efficiency is also important to me. I want to make sure that my money is going toward the cause that I'm trying to support, rather than going to advertising and administrative costs. A number of my favorite charities report that 90+ percent of their outlays go toward program expenses.

In the past couple weeks, I've gained two new perspectives on efficiency.

The first comes from a friend who says that although a couple of the charities he supports are not among the ultra-efficient, he feels that their programs allow more sustainable long-term poverty eradication through profits. (He recommends a book on the topic by famous business strategist C.K. Prahalad that I've added to my reading list.) For example, he says he gets "a lot of buzz" from giving to Heifer Project International, where he says "$120 buys a family of geese for a child in Asia." I haven't had a chance to research the organization for myself yet, but I like the "teach a man to fish" type of philosophy. If a man needs a fish today, I'm happy to give him the fish, but if he can catch his own fish in the future and teach others how to catch fish, that's truly sustainable in the long-run. The same friend also recommends International Development Enterprises, whose tagline is "Fighting Rural Poverty With Profit." I plan to research both charities in the near future.

The second new perspective comes from Carol Davis, a CPA in the Denver area who audits non-profit organizations for a living. She says that "if an organization is spending at least 80% of its funds on program activities, that is commendable." She further adds that in reality many organizations that report 90+ percent of their outlays are going to program expenses are "passing out monies to other non-profits who will...use the funds on programs they're actually running." Below is an example I ran past Carol to make sure I understand the point she's trying to make:

  • Many "Tier 1" international charities based in the United States say that they work with local "Tier 2" organizations in impoverished countries to provide needed aid.
  • In other words, Tier 1 international charities are giving money to Tier 2 local organizations.
  • Those Tier 2 local organizations have their own administrative costs.
  • However, the administrative costs of the Tier 2 charities are not included in the Tier 1 international organizations' calculations on Charity Navigator.
  • So if the Tier 1 international charity is listed as spending 95% of funds on program expenses, but the Tier 2 local charity with whom they work spends 80% on program expenses, the "true" Tier 1 calculation should be 95% * 80% = 76% of funds go toward program expenses.

With that in mind, my next question was "How do we get at the true figures?" to which Carol gave the following answer, shown in italics:

Once money goes to a foreign organization in a 3rd world country, it is much more difficult to track what happens with the money. In the U.S. the Form 990 and audited financial statements provide a lot of transparency as to what the organization does with its money. Accounting systems in foreign countries are normally nowhere near as developed which is why the IRS only allows a tax deduction for charitable contributions to U.S. charities.

But, if you were going to try to track what happens, the starting point would probably be to look at pg. 2 of the U.S. organization's Form 990 to see what regrants they have made to foreign organizations. If they've made regrants, they're supposed to list the name, address, type of organization, $ given, and whether it was a foreign grant. You would then have to try and somehow find out financial info. on that foreign entity which might be difficult.

That's why in many respects, a U.S. charitable organization which spends 80% on programming, but actually has its own personnel (who are local citizens of that foreign country) running programs in other countries or doing "joint venture" type things there might be a safer bet than one with a much higher program percentage doing purely regrants, but with no on site personnel. Some organizations will do regrants and also make annual trips to visit those entities to see the results of the work and help assure some accountability, but you would have to ask to find if this is the case.

Bottom line. There's no easy answer to your question.

Carol's answer was extremely enlightening on the one hand, yet somewhat frustrating on the other hand. As someone who admittedly places more value on rankings than perhaps I should, it's disheartening to realize that to be a truly responsible giver, I should do more than just look at the mission and the stated % of funds applied toward program expenses. More than that, I should also do enough research to understand how charities carry out their programs and try to gain a sense of whether I'm truly getting the bang for the buck that I expect. In other words, just as there is false thrift, it appears there is also false efficiency.


Stacie said...

I'm going through your blog backwards. Your discussion of efficiency--and the difficulty in knowing/trusting the numbers--is useful. We have contributed to Heiffer. A couple years ago each of our kids chose one animal to "buy," which made the giving more concrete and meaningful than just sending money. Their thick, glossy catalogues clued me in that their operation isn't super-efficient; last year I found a more efficient (in this case, faith-based) operation that has a program similar to Heiffer's (sort of microloans with animals). I can't recall who they are or how I found them, except that it was through a website that scores charities--when I brought up Heiffer, the site listed similar charities and their scores.

Ryan said...

Was it at Charity Navigator? See link below:

Looking at the list of organizations that are listed as peers to Heifer Project, I assume you chose World Relief?