Don’t judge a charity by its annual report

These findings reflect previous research. Stories and images of needy people increase the emotional reward of giving¹ and people perceive charities with low administration costs as less ¡®wasteful¡¯, because more money goes to those who need it.² That reasoning however, is highly problematic.

First, it tells us nothing about impact. A charity that spends 5% of its revenue on administration could be extremely wasteful if 95% of its spending doesn¡¯t further its goals. And, a charity with high administration costs can be hugely impactful. For example, Physicians for Human Rights, a charity shared the Nobel Peace Prize in 1997 for its work on banning landmines globally. At the time, its administration costs were high.

Second, far from signaling efficiency, a charity may have low overhead simply because it¡¯s not investing in the people, training, or infrastructure required to make it successful.

Third, administration costs amount to unfair discrimination between causes. Charities working on widely publicised causes attract more donations with the same amount of campaigning than those working on lesser known problems. So charities working on popular issues (e.g., childrens well-being) naturally have lower costs than those working on less popular ones (e.g., addiction). A benchmark of low administration costs penalizes charities working on marginalized issues and restricts their reatch.

Lastly, low administration cost is a metric that depends entirely on how a charity defines its cause in their accounting. A homeless charity that spends money on advertising its shelters might classify the expense as fundraising; but it could also be considered part of the cause.

In short, there¡¯s no relationship between low administration costs and NGO effectiveness. If we want our donations to help charities succeed, we need to look elsewhere.

Let¡¯s Ask Better Question

As consumers, we spend weeks gathering information about a product before making even small purchases.³ If we did the same before donating, we¡¯d be more likely to select good charities aligned to our personal preferences. Three questions in particular are helpful to explore. And chances are you won¡¯t find all the answers scouring through a charity¡¯s annual report or website. So don¡¯t be afraid to write them an email or ask for a phonecall. You¡¯re not wasting their time, you¡¯re building a relationship they¡¯ll appreciate. (Trust me, I previously worked for a Swiss NGO.)

1. What are your goals? Many charities have appealing visions but not all have goals that are specific, time-bound, and visible. Concrete goals indicate accountability and a willingness to be scrutinized if they aren¡¯t met. Note however, policing goals shouldn¡¯t be our primary concern! (see below).
2. What are you learning? Charities aim to solve some of the world¡¯s toughest challenges yet, they have little room for failure. Amazon made losses for years before it became profitable and it did so because it systematically learnt what was driving up sales and reviews. So rather than asking charities if they met their goals, we should ask how and what they are learning from their experiences as they strive towards those goals. But learning alone isn¡¯t enough.
3. How does that learning influence your activities? Putting knowledge into practice is difficult. It involves unlearning and taking on new risks but without it, improvements are near impossible. So if something isn¡¯t working, charities need to have strong processes to ensure it stops. Similarly, if a new idea shows promise, we should be interested in knowing if the organization takes it seriously or sticks to doing what it has always done.
   

These are weighty questions and it¡¯s tempting to fall back on an easy ¡®one-size fits all¡¯ metric, but by asking them not only do we raise our odds of giving to charities more likely to succeed, we also help them become successful ¨C and that has nothing to do with how much money is spent on administration.