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Time for Charities to Face the Facts: Efficiency Matters

Trent Stamp and Kyle Waide of Charity Navigator

June 1, 2003


If America's charities are left to their own devices, they will not find ways to operate more efficiently. Why not? Because leaders of America's charities and foundations don't believe efficiency matters. And as a result, we all lose. A new report by some of America's most highly-regarded experts claims America's charities could save an extra $100 billion in resources simply by changing the way they operate. The majority of these savings would be realized if charities simply operated more efficiently--that is, if they developed ways to spend less on fundraising and administration and to streamline the delivery of their programs.

This is an amazing claim. $100 billion represents 13% of the roughly $800 billion spent each year by America's charities. It equals the entire state budget of California. It is four times larger than all of the money contributed to charities by our nation's foundations. Adding this sum to American charities' coffers would expand their capacity more dramatically than even our most ambitious philanthropists have ever imagined.

The report is authored by former Senator Bill Bradley, one of our nation's most respected public officials, and two colleagues from McKinsey & Company, the world's most respected management consulting firm. Not exactly lightweights. It is published in the May issue of the Harvard Business Review, not exactly a tabloid publication.

Given the scale of the report's claims, and given the prominence of its authors, one would expect our nation's philanthropic leaders to greet the report with great curiosity and interest, if not outright enthusiasm. After all, they're in the business of solving social problems, and the McKinsey report offers ideas for increasing our capacity to solve problems by 13%. Who wouldn't want free advice on how to grow their business 13%?

Apparently America's charities and foundations don't. In response to the McKinsey report, nonprofit leaders have gone on the extreme defensive. They claim the report suggests that nonprofit managers are incompetent and will therefore discourage giving. They have also attacked the messengers, claiming they aren't really qualified to make these assertions. In The New York Times, one prominent foundation leader accused McKinsey, the most sought-after place of employment for recent MBAs, of being not only incompetent but dishonest, because they once worked with Enron. In doing so, these leaders have shoved their heads further in the sand, demonstrated how out-of-touch non-profit leadership can be with mainstream America, and are threatening to do long-term damage to their own credibility.

Ultimately the report proposes a very simple, easy-to-understand strategy for finding this extra $100 billion. Bradley and his colleagues claim that we need our less efficient charities to perform more like their more efficient peers. If the bottom half performed nearly as efficiently as the top half, we'd realize the bulk of the $100 billion in savings. They base this claim on the fact that the bottom half has a lot of room to improve.

Charity Navigator's analysis of 2500 charities substantiates the report's central claims. In comparing more efficient and less efficient charities, we identify substantial gaps in how efficiently similar charities function. For example, we found gaps in fundraising efficiencies of 36% among local United Ways and 87% among local community foundations, and gaps in administrative spending of 39% among symphonies and 65% among educational scholarship programs. These disparities are very similar to those described by Bradley and his colleagues.

The McKinsey authors simply suggest that we need to narrow those gaps. What if the gap in fundraising efficiencies among United Ways was closer to 15%? Wouldn't it be worthwhile to explore strategies for realizing these savings?

Not according to leaders of charities and foundations. Instead, charity leaders dismiss out of hand the use of fundraising and administrative ratios to evaluate charities. These high-minded folks refuse to believe that more efficient operations represent a powerful tool for making charities more effective. They deny that efficiency matters, even when the message comes from a trio of highly respected individuals, one of whom happens to have built a career around promoting innovative social programs that seek to end poverty.

The improvements Bradley et al suggest could help charities dramatically. This makes the overly defensive response of nonprofit leaders all the more indefensible. These leaders must begin to embrace findings like Bradley's, to welcome outside, data-driven analysis, and to respond with strategic action, not with the tired arguments that outsiders don't understand the sector and that financial ratios are irrelevant to charities. At the end of the day, the nonprofit bottom line is helping people, and another $100 billion would go a long way.

Now more than ever, charities need our help. Donations are down at precisely the same time that needs are greatest. We as Americans must dig deep and help charities find additional resources. But in addition to donating money, we must also help charities with the toughest love we can muster. We must demand that they do more with our dollars--not more with less, but more with more. We must compel them to accept that efficiency matters. They refuse to learn this lesson on their own.

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