5. Developing Partner Relationships
b."Cherry Picking" - Support the Whole Organisation

"Don't get hung up on the level of administration costs or fundraising costs it's not a reliable measure of efficiency of an NGO."

NGOs will tell you that:-

 "Most funders, particularly Corporate Funders, like to cherry pick – they want high profile things, in neat packages and do not want to fund overheads.  Most don't fund salaries, equipment, cars etc. which raises a problem for running an NGO effectively."

Many funders want to fund self-contained projects as it is easier to measure the outcomes of an isolated stand alone project but by doing so they may increase the organizational risk for the NGO as the project funding often fails to cover, or explicitly excludes the costs of administration and management. Not for Profit organisations are competing for a relatively small pot of available funding and in order to attract funding they are often driven to focus on the needs of the funders rather than the needs of the people they serve. As a result by 'chasing the money' NGOs can suffer 'mission drift' which will ultimately make it harder for them to demonstrate their impact and continue to raise funding in the future.

  1. Support the Organisation
  2. Assessing Who to Fund
  3. Overhead - a Very Blunt Measure
  4. Overheads and Structures
  5. Fundraising Costs
  6. Expense Classification
  7. Using Overheads and Fundraising Costs to Evaluate Effectiveness
  8. Funding Success

1 Support the Organisation

Enlightened funders recognise the need to fund the organisation and not projects.

A customer going into a shop to buy a computer isn't able to say "show me a breakdown of your costs because I am only prepared to pay the direct variable costs- but I don't want to pay for any overheads, development and research or cost of financing your business" Unfortunately this is exactly the approach many funders will take with an NGO as they are fearful that funding overhead will encourage inefficiency and that a smaller percentage of their grant will be spent on service provision.

However, as one funder we spoke to stated

"A knowledge based business recognises the benefit of spending on improving
their own abilities, structures and capacity. Therefore we should look at NGOs on the same basis."

To use a popular marketing analogy, Black and Decker don't sell drills, what they sell is the ability to make holes in walls. In the NGO world, organisations sell solutions to global issues which are what Funders want to buy. However, to create a hole in the wall one needs to buy the drill which includes not just the drill-bit but also the motor that drives it; likewise to solve development issues one needs to pay for not only the front line projects but also the ability to drive and manage the organisation i.e. the infrastructure.

2 Assessing Who to Fund

A number of evaluators will look at an NGO's financial data as the key factor for evaluation. The two main areas they focus on are accessing the level of 'Overheads' and 'Fundraising Costs' as percentages of the overall cost base. The assumption is that a high level of either reflects an in efficient and 'fat' organization but as discussed in 'Evaluating NGOs' this is a very blunt instrument and will not provide a realistic picture of the value of the NGO and its work.

3 Overhead - a Very Blunt Measure

One of the main problems associated with using Overheards alone as a measure of efficiency is that, like all businesses, NGOs need good managers and systems if they are to be run efficiently and effectively. The more experienced funders and foundations we spoke to are not afraid to pay for a reasonable level of overhead as they recognise the benefits they can bring.

Historically many funders have been reluctant, or refused, to pay for overheads.  As a result the more established NGOs and INGOs have developed sophisticated ways of recharging overheads across the direct and indirect costs of their projects. If they are sensible they load the popular "sexy" projects with a higher percentage of overheads than the low key, "less sexy" projects that may in fact have greater impact in the field but are less attractive to funders. An NGO will seek to demonstrate that overheads are the smallest part of the cost base and this in itself creates wasted time and resources. A funder should be encouraging management systems that enable effective decision making and transparency not manipulation of financial data to hide reality.

The smaller the NGO the bigger the problem.  A small NGO will have less projects and a smaller budget relative to the core overheads and may superficially 'appear' inefficient. If the comparative percentage of overheads to project costs is used as a measure by funders deciding who to fund then these smaller organisations will struggle to raise additional funds even though they may have more effective solutions in the field than larger NGOs.

Additionally without administrative support NGOs will not have the time or skill to prepare the level of reporting funders now expect and demand. Larger organisations with more resources to spend on administration and reporting will find it easier to raise funding regardless of the effectiveness of their programmes.

Funders are quite rightly asking for more accountability from NGOs (see 'Monitoring Projects' and 'Evaluating Projects'). However, measuring and monitoring is an additional administrative cost for the NGO, which funders should recognise and be prepared to fund.

4 Overheads and Structure

The relative 'overhead percentage' is also influenced by the structure of the organisation and the type of work undertaken. For example, NGOs using mainly volunteers to provide their front line services will have a disproportionally high level of overhead as volunteers are an invisible resource in financial terms. However, the volunteers enable the organisation to provide a higher level of service than if they had to employ all their staff, but this is will not be reflected when looking at financial information in isolation. (See 'Volunteers and their impacts').

New Venture Philanthropy's "Full cost recovery toolkit" looks at the issue of recovering overheads for NGOs

5 Fundraising Costs

Another measure often used by funders to assess an NGO is the return on fundraising costs. This again can be used inappropriately as a charity can't mandate their fundraising ratio as it will depend on the type of work they do and the historical development of the organisation. Fundraising is a highly specialised area and success varies with:

  • brand awareness
  • local philanthropic trends
  • available fundraising methods
  • local legal restrictions and regulations
  • and many other factors.

An NGO funded by a few major donors will naturally have much lower fundraising costs than one reliant on small individual donations from direct mailing campaigns.

Smaller organisations with no branding or name recognition will also find it much harder to raise funds and they are likely to achieve a much lower return on fundraising. With small organisations the fundraiser is also likely to be fulfilling other management roles as well so it may be difficult to separate out fundraising cost from general overheads.

6 Expense Classification

A further problem with applying simplistic financial analysis is that in many countries there are still no accounting standards specifically applied to NGOs. As a result the allocation and treatment of costs will vary greatly making it difficult to undertake direct comparison or NGOs reporting in different countries.
HKCSS are currently working with the Institute of CPA's in HK to develop standards and principles to determine the classification of expenses for organization based in Hong Kong.

Information on the UK Statement of Standard Accounting Practice for Charities registered in the UK can be found at Charity Commission website.

7 Using Overheads and Fundraising Costs to Evaluate Effectiveness

The Hong Kong Council of Social Service's Wise Giving website looks at overhead levels of the NGOs listed on their site. They do not however set any recommended percentage threshold as their aim is to "help donors understand the figures rather than merely set out comparatives, as each NGO will have different drivers and structures. The figures are intended to be used as a process of education rather than an end in themselves and should not be used in isolation." (See 'Different Types of NGOs and Civil Society')

The gross and net profit margins expected within the commercial arena vary by industry. Within each sector companies aim to achieve a ratio that is realistic given the type of business undertaken. The property, retail or telecommunications sectors will each exhibit fundamentally different ratios.

If funders wish to apply simplistic ratio analysis to the Not for Profit sector then they must at the very least look at the type of work being undertaken and the impact that will have on the structure and cost base.  To truly evaluate across the NfP sector NGOs need to be broken down into similar areas.  

This topic is further discussed in the funding section.

8 Funding Success

The following extract from New Philanthropy Capital's paper "Funding Success" neatly sums up the issues as follows:

A note on administrative and fundraising costs

Many donors and funders look to measures of administrative efficiency (such as administrative cost) when deciding which charities to fund. NPC does not do this for two reasons:

Firstly, administrative cost is not a predictor of results. In fact, higher levels of administrative spend may lead to improved results. For example, a charity offering legal advice to disabled people and their families currently employs solicitors who each serve approximately 400 clients per annum (by phone, email or in person). In order to grow, this charity could either raise funds to employ another solicitor (at £50,000 per annum) or an administrative assistant (at £30,000 per annum). The administrative assistance would increase administrative cost, but by booking appointments, following up and filing notes, it would also free up the time of the existing solicitors to serve more clients and deliver more results.

Secondly, comparisons on the basis of administrative costs are flawed. Despite guidelines regulating the reporting of administrative costs, there is wide variation between the methods used, and therefore between the costs reported. For example, one charity might report the salary of an administrative assistant as an administrative cost, while another might report it as a cost within the delivery of its charitable activities. In effect, reported ratios of administrative spend are so arbitrary as to be misleading without a detailed investigation of the underlying cost elements.

Fundraising Costs raise similar issues. These costs tell us nothing about results, and comparisons between them can be misleading. Fundraising Costs vary widely between charities of different sizes, between those working in different areas of social welfare and between those using different fundraising mechanisms.

These problems mean that it is dangerous to use reported administrative or fundraising costs as the basis of any judgement of effectiveness. While NPC considers financial indicators during the analysis of a charity's operational efficiency, this is always within the broader context of the charity's results.