When deciding
whether or not to donate to a nonprofit, many potential donors ask “How much of my donation goes to
administration?” While
well-intentioned, there are two fundamental problems with this question.
1.
It
focuses on activity rather than results. When you have asked your son to mow the yard,
you don’t later ask him “How much of your time today was spent mowing the yard?” Instead, you ask him “Did you get the yard
mowed?” The first question is about
activity, and the second question is about results. For some reason, the nonprofit sector is
allowed to be judged on activity, whereas all other businesses are judged by
the results they produce.
To demonstrate this point, please
consider the following two scenarios. Remember:
A.
Haute raises $20,000
from donors. It spends $10,000 on
management training and consulting services for new clients, who then use their
new knowledge and skills to grow their businesses and create 150 new jobs.
B.
Haute’s raises $20,000
from donors. It spends $15,000 on
management training and consulting services for new clients, who then use their
new knowledge and skills to grow their businesses and create 100 new jobs.
Which of these
two scenarios is the best use of donor funds?
Well, if we use
the “% to administration” criteria, then scenario B is the best, as only 25%
goes to administration, vs. 50% going to administration in scenario A. But what if we focus on results rather than
activity? In scenario A, $20,000
resulted in 150 new jobs, meaning that is takes $133 to create one new
job. In scenario B, $20,000 resulted in
100 new jobs, meaning that is takes $200 to create one new job. Scenario B is now clearly shown to be a waste
of donor funds, even though the “% to administration” test results in the
opposite conclusion.
2.
It
greatly restricts the nonprofit’s ability to expand its impact. Dan Pallotta does a great job of explaining
this point, so I’ll leave it to him.
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