How much goes to administration?

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: Haute’s key metric is the number of new jobs that our clients have created after benefiting from our management training and consulting services.

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.

Dead Aid

In our previous post, Ernesto Sirolli made reference to Dambisa Moyo’s book Dead Aid: Why Aid Makes Things Worse and How There Is Another Way for Africa¹. 

Dambisa was born and raised in Lusaka, Zambia, in Southern Africa.  She holds degrees from Oxford and Harvard, and has work experience with Goldman Sachs and the World Bank.  Her background, education and work experience came together in Dead Aid to produce a highly-acclaimed book that challenges the way many of us implicitly think about aid in Africa.

In her book, she points out that over the past sixty years, more than $1 trillion in aid has poured into Africa, with little positive impact.  She then goes on to state “Were aid simply innocuous – just not doing what it claimed it would do – this book would not have been written.  The problem is that aid is not benign – it’s malignant.  No longer part of the potential solution, it’s part of the problem – in fact aid is the problem” (Moyo, 2009, pg 47).

For those that are interested in learning more about Dambisa’s point of view and her proposed solutions, you can pick up a copy of the latest edition of Dead Aid on Amazon by clicking here. 

Or if you are more pressed for time, you can check out Dambisa’s 2009 Wall Street Journal article “Why Foreign Aid is Hurting Africa”² by clicking here.

References
1 Moyo, D. (2009). Dead Aid: Why Aid Makes Things Worse and How There Is Another Way for Africa. New York, NY: Farrar, Straus and Giroux.

2 Moyo, D. (2009, March 21). Why Foreign Aid is Hurting Africa.  The Wall Street Journal. Retrieved from http://online.wsj.com