Editorial. Are we cost efficient?
18/09/2008
Before I worked for SOS Children I spent a dozen years as CEO in the private sector. Drastically improving efficiency every few years was part of everyday life. That experience, and a personality shaped by a "war" mother whose generation thought waste was the most serious of sins leaves me with a continual drive to waste as little as possible and send as much of our funds as possible abroad, where the real need is. So how are we doing? The first step is easy, over the last few years our UK costs per pound raised have dropped to less than half what they were when I started in 2004 and are still dropping (in large part due to the internet). But apart from improving ourselves, it would be nice to compare ourselves with other charities and get an overall idea. Nice, but very hard to achieve...
Finding charity facts to compare them.
A first problem which presents is finding the numbers to compare in the first place. I spent a little while trying. You might think it easy: just go and look at the charity annual reports. But did you notice the footnote that Charity A puts all its "trading activities" (like selling Christmas cards) into a subsidiary and only shows the profit as a donation on its main books? And did you spot that charity B (or more likely charity A again) gets a lot of its income via a joint fundraising committee with other charities (set up as a charity itself) and apparently includes its share of the income from this in its accounts but not its share of the fundraising and admin costs? Or perhaps charity C (or perhaps charity A again) presents international accounts with net proceeds from national fundraising activities included but only costs of the international umbrella? Of course, you can try and pick up the accounts of all the bits, but the more complicated it is the less likely you will get anything which is meaningful out of the far end, and we are a long way from having easy figures to compare.
Second problem: "charitable and non-charitable spend"
If we could find decent accounts, the obvious measure which we could try to use is comparing charitable and non charitable spend. Does that sound easy? The higher proportion of charitable spend the better, surely. Some charities present this as "projects" and "cost". Unfortunately this doesn't work terribly well, because the definitions allowed for "charitable spend" embrace a lot of things for which donors, in my view, would probably not give money. For example, there are large charities which include as a "project" charitable spend on "communication between the first and third world" under which they place the admin costs of their child sponsorship programmes (rather than including them under "admin"). "Advocacy" is another "charitable spend" which in some cases (say Amnesty International) is obviously what donors give to support but in others gets blurred into TV adverts which "the man on the Clapham Omnibus" might consider to be fundraising. You remember people used to get car stickers saying "this car has an anti-theft device" where the sticker was the anti-theft device. It is a bit like that with some charities: you give money to help stop abuse in response to a TV advert about abuse and all your money may be used for is TV adverts ("raising awareness" about abuse people call it).
So how can we benchmark ourselves?
There are many different types of charity with many different models. However, I think a good cost measure for many charities is the proportion of our annual income which is spent in total in the UK. That should include all annual income including gross share of fundraising committee income, gross sales of cards etc, and all of the fundraising costs incurred including gross card costs, share of subsidiary and fundraising committee costs. When people dig into their pocket to give they really ought to know how many pence in the pound will end up in Africa or whereever. Of course, it isn't perfect: one NGO has recently moved its sponsorship admin centre to Joh'berg reducing its UK cost but not necessarily its admin cost, but from an international development viewpoint, isn't that a good thing?
Using UK costs as a measure is good from another view point. Actual expenditure abroad is more erratic because of the way project management works in the third world (we only transfer construction funds from the UK when construction reaches mile-stones which is often late if only because of the weather). I think all the development charities could easily compare UK expenditure and it would be an eye opener (especially for the direct mail charities who spend so much on mail). Perhaps Intelligent Giving could have a go?
Investment and Return on Investment: another headache
From a management accounting point of view (and comparing ourselves to others is foremost for us to learn and keep improving) there is another complicating issue. The charitable sector is full of talk of "investment" meaning not investment but paying for growth. Partly this talk originates from mailing houses who like to encourage people to spend on direct mail. We don't really want to include a "Return on Investment" element in our calculation but if we don't people will use it as an excuse so lets put it in. Anyway, there is an argument of sorts.
A direct mail campaign (no we don't do them) might cost £180 per £15/month donor recruited (that's a payback time of a year as 180 = 15x12). People who do these argue that as a regular donor stays with them for say 5-10 years on average (we are nearer 10) this gives them a fundraising cost of 10-20% of the donations they receive. Since the actual cost of maintaining a regular donor can be put into a "project" overall (we don't do that either) this doesn't look too bad to them. Well, we don't buy the justification for high cost fundraising but when you are growing regular income (direct debits and standing orders) there is some argument for saying this justifies higher fundraising costs in a year when the regular income rises.
You could take gross income plus 7 times the growth in regular income but there is a cost to serve the higher income in future years. Our child sponsorship scheme costs around £1 per donor per month for a £20 sponsorship. So to be completely fair we should include future cost to serve in the equation too.
Our proposed benchmark
If the growth in "committed giving" (standing orders and direct debits) is X, your cost to serve committed giving is 5%, and you assume 7 more years of donations this gives a total cost performance figure of
(UK costs +0.35X)/(Gross Income+7X)
How did you do? Us first? Okay we are under 20% costs on this basis and heading for our next target of 15%. We think 15% is still too costly but then again we suspect (since we get such a high proportion of new supporters online) that plenty of charities, even ones which ought to have a big scale advantage, will be much much worse than us.
And don't forget to include your share of all costs after the money leaves the donor's purse or wallet including fundraising committees, subsidiaries and so on. Any one out there prepared to benchmark against us?
This editorial was written by Andrew Cates