Might it be time to stop talking about NGO Administration Costs?

03/04/2012 at 4:15 pm 8 comments

Guest blog by Marguerite Hughes

As highlighted by the resource lists recently compiled by Dóchas on this blog, there is a formidable opposition to the use of administration costs as a measure of NGO quality.

Reasons cited for this opposition include

  • The claim that the measure cannot be relied upon either to accurately convey actual NGO administration costs or to highlight inefficiencies in NGO administration.
  • The argument that not only do administration cost figures not convey how efficient an NGO’s administration is, but they also completely fail to convey how efficient areas other than an NGO’s administration are.
  • Perhaps most importantly of all, that NGO administration costs are said to be problematic because they detract attention from far more profound questions about NGO impact and the appropriateness and quality of NGO work from the perspectives of those in whose name is it conducted.

Among opponents of the use of NGO administration costs as an indicator of quality there is an almost palpable tone of frustration that use of the measure continues at all. Perhaps stemming from this frustration has been a tendency for analysts to present analogies possibly in an attempt to definitely expose the measure’s shortcomings.

Smillie (1997) for example, spoke of the use of administration costs as an indicator of NGO quality as being “like saying that the Lada is the best car in the world (or the most efficient) because it is the cheapest”. Personally, I have been drawn to the analogy of a haircut and view judging NGOs on their reported administration costs alone as akin to selecting a salon on the basis of its declared prices alone, and ignoring factors such as the experience of the hairdresser, whether the hairdresser or client will have the power to select the style of haircut, and whether one’s ears are likely to be cut off during the process.

While NGO analysts seem largely in agreement that the measure is inappropriate, and published arguments in favour of the measure are difficult to find, the US charity watchdogs Better Business Wise Giving Alliance and ; CharityWatch both continue to publish (among other recommendations) maximum recommended percentage figures they believe that charities should spend on administration.

In addition, some studies have found a positive correlation between meeting the Better Business Wise Giving Alliance standards and increased contributions from donors (Chen, 2009; Sloan, 2009), and others have reported that charitable givers typically give more to organisations that allocate a greater proportion of their expenditure to programs than administration (Sargeant et al, 2009).

In Ireland, while Dóchas has been consistent in highlighting problems with the measure, there is an absence of evidence on the frequency of its use. As part of a larger recent research project I sought to identify every Irish Times article published between 1994 and 2009 in which the term “administration costs” or “administration cost” appeared in relation to NGOs in general or one or more of 77 named Irish NGOs (including all those that were Dóchas members in 2009 and any other NGOs that were identified in Irish Aid annual reports as having received funding during the period). To my surprise my search yielded only 15 articles – equivalent to less than one per year. In addition to the infrequency of coverage of NGO administration costs, points I consider noteworthy from the analysis of these articles include the following:

  1. In 3 of the 15 relevant articles the approach to administration costs was not discernible. In 11 of the remaining 12 it was implied that low NGO administration costs were desirable without any mention of possible limitations associated with the measure. In only one article (written in 2005 in which Hans Zomer of Dóchas was cited) was the validity of the measure questioned;
  2. NGOs themselves reportedly referred to NGO administration costs more commonly than non-NGO sources and more commonly implied that low NGO administration costs were desirable without identifying any weaknesses associated with the measure. In fact, in 10 different articles NGOs reportedly implied that low NGO administration costs were desirable without identifying any possible problems associated with the measure.
  3. Although one NGO reportedly referred to NGO administration costs far more than any other, many different NGOs reportedly implied that low administration costs were desirable. For example, in a 2005 Irish Times article entitled “Tracking the aid: where the charities say your donations go”, not alone did 5 prominent Irish NGOs respond to a question about what percentage of their tsunami donations would be used for administration, but 3 declared that 0% of donations would be used for administration.

In sum, NGO administration costs received relatively little Irish Times coverage between 1994 and 2009. Of that coverage most implied that low NGO administration costs were desirable without making any reference to possible problems associated with the measure and most of the references to NGO administration costs were attributed to NGOs themselves.

Dan Pallotta in his controversial book Uncharitable dedicated a chapter to the question of charity administration costs. Making his position clear he entitled this chapter “Stop Asking This Question”. While it seems sensible to me to advise members of the public to stop asking about NGO administration costs, perhaps the Irish Times coverage I reviewed suggests that NGOs should also stop highlighting their own administration costs and should respond to questions about their administration costs by consistently pointing out the limitations of using administration costs as an indicator of NGO quality.

References

Chen, G. 2009. Does meeting standards affect charitable giving? An empirical study of New York Metropolitan Area charities. Nonprofit Management and Leadership, 19, 349-365.

Sargeant, A., Lee, S. & Jay, E. 2009. Communicating the “realities” of charity costs: an institute of fundraising initiative. Nonprofit and Voluntary Sector Quarterly, 38, 333-342.

Sloan, M. F. 2009. The effects of nonprofit accountability ratings on donor behavior. Nonprofit and Voluntary Sector Quarterly, 38, 220-236.

Smillie, I. 1997. NGOs and development assistance: a change in mind-set? Third World Quarterly, 18, 563-577.

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8 Comments Add your own

  • 1. Jayne Cravens  |  03/04/2012 at 9:42 pm

    What are “administrative costs”? Seriously – name some administration costs, and name things that cannot be considered administration costs. And would those categories hold at *every* nonprofit?

    Reply
  • 3. Trish  |  06/04/2012 at 7:29 pm

    Interesting article, Marguerite. The word ‘administration’ is often used perjoratively to describe work which is perceived as wasteful or non-essential, whereas in fact many ‘administrators’ are the oil which keeps the machinery of NGOs, local government and the civil service running. Strong record-keeping, compliance and filing systems are essential to good governance and accountability, and no organisation could function without people to answer the phones, reply to letters, respond to e-mail requests, etc. But to balance that argument, if an organisation spent, say, 95% on administration, but only 5% on its work programme, that would definitely ring alarm bells!

    Reply
  • 4. Marguerite Hughes  |  09/04/2012 at 7:57 pm

    Thanks for the comments! I agree that one of the (many!) problems with the measure is the absence of an agreed-upon definition as to what should be counted under the umbrella of administration costs, which in turn may be related to the difficulty of disentangling so-called administration from so-called programme costs. Trish, while I believe that there are inefficient and efficient NGOs I don’t think that administration cost figures as reported can ever be relied upon as an indicator of either. For example, I am involved with a small patient support group. It has no paid staff and what some commentators might classify as its “programme” functions are carried out largely without incurring any direct costs. Its only substantial cost is the rental of its (very modest) office space, which some commentators might choose to classify as “administration” costs. If this definition of administration costs were applied it could be the case that 95% of this organisation’s costs would be categorised as administration. However, I don’t think this would in any way serve as an indicator of the efficiency or indeed quality of its work.

    Reply
  • 5. Hans Zomer  |  23/04/2012 at 8:43 am

    This piece is The Guardian settles it: Charities need to stop talking about their administration costs and focus on telling donors where their money goes

    “This separation between the person providing the money and the person consuming the product is at the heart of most problems in the charity sector. The admin question is usually a misplaced quest for some reassurance that something useful is happening.”

    http://www.guardian.co.uk/voluntary-sector-network/2012/apr/23/charity-administration-course-giving-evidence?utm_medium=twitter&utm_source=twitterfeed

    Reply
  • 6. Hans Zomer  |  11/05/2012 at 9:01 am

    Proof that it’s not just NGOs that talk about admin ratios: http://www.labour.ie/press/listing/13365815447913517.html

    Reply
  • 7. R Storey  |  20/05/2012 at 8:04 pm

    Clearly the use of administration costs as a measure of NGO efficiency is a blunt instrument focussed on out of the frustration of lack of NGO accountability by the general donor public.
    There are no strict rules on what can and cannot be included in Admin charges hense the confusion.
    Comparison ratios as used in similar businesses could be usefully applied say to those working on HIV & AIDS, water and sanitation etc. We all know that the stripped down funding tools used of – “£25 can feed a family for a month” are untruthful but still they are used.
    There is a need for transparency and accountability rather than the use of accounting tricks to make administration costs look good.

    Reply
  • [...] Might it be time to stop talking about NGO Administration Costs? (April 2012) [...]

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