Challenge and reward of administrative efficiency

by Bronagh McKenna

An ethical organisation which invests in improved administrative systems will, in the long-term, be more streamlined and efficient, more attractive to donors and will have more funds at its disposal.

Introduction

Recent surveys indicate that the not-for-profit sector is growing, resulting in fierce competition for resources. Traditionally, donor pressure has resulted in the vast majority of expenditure being channeled towards short-term mission delivery, frequently to the neglect of an organisation’s administrative systems and therefore the longer-term effectiveness and sustainability of its mission delivery.

As the not-for-profit sector grows, however, ethical organisations must evolve to meet the new challenges posed by the more competitive environment in which they operate.

In this article we highlight the recent findings in relation to one such challenge, namely the acute need for greater administrative efficiency in ethical organisations. We discuss the increasing demand from donors that organisations address this need and the substantial gains which organisations which are willing to rise to this challenge will reap.

Growth in the Not-for-profit sector

The not for profit sector’s income is growing. According to the National Council for Voluntary Organisations (NCVO) The UK Civil Society Almanac 2008 , UK charities income increased by almost 10% in 2005-2006 while expenditure increased by almost 15% to just over £29 billion.
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However, the UK Civil Society Almanac 2008 illustrates that most individual organisations’ incomes continue to fall, with an increased share of money in the sector going to a small group of the very largest charities. The greatest level of income uncertainty and lowest growth was seen in the smallest organisations in the under £10, 000 strata.

As noted by the NCVO: “One in ten of the largest charities had large swings in income over the two financial years from 2003/4 to 2005/06, rising to a third of the smallest charities.”

Against this background of disproportionate growth between smaller and larger organisations in the sector and with the current global economic climate, ethical organisations must find ever more innovative means to survive and to secure finances in order to continue to serve their beneficiaries effectively.

Spending on fundraising, management and administration

Ethical organisations operate in an environment of constant pressure on resources. The 2005-2006 data illustrates that around 72% of the sector’s current expenditure is accounted for by the direct delivery of mission. The remaining 28% is spent on fundraising, management and administration. This is a 1.8% reduction on the equivalent expenditure in 2004-2005, suggesting that efficiency in the sector is gradually improving. As discussed below, significant benefits can be reaped by not-for-profit organisations willing to follow this trend of improved organisational efficiency.

How to compete more effectively

In light of the above, an article by McKinsey consultants in the Harvard Business Review makes mandatory reading for any charity hoping to flourish in this increasingly competitive sector. “The Nonprofit Sector's $100 Billion Opportunity” explains how America’s charities could save an extra $100 billion in resources by operating more efficiently, namely by developing ways to spend less on fundraising and administration and to streamline the delivery of their programs.

The article’s authors claim that if less efficient organisations performed nearly as efficiently as their more efficient peers, these vast savings would be realised. The article suggests that US nonprofits could save roughly $25 billion a year by changing the way they raise funds. By distributing funds more quickly, they could contribute an extra $30 billion to social causes. Most significantly, the article states that US organisations could generate more than $60 billion a year by streamlining and restructuring the way in which they provide services and by reducing administrative costs. $60 billion represents over 7% of the roughly $800 billion spent each year by America's charities. Even a fraction of a proportionate saving in the UK and Ireland would have a huge impact on the effectiveness of the sector.

Thus, for example, the 2008 UK Voluntary Sector Almanac states that total current expenditure in the sector in 2004-2005 was in the region of £29 billion. A 7% saving on expenditure through streamlining service provision and administration would generate savings in the sector in the order of £2 billion.

Charity Navigator, an independent charity evaluator based in the US which scrutinises the activities of charities in order to ensure that they use donor funds most effectively and best serve their beneficiaries’ needs, has stated that its analysis of 2,500 charities supports the McKinsey article’s central claims. It explains that in comparing more efficient and less efficient charities, it has identified substantial gaps in the levels of operational efficiency of similar charities.

Charity Navigator calls upon donors both to help charities find additional resources and to demand that they do more with these extra funds, stating: “We must compel them to accept that efficiency matters”.

Facing the challenge

Rising to the challenge of increasing efficiency will not be easy. Traditionally, pressure from institutional and private donors to spend all available resources on delivery of mission could result in organisations foregoing short-term expenditure on administration to the longer-term neglect of efficiency. Streamlining administrative systems in order to recoup long-term savings requires an initial investment which, in light of the pressing immediate needs of beneficiaries, ethical organisations have frequently found difficult to justify.

The donor climate is, however, changing. The current trend of both large scale and smaller scale philanthropy has resulted in private donors becoming ever more interested in how their money is spent. Along with the heightened scrutiny of not for profit expenditure comes an increasing realisation on the part of donors of the necessity of investment in an organisation’s administrative framework in order to deliver optimal results. Thus, New Philanthropy Capital, a UK based organisation which helps private donors understand how to use their donations to greatest effect by providing independent research and advice on the most effective ways to support charities, lists as its number one Good Giving Principle the “Pro active selection of charities based on results: Donors should support charities that are achieving excellent results for the people that they serve, rather than charities that have the most effective and professional fundraising teams or the lowest administrative costs (all organisations need administrative costs in order to be effective; low admin costs may in fact be the sign of an inefficient organisation).”

Similarly, Charity Navigator has recently highlighted as one of five key charity myths the idea that: “Excellent charities spend 100% of their budgets on program services”. Charity Navigator explains that, while, donors should only donate to charities that will spend their money efficiently, “no charity is able to operate effectively without allocating at least a portion of their resources towards generating new funds and supporting the infrastructure that makes their activities possible. Any charity that claims to spend 100% of your donation on programs should be looked at with a critical eye.”

Equally, Social Venture Partners, a US based nonprofit organisation which connects philanthropist “partners” with charitable projects, identifies the concern of partners that “I want all of my contribution to go directly to the program and the kids being served and not have any wasted on overhead or administration”. It states that: “This desire is well-intentioned, but the consequences can oftentimes be detrimental … Non-profit organisations are businesses just like any for-profit entity, but with a social mission. They have to invest not only in the “product,” but also in the systems, infrastructure and operations to support the end product … A non-profit has to build a successful, holistic enterprise just like any other business.”

An article on the emerging trend of venture philanthropy observed that “there is a growing realisation that venture philanthropy’s emphasis on organisational efficiency can and should apply to much of the nonprofit world”. It quotes Jeff Bradach, cofounder and managing partner of Bridgespan Group, a not-for-profit consulting firm affiliated with Bain & Co that helps not-for-profit organisations boost performance saying that: “The for-profit sector discovered 20 to 25 years ago that strong organizations produced strong performance. Now the nonprofit sector is discovering the same thing”.

Ethical organisations wishing to compete for the limited funds available in the sector will need to respond to this increased donor scrutiny and demand for operational efficiency. However, the benefits of rising to this challenge and building a more efficient and therefore more effective sector will be great, both for the organisations themselves and for their beneficiaries.

Reaping the benefits

It is clear that there are crucial differences between the not-for-profit and the for-profit sectors, and that no “one size fits all” approach to improving organisation and administration exist. What is, however, also clear is that there is major potential for improved administrative efficiency in the not-for-profit sector, and organisations which can harness this potential will reap significant rewards. An ethical organisation which invests in improved administrative systems will, in the long-term, be more streamlined and efficient, more attractive to donors and will have more funds at its disposal.

As a result, such an organisation will undoubtedly be more effective in achieving its charitable goals and fulfilling its mission.