The administration costs of NGOs are being singled out for analysis in this study as a particular accountability mechanism. Rhetoric on NGO administration costs suggests that cheapest is best – so an NGO with administration costs of 7% is invariably better than an NGO with administration costs of 11%. While there is no agreed definition of NGO administration costs, the measure is usually associated with fundraising and some or all of an NGO’s head office costs. Despite the lack of clarity on what precisely administration costs entail, reporting by NGOs on how much is spent on administration costs is common. Long criticised within the NGO sector, it has been argued that the question of what percentage of one’s donation goes to “the cause” functions as a kind of “coercive, authoritative, life-sucking state that reigns over the whole nonprofit endeavour” (Pallotta, 2008, p. 129).
While I largely agree with Pallotta’s critique, I should make clear from the outset that regardless how appealing an NGO’s overall objectives or how committed its staff may be, I believe that no NGO should be excused for inefficiency or
incurring higher costs than necessary in conducting its operations. Furthermore I acknowledge that there are numerous ways in which NGOs can incur unnecessarily high costs including through recruitment and staff remuneration practices, inefficient procurement practices, inadequate planning, and failure to capitalise on funding and efficiency opportunities. I believe that consideration of any of these or related specific issues in relation to NGOs is not only justifiable but could potentially be very helpful in highlighting or discouraging bad practices. However, as I will argue below, judging NGOs based on their “administration costs” is unhelpful, because not alone can the measure not be relied upon to accurately convey how cost-effective or efficient NGOs’ administrative or other functions are, but, more damagingly in my opinion, the measure also orients analysis of NGOs away from the impact of their work.
Before discussing problems with the notion of administration costs it is worth identifying likely reasons for its popularity. For a start, the measure provides an easy way of differentiating between NGOs in a crowded sector. Difficulties of measuring the impact of NGO humanitarian and development work are widely acknowledged and remain unresolved within the sector (Taylor and Soal, 2003, Spar and Dail, 2002). In this context a focus on administration costs allows donors to appear to
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evaluate NGOs without having to engage beyond a simple percentage figure and allows NGOs a relatively easy basis on which to compete with each other. The notion of keeping administration costs - and by implication head office salaries - low also helps NGOs to distinguish their staff from apparently well-paid corporate staff and to further promote the notion of NGOs as ethical and value-driven
operators who are worthy of public support.
The first problem with the administration cost measure is that it cannot be relied upon to convey how efficient or cost-effective an NGO’s administrative function is. There are many reasons for this. Firstly, administration costs figures are generally produced by NGOs on the basis of their administration (however they choose to define administration) as a whole. Therefore grossly inefficient elements of administration can be concealed within an overall figure. For example, very large senior management salaries could be concealed within an overall administration cost figure if an NGO pays its junior staff very modestly or uses volunteers or seconded staff members to whom salaries are not paid to carry out other functions. Secondly, a wide range of creative accounting techniques have been reported to be in use by NGOs seeking to produce low administration costs (Smillie, 1997) with variations of up to 30% having been reported on the basis of different accounting practices alone (Sargeant and Jay, 2004). For example, the administration costs for a fundraising event can appear to be eliminated if a sufficient number of attendees “sponsor” the costs of the event by giving the money they would expect to pay for their attendance directly to suppliers of goods and services. In such cases an NGO can report 0%
administration costs for their event without the figure giving any indication as to whether the NGO has secured the necessary supplies or services for the event at competitive prices. Thirdly, NGO administration cost figures ignore the reality that it is harder and more expensive to raise money at some times than others and for some causes than others (Pallotta, 2008, Smillie, 1995). For example, if in a given year a large humanitarian emergency occurs and receives significant news coverage NGOs that have identified themselves as operational in the area or are assumed to be operational in the area can expect to receive significant increases in public donations without any additional advertising expenses being incurred on their part. This will result in reduced administration costs for that NGO that year compared to in years when no such large-scale coverage reminds people of their work. This is despite the fact that the NGOs involved may be no more efficient in their administration during
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the year in which this coverage has occurred. Fourthly, NGO administration costs are generally only meaningful in comparative perspectives. For example, if an NGO reported that it spent 8% on its administration costs it would be difficult to assess whether this represented efficient or inefficient administration unless there was another NGO that had conducted exactly the same work in exactly the same way with exact the same resources, circumstances and results and reported administration costs based on the same definition. However, no two NGOs do exactly the same work and the absence of agreed parameters as to what should be included or excluded from administration costs make comparisons virtually impossible to interpret.
Not only do reports of NGO administration costs not convey how efficient or cost-effective an NGO’s administrative function is, but they also completely fail to indicate whether areas other than an NGO’s administration are efficient or cost-effective. Put another way, if an NGO reports administration costs of 5% and an individual donates €100, the administration cost figure is only concerned with reporting on how €5 of that donation is spent and completely disregards the far more substantial €95 of that donation. There is, however, a very problematic assumption implicit in the reporting of administration costs that these costs will correlate with quality in other areas of an NGO’s work. There is not necessarily any link between being cheap and being effective, however, and this assumed correlation is, in the words of one commentator, “like saying that the Lada is the best car in the world (or the most efficient) because it is the cheapest” (Smillie, 1997, p. 567).
Clearly there are many criteria or combinations of criteria that can be employed when attempting assessments of NGO performance and the subject has generated a significant literature. I believe an emphasis on NGO administration costs to be particularly problematic because it directs attention away from
substantive issues such as the appropriateness and quality of NGO work from the perspective of those in whose name it is conducted, and, ultimately, the long-term impact of that work. Even if there were a way of defining and policing the reporting of the measure so that it did accurately reflect how much it cost NGOs to administer their activities, therefore, I believe that by focusing exclusively on cost and ignoring impact that this measure should at best only form a small part of overall assessments of NGOs.
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Finally, it has been argued that having to maintain low administration costs can undermine the overall quality of NGO work by leading to the neglect of organizational learning (Edwards, 1997) and failure to invest in necessary organizational infrastructure (Pallotta, 2008).
There is a longstanding consensus among NGO analysts that administration costs have little relevance to programme success (Wenar, 2006, Smillie, 1995).
Perhaps as a result of this consensus there has been relatively little empirical study into the use of the measure by NGOs. There is, however, international evidence that perception of costs matter to charitable givers in general, who typically give more to organisations that allocate a greater proportion of their expenditure to programmes as against fundraising and administration (Sargeant et al., 2009, Callan, 1994). A focus on administration costs also retains considerable rhetorical power internationally.
Two key US charity watchdogs, the Better Business Bureau Wise Giving Alliance and the American Institute of Philanthropy, both publish (among other
recommendations) maximum recommended percentage figures that they believe charities should spend on administration (Better Business Bureau Wise Giving Alliance, 2009, American Institute of Philanthropy, 2009) thereby lending tacit approval to the measure. Studies have also demonstrated a positive relationship between meeting the Better Business Bureau Wise Giving Alliance standards and increased contributions from donors (Chen, 2009, Sloan, 2009).
Finally, and of particular relevance to this study, the use of administration costs as an indicator of relief and development NGO quality clearly benefits NGOs that are predominantly engaged in developing country activities. Organisations that pursue roles similar to those I recommend will inevitably have high administration costs as their costs will be predominantly – or even exclusively – incurred in the developed world.