Cost effectiveness could be the end of your charity

Before we start, I want you to work with me here.

On a piece of paper, or open up your word-processor or notes program write down:

1. Your favourite charity - not the one you work for
2. How you support the charity (eg monthly gift, volunteer, occasional donation)
3. Why you support them

Here is an example:

1. My favourite Charity: The Sumba Foundation
2. How you support: Regular gift from credit card & occasional donation
3. Why?
   I went to see them at Christmas last year and met loads of the kids. Before the Sumba Foundation started its work, the infant mortality was about half the kids. ie half of them would die before they get to adulthood, mostly from malaria. It is easily prevented - nets and education, and I was really motivated.

Please take the time to do that, it will be worth it.

Now, back to the blog...

It’s a curious thing, but most charities, much of the media and an annoying number of public servants appear to think that the percentage of money raised by charities and spent on actual charitable work is the most important measure of worth available.

So much so, that for some states and nations return on investment (ROI) is one of the key measures that charities need to report on.

But our obsession with ROI damages our ability to make the world a better place, and I have the data to prove it.

When I meet with charity staff and boards, ROI is always an important consideration.

Fundraisers are given a brief that they must grow income by X without the annual cost of fundraising (COF – an inversion of ROI) increasing by more than Y.

ROI can be a useful measure – for example, when a fundraiser is considering tactic A vs tactic B to acquire new donors and there is a limited budget. Provided ROI is considered over several years, measured holistically (ie to include additional gifts, upgrades and bequests), and the rollout/repeat potential is considered, then it can be the best measure.

So why does it make me so angry? Principally, because obsession with ROI above all else harms growth. Too many charities choose the path of slow growth – or even reject otherwise successful strategies – because of their fear of a low ROI.

For example, charity A raises $40,000 from its Christmas appeal to warm donors, at a cost of $10,000 - an ROI of 4. It knows that by increasing the amount of time spent on the DM pack, sending out more information and writing longer, more professional copy (in other words, by spending more money) it could probably increase the donation income to $100,000. But the pack would then cost about $50,000, giving an ROI of just 2.

So the boss says no, and the charity continues the old way, maybe improving income a bit by writing longer copy. Net income, however, is still only about $30K, whereas the more expensive method would have netted $50K. Apart from the fact that the charity has $20k less to spend on services (or fundraising growth) in the immediate term, the decision is greatly flawed in the long term.

Meanwhile, Charity B, which decides to go the more expensive route, is set to benefit from a) higher net income, and b) many more donors. This is not just some hypothetical example. The chart below depicts a real life Australian case study. This charity decided to look at the long-term picture, and not worry about ROI.

The consequence for this charity of the shift in mindset was enormous. You can see that after a number of years, ROI is creeping back up again, but more importantly, the overall amount available for services (ie net income) from Tax 04 to Xmas 07 was $2.08 million. (Charities in Australia usually have two peak times for mailing – Christmas and “tax” – which is mailed around April/May). If they had kept to the old strategy, and experienced a bit of growth, they could have expected to net about $600K.

I repeat: the organization could have raised NET $600K, at an average ROI of 7 or NET of $2.08 million at an average ROI of 2.8. Come on, which result is going to help its beneficiaries more?

So how come so many intelligent people are led astray by ROI? The answer is simple – they are frequently told that this is what is important to donors.

The conspiracy theorist could argue that actually perpetuating the myth does help some charities – but only the really big ones. A shift in strategy for a small charity striving for growth is likely to reduce its ROI, but exactly the same strategy change for a larger one could actually improve its ROI. That’s just a mathematical fact.

This means that if the big charities were to be protective of their turf, banging on about ROI is a good way of preventing smaller organizations from being able to compete.

In the above example, a charity raising $500,000 per appeal who followed the same change in strategy would have seen hardly any change in ROI.

But we keep hearing "ROI (or COF) is important to donors." But who says so? Well, the media, common sense – and even the public. The problem is that this is what people (donors and non-donors) really do think. But it’s not how they behave. The charity above clearly had no problem.

And I have lots of other examples.

The charity probably had to explain the strategy to some major donors, and even the authorities, but its economic basis was so solid that those guys were not going to have a problem with it. Normal donors still gave – and none of my examples hid their COF.

As for the public, they may say ROI (or COF) is really important, but that isn’t reflected in their giving behaviour. The reason they give is because they were asked properly and they care about the cause. People who harp on about the amount of money that goes on administration are normally non-donors; COF is just a good excuse for not giving.

I recall being told about an experiment where a group of people were given real money to donate. They were given choices based on photos, stories about beneficiaries, and pie charts of expenditure. Never were the pie charts a significant factor for choosing which charity to support.
I admit I am not as extreme as Professor Myles McGregor-Lowndes of The Australian Centre for Philanthropy and Non-profit Studies at QUT. During a presentation on accounting for charities (which he managed to make interesting) he called on the Fundraising Institute of Australia to bar charities who bang on about how low their COF is.

But no fundraiser should allow his/her organization’s beneficiaries to suffer because they are bamboozled by the unsubstantiated bollocks that passes for fact when it comes to ROI. Of course, you need to be careful with your funds - I am not suggesting charities go out and take ridiculous risks - just plan strategically.

Don't believe me?

Remember the exercise right at the beginning? Did you write something like this?

1. My favourite Charity: The Sumba Foundation
2. How you support: Regular gift from credit card & occasional donation
3. Why? Their cost of fundraising is really low and I am impressed by their effective admin systems...

Of course not. And do you even know their cost of fundraising?

Donors care about what you do, the impact that you have not how you raise it.

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Pareto Fundraising help charities in many ways, not least explaining this in more detail to boards and management. If you want us to help, please email canyouhelp@paretofundraising.com.

Canadian Fundraiser published much of this information as an article in May 2008.