The GiveWell Blog

I’ve done an arguably excessive amount of ranting on what I’ve dubbed the “Straw Ratio”: the idea that we can find the best charities by seeing what percentage of their total expenses goes to program expenses, or, in Straw Man parlance, goes “straight to the people who need it.” It’s about time for me to stop devoting every post to this, but before I do, I want to wrap up with why I’m so obsessed with this issue.

To me, the Straw Ratio is more than a bad metric: it’s an emblem of the biggest single problem with charitable giving today. The problem is the fallacy - specific to charity - that how much you spend is more important than how you spend it. That, in the end, is the fallacy behind the Straw Ratio: that what matters about a donation is not what it pays for, but how much it pays for.

It’s the same problem that sits behind the success of “microcharity” sites such as DonorsChoose and GlobalGiving and Kiva, which I will complain about more later - the attitude that getting your money straight to where it’s needed, bypassing administration and planning, is an exciting and intelligent way to give it.

It’s the same problem that sits behind some of the excessive restriction/designation of donations, both by individuals and foundations, which I will also complain more about later. Too many donors feel that if “someone else” pays for all the planning, evaluating, and administration (or if they simply aren’t paid for at all?), they’ve gotten more bang for their buck.

It might be the same problem that makes charities so reluctant to embrace transparency and admit that not everything they do is perfect - the obvious benefits of global dialogue, in terms of figuring out how to spend money, are offset by a fear that there will be less money to spend.

And in the end, it is probably the same problem that explains why donors are not smart about their giving, and nobody aside from GiveWell seems interested in helping them to become more so. From the (RED) campaign to the “Don’t Almost Give” campaign to, well, everything, “being charitable” is identified with “giving a lot.” The nonprofit sector is naturally obsessed with getting people to give more, and donors think that the only thing that determines how good you are at giving is how wealthy you are. That’s wrong.

The world’s needy don’t just need your dollars, they need your thoughts. If your friend gives more than you but gives it worse, this is pretty much the equivalent of their having a vastly superior tennis racket and being a vastly inferior tennis player. You are better. Why does that make so much sense in every context except charity, but sound so foreign here?

In all, I can think of a whopping two activities where money alone will buy you success. 1. Arcade games (the ones where you can continue as long as you have more quarters). 2. Strip clubs. Nothing else comes to mind.

Money can’t buy you a great movie. Money can’t buy you a great product. Money can’t buy you love. It can’t buy you a better world either.

Anyone who has ever had a job knows that throwing money at a problem is worthless, and that a single great idea can dwarf the impact of a bigger budget. Anyone who has ever watched a tiny startup business take down a Goliath knows the same thing. Anyone who has ever had a hobby knows that how much you spend is going to account for half, at most, of how good you are.

Anyone who has ever had 5 minutes of consciousness knows that intelligent thoughts are gold, and that next to them, money is cheap. So next time you give, expect your donation to help pay for salaries and self-evaluations. And when it comes to choosing where to donate, don’t use the Forbes list or the first slickster who sends you a picture of a baby. Put in some time, and donate some of your own intelligence as well. The world needs it.

If my extended, multi-post rant on the Straw Ratio has been at all convincing to you, you should be concerned about what the Internet thinks “charity evaluation” means. I’m not just talking about the top result, but about the whole shebang.

Give.org’s criteria don’t say a single thing about the nature or effectiveness of a charity’s program activities - only its organizational policies and, of course, our friend the Straw Ratio (see “FINANCES”). The next link is referencing the American Institute of Philanthropy, whose ratings criteria will look familiar to fans of Charity Navigator’s: program expenses good, administrative and fundraising expenses bad, lots of assets/reserves good, content of programs irrelevant. Next one down gives a whole list of links to charity evaluators with more (or less) of the same.

Then you’ve got the bold Put your money where our math is (I’ll admit that’s a great pun), which says “Don’t worry. We’ve done your homework for you,” before laying out criteria for the charities that are “run the most efficiently” - criteria that, again, look mighty familiar, except these guys penalize charities for saving a lot where the above watchdogs reward them. (There are arguments both ways … and both arguments are pretty bad. I haven’t spelled out why I think how much a charity saves is a pretty crazy thing to look at when trying to help people … leave a comment if you want me to.)

And on and on … not to mention the ads for charities claiming to be “Top ranked in efficiency” and the like. One guess as to how they’re measuring that.

Not cool, Internet.

Measuring success at helping people is hard; it has inherent limits; it’s time-consuming; and it’s expensive. But it has to be done.

The first reason is that no matter how much sense an idea makes in your head, translating it to reality is another matter. I’d argue that acceptance of this basic idea is the single reason that we now have medical alternatives to prayer.

The second reason is that there are a a LOT of different charities out there for a donor to choose from - and without some sense of what they’ve actually accomplished, a donor has nothing to go on but theories and brochures. To me, that’s not much better than flinging our money randomly around the globe, with anyone who has a good story and a good accountant getting a chance to play. That isn’t a reasonable approach to solving the world’s problems.

The question of how to evaluate a given charity’s activities is a question for another day. It depends on the charity and it’s pretty much never easy. The question for today is, why isn’t it done more thoroughly and more often? And the answer for today (though it’s only one factor) is that funders don’t want to pay for it.

Children’s Aid Society has explicitly told us they’re concerned about funders’ reactions to the amount of their budget that is going to evaluation, “as opposed to” helping people - and that they’ve been unable to execute a major community school evaluation they’ve mapped out because it exceeds the “evaluation budget” designated in their grants. We asked New Visions for Public Schools why they don’t seem to have had the same problem, and they told us that they have, but that they’ve made a priority of fighting for larger evaluation budgets from their own funders. Over and over again, when we ask charities why they haven’t measured things that seem measurable, they’ve responded that the people who fund them don’t want it: many of their funds are often officially earmarked for non-evaluation purposes, and even when they’re not, they’re concerned about donors’ wishes to “get the money right to the people who need it.”

You and I are lucky that the people who build our bridges, cars, and airplanes don’t decide they can get more money directly to us if they cut their testing budget. The people served by nonprofits should be so lucky.

It’s very unlikely - maybe impossible - that the Straw Ratio bothers you as much as it bothers me. So I’m going to try to spill out all the ranting I have left on this topic over the next few posts, and then we’ll completely be done with it, at least until the next time I tell someone about our project and they go “Oh yeah, I’m really into giving intelligently. Like have you seen these websites that show you how much of your dollar REALLY goes to helping people?”, causing me to completely black out with rage and do things I can’t remember days later, like write incoherent blog posts or light Form 990s on fire. (FYI, this happens about 2x per day on average.)

So. My last post focused on one component of those evil, evil administrative expenses: salaries. Another common administrative expense that jumps to mind (although “administrative expense” is subject to some interpretation, as has been pointed out to me) is information technology. This is something I haven’t seen from the inside, but anecdotes about the generally poor state of nonprofit tech abound. Here’s a pretty good example: Today I Cried, an aborted (as of a few days ago) blog by a nonprofit IT director.

“I think I’m done with nonprofit. I’m looking at corporate - the bigger the better.”

“So much energy wasted on bull[bunnies].”

“Do you know what a modem-router is?”

Oy.

But the most relevant post here is Non-Profit Technology vs. For-Profit Technology. First overarching difference? “Money (restricted/unrestricted funding; discount pricing; used/donated technology; Tech Soup; technology grants)”. What do you know. Those dollars that you’ve so diligently been marking “FOR NEEDY CHILDREN ONLY” made it past that greedy tech department after all.

Ever try to do good work with bad technology?

Is that what you want to be funding?

Whoa, no way - young nonprofit sector workers don’t want to stay in the sector because of low pay? Young people don’t aspire to become nonprofit leaders? Well where are we going to get great leaders? We need great leaders at nonprofits if we want them to get great things done, right?

Man, that’s rough. Anyway, my attention span isn’t so hot, so I forget what I was just talking about, but you know what pisses me off? Charities that blow their money on fat salaries for their greedy executives!! Oh, man. Don’t get me started. At least I have a friend in Charity Navigator, which puts the CEO compensation right on that profile page so I can spot crooks like that Curtis R. Welling. Guy makes 275 THOUSAND DOLLARS (as much as a mid-level investment banker!) for running Americares, which barely cracks the top 20 largest nonprofits in the country. I mean, the AVERAGE nonprofit CEO makes ~$150k/yr - who needs that kind of money? That’s, like, entry-level MBA money!

Listen to me. I want my donation going to needy children, not to some jerk in a suit. I want great leaders in the nonprofit sector. I am confused.

Oh, actually, I think I’ve sorted it out. The problem seems to be that pesky Straw Ratio again, and the mentality that goes along with it: that we should evaluate charities by nitpicking their balance sheets and questioning their operating costs, rather than by looking at what they do and whether it works.

I’ve been ranting about how ridiculous it is to judge a charity by the % of its funds that go to administrative expenses, which I’ve dubbed the “Straw Ratio” because I was too lazy to find a prominent advocate of it so I just invented a Straw Man.

Well, it turns out there quite a lot of human men (and women) who make this mistake. Specifically, according to a recent study that I found out about from Gift Hub, 75% of high-net-worth households say they would give more to charity if less were spent on administrative expenses.

This aspect of charity got by far the strongest response out of anything the households were surveyed on. High-net-worth households care more about their money going to administration than they do about having more access to research (34%), or being able to determine the impact of their gifts (60%). See page 7 of the actual study if you think I’m lying.

Meanwhile, frustrated with the incompetence and disorganization I’ve seen in the nonprofit sector, I’ve practically been begging these guys to spend more on administrative expenses.

If these survey numbers are to be trusted, we’ve got quite a conundrum here. How do we convince people that this seductively easy-to-measure number is no more meaningful for a charity than for a company? How can we make people care more about accomplishing something than about pinching pennies from executives?

My initial ideas:

• Yell
• Blog
• Insist on calling the program expenses / total expenses the “Straw Ratio,” banking on the negative connotation of straw
• Start a project to collect all the meaningful information about charities that we can find in one place
• Hold a protest! We could march around with straw hats on - it would be so symbolic!
• Social networking

1. “90c of your dollar goes directly to building cars. Only 10% of our expenses go into planning and designing them.”

2. “We’re using a volunteer director and no advertising, so we can spend 100% of the movie’s budget on shooting expenses. It’ll be a hit!”

3. “90% of our military budget goes directly to soldiers and weapons. We don’t waste your tax dollars on administrative costs.”

4. “More than 90 percent of our expended resources … support our poverty-fighting projects around the world. Less than 10 percent of expended resources go toward administrative and fund-raising costs.”

The answer, of course, is #4, because it’s real. But to hear me tell it, it’s as silly a “selling point” as the others.

Efficiency is great, but who the heck came up with the idea that efficiency means low “administrative expenses”? When I think of what’s included in administrative expenses, the following jump to mind:

• Salaries for executives
• Technology infrastructure
• Self-tracking and -evaluation

For-profit companies spend boatloads on all of these things, and it isn’t because they’re being extravagant–it’s because these things are cost-effective. When you’re doing something complex and difficult (like, say, trying to improve the lives of Africans who suffer from a host of interrelated problems), you need to get great people and keep them happily employed, you need to have good tools to leverage their skills, and you need to be stepping back and looking at what you’re doing and how you can improve it.

A theme we have already hammered on ad nauseam, and don’t intend to stop, is that in giving as in everything else, It isn’t just how much you spend–it’s how you spend it. And that means that the people, tools and processes that can help you spend more intelligently are worth quite a bit of expense themselves.

This isn’t just a hypothetical/abstract argument about how the Straw Ratio can mislead you. This is the product of our experiences and frustrations with organizations that we find to be disorganized, technologically behind, and incapable of producing any details about what they do and whether it’s working. The obsession with the Straw Ratio goes beyond Charity Navigator: there is a pervasive attitude that nonprofits need to get all their money right to the needy, and do all their administration on the cheap. No one thinks a business should be run this way, but it’s conventional wisdom in the nonprofit sector, and the result is that the groups you’re paying to accomplish great things are trying to do them without good technology or good people. Examples of both to come.

I’m spreading my rant against the Straw Ratio across a few posts, because (a) I have a lot to say; (b) this idea is really central to what we’re doing.

Let’s start with an observation so obvious that you’re going to get mad at me for being patronizing. There is a lot you need to know about a charity besides its Straw Ratio. For example, if 99c of every dollar you give to Love the Children International goes directly to children in need (a common way of citing a strong Straw Ratio), but the specific way in which it goes to children in need is that it funds a team of singers that sings ’80s hits to them, this isn’t necessarily the best possible use of your donation.

Of course, I’m not aware of any charitable program devoted to singing ’80s hits. But I’m aware of many whose stated missions are vague enough that they may well encompass this. Some popular examples off the top of my head: one, two, three. I’m also aware that for many of the strategies I do understand, the effectiveness is far from clear. An example that jumps to mind is organizations like AmeriCares and Direct Relief International, which distribute medical supplies to areas in need, but (perhaps in pursuit of a high Straw Ratio) appear to do zero tracking of what happens to the supplies once they arrive (even though they are often arriving in extremely dangerous, disorganized areas).

So it isn’t enough to know how much of your dollar goes to programs–you need to know what the programs are. This might seem obvious, but I think it’s often overlooked. I think this because when I ask charities for budget info and evidence of their effectiveness, I often get a pie chart showing how much of my dollar goes directly to program expenses, and nothing else. And when I ask for more, I often get confusion as to why I would want anything else. Keep in mind, these are large charities, frequently with vague and all-encompassing mission statements and always with more than one major program. I want to know what they’re doing with the money. They think it’s enough to show me that they’re doing something.

If the need to know more than the Straw Ratio were obvious to everyone, this wouldn’t happen to me. If it were obvious, there wouldn’t be such a hubbub about Charity Navigator’s new feature allowing people to donate directly through the site–in other words, saving them the trouble of so much as visiting the charity’s website, and thereby allowing them to donate to a charity about which they know nothing other than the stated mission and the budget breakdown into program expenses, overhead and fundraising.

The fact is, I think most givers trust charities to do good things with their money. In other words, most givers are in a state of brain de-activation. Most of us wouldn’t give our best friend money without at least wanting to know what s/he’s going to do with it (and not just that s/he has good intentions). Yet many of us are ready to fork over a check to a bunch of total strangers as soon as they incorporate with a name like “Happy Smiles Worldwide.”

It isn’t enough to know that your dollars are being used with good intentions. You need to know that they’re being used on things that work. A yummy name and 501(c)(3) status guarantees neither that the people you’re funding are well-intentioned, nor that they have any idea what they’re doing. And as long as the Straw Ratio is all people look at, a good reputation and even a multimillion-dollar budget shouldn’t put you at ease, either. The only thing that tells you your money is accomplishing good is a description of what it’s being spent on and why that can be expected to improve people’s lives reliably and effectively.

This is obvious to anyone investing in a business, or lending to a friend, or buying a car (you do take it for a test drive, right?) So the only possible way that people can miss it when donating to charity is that they’re turning their brains off. And that’s exactly what I think is happening. Some of the smartest people I know turn into weak, gullible, soft-minded suckers the second the subject turns to “charity” or “giving.” And it’s too bad, because that’s possibly the area where their intelligence–not just their wallet–is most needed.

Tune in next time as I move on from “The Straw Ratio isn’t enough information” to “The Straw Ratio is misleading information.” I believe that a good Straw Ratio can be a bad thing–and in today’s climate, it generally is.

If what I’m saying is obvious and boring you, just fill in the arguments yourselves (comments) and I’ll go back to complaining about corrective surgery organizations.

Let me note that there is some truth to what the Straw Man says below. There is very little information that you can get and compare across all charities, and looking at the Straw Ratio (program expenses / total expenses) is probably the single quickest, easiest way to spot the worst of the worst (i.e., Lighting Your Cash On Fire International).

There are a surprising number of charities that fall into the “lighting your cash on fire” category. Websites like Charity Navigator, which evaluate huge numbers of charities using these simple metrics, provide an extremely valuable service to society. They help expose and avoid the worst of the worst, and it’s also worth mentioning that this filter (and the categorization they do) makes work like ours feasible.

To read about the worst, read the Charity Navigator blog. It’s good reading, and eye-opening. But when you’ve knocked out the crooks, you still need to separate the well-intentioned and effective from the well-intentioned and ineffective. For this, the Straw Ratio is useless and even destructive. In the coming weeks, I will go into a lot of detail on why. Right now I’m hungry.

Hi there. I’m the Straw Man, and the purpose of my life is to say things that Holden disagrees with, in exaggerated ways so that Holden can tear me apart. It might not be the most glamorous job, but I’ve come to terms with myself.

So, guess what? I’m really into intelligent giving. It isn’t enough to be generous with your money–you have to make sure it’s accomplishing good. I’m a philanthrocapitalist. I believe in accountability. I like charities that are run like a business. Cool, huh?

Even cooler: I have solved the problem of how to do intelligent giving easily! I have devised a single number–breathtaking in its information content, stunning in its simplicity–that totally tells you what you need to know about a charity, and you can calculate it off data that’s publicly available for every charity in the U.S. Awesome? Are you ready to hear my secret formula? Here it is:

Take the money a charity spent on “program expenses” (designated on its required IRS form 990). Now, divide that number by the charity’s total expenses for the same year. Pow! Now you know how much of your dollar they will actually spend accomplishing good! What a number! I will call it the Straw Ratio.

A couple examples will demonstrate the frightening power of the straw ratio.

1. AmeriCares is a gigantic charity that takes donated medical supplies and delivers them to local organizations. Last year it spent over $1 billion, less than $7 million of which was on overhead, for a near-perfect Straw Ratio of 99.4. Good luck finding a better charity than that!

2. Interplast seeks to provide corrective surgery to people with deformities, through a combination of missions (sending surgeons overseas) and measures to build local capacity, including training and operating local centers. Last year it spent $3.6 million total–but $350,000 of this was on administrative overhead, and another $500,000 was fundraising. The Straw Ratio tells us that for every dollar you give, only about 77c are going to charity. Pretty fishy if you ask me.

This is an awesome number, so it’s no wonder that independent charity evaluators focus on it, from Charity Navigator (the biggest of all) to American Institute of Philanthropy (whose criteria are strikingly similar to Charity Navigator’s, hmm, actually, they seem identical) to the BBB Wise Giving Alliance. And no wonder that charities with high Straw Ratios love to put this info front and center, and those with truly innovative minds–here and here–even manage to achieve PERFECT STRAW RATIOS! Roll that around in your brain for a second. I guess these organizations neither fundraise nor administrate . . . and that means every penny is good!

There couldn’t possibly be any objections to this, right?