First, it tells us nothing about impact. A charity that spends 5% of its revenue on administration could be extremely wasteful if 95% of its spending doesn’t further its goals. And, a charity with high administration costs can be hugely impactful. For example, Physicians for Human Rights, a charity shared the Nobel Peace Prize in 1997 for its work on banning landmines globally. At the time, its administration costs were high.
Second, far from signaling efficiency, a charity may have low overhead simply because it’s not investing in the people, training, or infrastructure required to make it successful.
Third, administration costs amount to unfair discrimination between causes. Charities working on widely publicised causes attract more donations with the same amount of campaigning than those working on lesser known problems. So charities working on popular issues (e.g., childrens well-being) naturally have lower costs than those working on less popular ones (e.g., addiction). A benchmark of low administration costs penalizes charities working on marginalized issues and restricts their reatch.
Lastly, low administration cost is a metric that depends entirely on how a charity defines its cause in their accounting. A homeless charity that spends money on advertising its shelters might classify the expense as fundraising; but it could also be considered part of the cause.
In short, there’s no relationship between low administration costs and NGO effectiveness. If we want our donations to help charities succeed, we need to look elsewhere.
