A bad idea from the Charity Commission

Some ideas are just plain bad. The latest idea floated by Dame Suzi Leather, chair of the Charity Commission, is one such.

According to Third Sector, Dame Suzi said the Commission wanted to work with charities to develop a ‘good enough index’ of how much money was spent on administration and, by implication, what percentage of donations reached beneficiaries. Dame Suzi said this was a clear concern of the public and the regulator’s role was to serve the public.

This is a surprising turn. It is true that the public care about overheads in charities, but it is also true that this is a meaningless measure. No-one in the sector takes seriously the idea that the level of overheads in a charity is informative.

At NPC we have long railed against overheads as a measure (see here, here and here). In ‘The little blue book’, our handbook of how we analyse charities, we write it is “dangerous to use reported administrative or fundraising costs as the basis of any judgement of effectiveness.” And it is charity effectiveness – what charities achieve through their work – which ultimately matters.

When I speak publicly about charities, I normally say that in my experience most charities spend too little on administration, relying on poor IT systems, under-investing in training, or working from poor facilities. This is often because charities seek to maximise the money they spend on their services rather than themselves. But it is sometimes also because they fear being seen to spend ‘too much’ on overheads.

In truth, charities have exposed themselves by putting insufficient emphasis on measuring, demonstrating and communicating their results. This makes it easy to suggest silly ways of assessing them. It implicitly validates a misguided focus on overheads by providing no alternative. Many charities go further and explicitly collude in this by stressing how little they spend on overheads.

A number of years ago I developed a template for charities to allocate overheads. This became the ‘acevo template’ and was endorsed by government, the Big Lottery Fund and many other funders. In developing this template I discovered lots of ways in which overheads could be distorted. If, for example, IT equipment was allocated and budgeted centrally rather than at a project level, overheads would be higher. Absolutely nothing real would be different. The incentive, therefore, is to shuffle around costs and make overheads look as low as possible.

The Charity Commission SORP guidance is quite flexible in how charities can allocate their overheads and, therefore, what level of administration costs they report. Is the Commission now suggesting a more dogmatic and directive framework for cost allocation? Without this any ranking by overheads would be meaningless even on the basis of what it was trying to achieve. So, what such an index would seek to do is wrongheaded and damaging. And it would even struggle to do that well!

The danger of judging charities based on overheads has been the subject of concerted action in the US from a leading group of organisations which analyse nonprofits there. We need more action in the UK on this, starting with the various sector leadership bodies. However, we also need charities to grasp the nettle on impact more firmly. Too many still provide little if any information on this, as we highlighted in a report last year.

As the number of links in this post to past NPC blogs indicates, the question of overheads is something we feel strongly about. Strongly because it risks damaging charities and their ability to help people. Strike that. It doesn’t risk damaging charities – it already does damage them.

It is useful to air ideas, to stimulate discussion and debate. Perhaps that was Dame Suzi’s intention. If her comments encourage debate and help progress towards a more sensible understanding and appreciation of charitable performance, so much the better. If part of this is achieved by making charities anxious and more determined to prove their true worth and communicate this to their supporters, that is ok. If the comments were inadvertent and not intended to be taken literally, that too is fine. We all make the odd slip and accidentally provoke a reaction, as I did recently when talking about fundraising. If not, if, instead, Dame Suzi genuinely believes this is a right path and the Commission is actually planning such a step, it is a worrying and bad development. And it should be stopped.