Maahs: How to strategically invest in nonprofits
It's more important than ever to make sure the nonprofits we donate to are accountable. That's why Unseen invests in organizations only after a thorough vetting process. Over time, we've created a system to ensure that our partner nonprofits are doing the most good in the most accountable way. In building this system, we made a discovery; many donors are measuring accountability of nonprofits poorly. Worse than that, some accountability checks are not just ineffective; they're harmful.
One potentially harmful practice is judging an organization's effectiveness by their "admin costs." Administrative costs are the ratio of a nonprofit's budget that is spent on direct services, versus operating expenses like staff, accounting, marketing and maintenance.
Donors who want to do the most good often look at administrative costs to decide where to invest. It's really important for nonprofits to spend wisely, but evaluating nonprofits on those costs alone misses the mark. Giving this way is like being a stingy business owner who refuses to pay for the things his or her business needs to thrive.
The truth is, investing in an organization's admin costs is important. At Unseen, we invest our services into anti-slavery initiatives. Our funding is limited, so we're constantly working to maximize our investments. Through partnerships with effective organizations around the world, we've found that the most strategic donors are the ones willing to invest in the essential, boring things that nonprofits really need. The problem is that investing this way can be less fun. But the results are clear: giving to organizations that spend wisely on admin is essential to changing the world on a global scale.
Sometimes higher spending means higher investment in growth. Consider this example of two different businesses' approaches to spending money:
• Example A. Adam spends his summer running a lemonade stand to fight human trafficking. He spends his summer asking for donated supplies, gathering his friends to make signs out of donated cardboard, and organizing volunteers to make drinks. Alex donates his time after work, and raises $2,260 in the summer, and only spends $200. Adam sends 92 percent of funds to a good cause, for a total of $2,120.
• Example B. Brittany starts a gourmet lemonade business to end trafficking. She hires graphic designers, a digital marketing firm to recruit customers, leases pop-up spaces in downtown shopping districts, and hires a volunteer coordinator to oversee staffing. She even rents coworking space to house their operations and takes a salary because she works full time. They sell $550,310 worth of drinks and merchandise at six locations and spend $180,610 on their administrative costs. Brittany sent 67 percent of funds to a good cause, for a total of $369,700.
Which business will help more people? The best businesses spend money, not because they're frivolous, but because it's necessary for growth. Why do we have a double standard when it comes to nonprofits? When we do, the results are damaging; in an attempt to keep spending low, many organizations can't make the purchases, hires and investments necessary to expand. They're stuck running their organizations like Adam: doing good work, but unable to do great work. They can't retain staff with competitive wages, and they waste time with old technology and bad systems. Our expectations of "low admin costs" crush their vision and shrink their impact.
There is a better way; we must stop judging organizations' effectiveness by how much money they spend. This doesn't mean that we support trivial spending, but it does mean we recognize that some spending is healthy and that sometimes not spending is irresponsible. This will allow us to give strategically by focusing on what they do, not how much they spend on business cards.
If we realize that the nonprofits who spend strategically are sometimes doing the best work, we might all give a little smarter. If we believe that investing in organizations is worth it, we'll all create more good. And if we look at overall impact instead of individual percentage, we may give nonprofits the space they need to truly change the world.
At Unseen, we invest in organizations doing the best work in the fight against trafficking by helping them grow. Consider changing the world with Unseen by donating to end slavery.
Maahs is the assistant program director of Unseen, a nonprofit dedicated to fighting human trafficking.