Big spenders
April 2008
Cathy Pharoah and Mark Pincher take a look at the sector’s cost baselines and benchmarks...
Charity costs are perennially under the spotlight. New US research reports that 62 per cent of the US public think that charities spend too much money on overhead costs such as fundraising and administration[i] . In the UK the current industrial relations dispute at Shelter on pay and working hours is basically another variant on the theme of public expectations about charity costs (albeit with an interesting twist). Public demand for, and access to, information on individual charities’ costs has been growing steadily over the last couple of decades. The revised charity SORP, for example, provides for much clearer apportionment of costs to charity activities, separating out management costs from charitable services, fundraising by voluntary from non-voluntary sources, and governance, grantmaking and investment. There is virtually instant availability of charities’ annual reports and accounts online through the Charity Commission website. Meanwhile recent UK initiatives such as New Philanthropy Capital, Intelligent Giving and Charity Facts, aim to give donors better comparative advice on costs, though we have so far resisted the national efficiency scoring systems increasingly popular in the US, such as Charity Navigator, the American Institute of Philanthropy (AIP) Charity Rating Guide and the BBB Wise Giving Alliance reports.
One (very sensible) reason for this resistance in the UK is the lack of genuinely comparable information. The charitable and income-generating activities of the charity sector are so diverse, and accounting practice still so varied, that broad-brush sector-wide benchmarks are seen to have limited value. Nonetheless, comparative baseline information can be a very useful tool for charities in assessing their cost efficiency, particularly if used as part of more sophisticated ‘balanced scorecard’ approaches to performance measurement[ii] .
The key to meaningful cost assessment is to find like-for-like comparisons. Sector-wide information needs to be usefully aggregated. This can be done in a number of ways, by charity size, cause, type of activity and so on. The forthcoming edition of CaritasData Top 3000 Charities 2008/09provides some brand new data on how the total expenditure, income, and assets of the top 3000 largest charities is divided out by charitable cause. It reveals which causes have the strongest endowment base, and enables comparison between causes' direct charitable expenditure. This article previews some of this new data. It looks in detail at one particular population – the operating charities within the top 3000 only, excluding the grantmakers. For the purposes of the research, the operating charities were further divided into major cause sub-sectors: average expenditure ratios in nine of these charity sub-sectors, for several costs areas, were compared. The results provide a range of values across the sub-sectors - for each cost area. This type of analysis needs to be followed by closer examination of ranges within sub-sectors, although this article only touches on it.
The total expenditure of the operating charities included in the analysis was £24 billion, worth more than half that of the whole registered charity sector. So it is a substantial sample by value. The results show the huge dominance of certain fields of charitable activity, and consequently the fields of operation where competitive pressures on costs are most likely. By far the biggest category of operating organisations by expenditure in the Top 3000 was health and medical at £6.7 billion, vastly outstripping even the next-nearest category, International, whose expenditure was at just over £4 billion. This means that health and medical causes represent over a quarter of the total expenditure of this sample.
Figure 1: Spending of major operating charity sub-sectors, 2007
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If conservation and animal causes are split out, then the expenditure of the conservation charities was around £1 billion, compared with £340 million for animal protection. This is interestingly similar to charitable expenditure on civil rights at £365 million!
The big charity spenders
Figure 2 sets out the big spenders, showing the huge dominance of health and medical spending.
Figure 2: Top 25 charities by total expenditure
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Accounting Year
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Total Expenditure
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1
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Cancer Research UK
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31-Mar-07
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£553.2m
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2
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The British Council
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31-Mar-07
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£545.7m
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3
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Nuffield Hospitals
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31-Dec-06
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£478.7m
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4
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International Finance Facility for Immunisation Company
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31-Dec-06
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£441.8m
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5
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The National Trust
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28-Feb-07
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£312.8m
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6
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Oxfam
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30-Apr-07
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£297.2m
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7
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CITB-ConstructionSkills
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31-Dec-06
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£250.4m
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8
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Anchor Trust
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31-Mar-07
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£241.2m
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9
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NCH
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31-Mar-07
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£214.0m
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10
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Church Commissioners for England
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31-Dec-06
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£201.2m
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11
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The British Red Cross Society
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31-Dec-06
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£200.9m
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12
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Barnardo's
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31-Mar-07
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£195.6m
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13
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UFI Charitable Trust
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31-Jul-07
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£183.5m
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14
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Royal Mencap Society
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31-Mar-07
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£172.1m
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15
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British Heart Foundation
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31-Mar-07
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£167.2m
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16
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Peabody Trust
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31-Mar-07
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£151.4m
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17
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NSPCC
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31-Mar-07
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£146.0m
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18
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Leonard Cheshire Disability
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31-Mar-07
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£143.4m
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19
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Save the Children (UK)
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31-Mar-07
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£139.9m
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20
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Royal National Lifeboat Institution
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31-Dec-06
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£132.9m
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21
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The British Library
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31-Mar-07
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£132.7m
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22
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Assessment and Qualifications Alliance
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30-Sep-06
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£126.1m
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23
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The Salvation Army Trust
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31-Mar-07
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£120.8m
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24
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ActionAid
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31-Dec-06
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£110.3m
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25
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The Church of Scotland Unincorporated Councils and Committees
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31-Dec-06
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£105.1m
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Direct charitable expenditure
The analysis found that ratios for different cost categories varied widely by cause. The article looks first at direct charitable expenditure. The AIP believes that 60 per cent or above is a reasonable level for charitable expenditure directly on charitable activities. It rates the performance of 500 national US charities who subscribe to its service, and adjusts charities’ cost apportionments in its own data, where appropriate, to achieve better comparability. Charity Navigator finds that 7 out of 10 charities spend at least 75per cent of their budget directly on their programmes and services. Its evaluations are based on the financial information in charities’ standard tax returns and compare performance within similar groups of charities, first breaking down within broad categories, and then within categories by cause. What is the picture for the UK? Firstly, our analysis reveals that the ratio for direct charitable expenditure does indeed vary considerably by cause, from an average of 74 per cent in the business/ professional category to over 84 per cent in housing and community development. These ratios are high and may possibly reflect the scope amongst the larger charities to introduce economies of scale. A sample of charities with a wider range of income bases might have produced lower ratios. Figure 3 shows the range of ratios for direct charitable expenditure across causes.
Some of the reasons for this variation will be seen in the data below. It is worth noting, however, that these ratios for direct charitable expenditure do not include expenditure on grantmaking by the operating charities (but who are not principally grantmakers). If grantmaking is included, the highest ratio for direct charitable expenditure would be 92 per cent, in the international category. Grantmaking represents 11 per cent of total expenditure amongst operating international charities, at around £470 million. This figure probably reflects the increasing trend for international charities to provide funds to NGOs in the developing world to manage their own programmes directly and independently.
Figure 3: Ratios of direct charitable expenditure across causes
Figure 4: Ratios of expenditure on voluntary income fundraising across causes
Voluntary income costs
Costs of fundraising are probably the hottest topic in charity expenditure from the public’s point of view, if not from the charity perspective. A belief that costs are too high may make it harder for charities to raise money, although it has never been clear what exactly the public would find acceptable. US research showed that the public thought that charities spend at least a third more on fundraising than what is appropriate. To some extent charities need to bear the responsibility for public misperceptions, as historically they have provided little clear comparative information or guidance to the public on costs, or on the true proportion of work carried out by volunteers.
Intelligent Giving (IG) exposed BBC Children in Need’s ambiguity in claiming every penny you give goes towards helping children and young people in the UK. IG felt that this was just clever wording, because the charity acted similarly to all other big charities, investing the big sums it raised and using the interest to cover costs. The charity’s most recent submission to the Charity Commission reports expenditure of £1.8 billion on 'management and administration' in the previous year. In some cases it is technically true that all funds raised are spent on beneficiaries because the charity undertakes no work with beneficiaries itself, but provides grants to other organisations that actually do the work. These charities will certainly have administration costs of their own which will be deducted from the funding, but as far as the original charity is concerned, all its funding has been spent ‘on the cause’. Only the very smallest of charities wholly dependent on volunteers and in-kind support can fundraise and run their organisations without incurring costs.
Again it can be seen from Figure 4 that ratios for the costs of raising voluntary income varied considerably across cause, from 1 per cent of total expenditure in the business/professional category to 7 per cent in the conservation/ animals category. This variation partly reflects the importance of voluntary income within different causes. For example, voluntary income represented only 6 per cent of the income of the former, compared with 40 per cent in the latter.
But the story is not straightforward. It might be expected that business and professional organisations would be investing in generating a substantial voluntary income, because of the strong member interests which they represent. This group contains, for example, many professional institutes, for example, the Royal Town Planning Institute, the Institution of Chemical Engineers, the Chartered Institute of Housing, the Chartered Institute of Personnel and Development, and the Royal Institute of British Architects. In fact most of the activity of this group was classified as charitable activities to meet charitable objectives or ‘primary purpose trading’.
Looking at ROI also shows the complexities of providing comparative benchmarks. Across the board, for example, in terms of a crude ROI for fundraising (i.e. voluntary income raised against expenditure on voluntary costs), international causes appeared to have an average return of £21 for every £1 spent and health/ medical causes had a return of just £5. The reason for this discrepancy is the high level of government grants in the voluntary income of international causes. If these are removed, then international causes had an ROI of £8.60 to every £1 spent, and health/ medical causes had £4.50. It is possible that the difference in these ratios relate to the very broad base of fundraising for health/ medical causes, which has been shown in individual giving surveys to have a large volume of low-value cash donations from the general public.
The Fundratios service[iii] of the Centre for Interfirm Comparisons is a confidential benchmarking service on fundraising performance to 28 national charities who subscribe. Its comparisons show the huge range in ROI for different types of fundraising. For example, median ROI include £39.24 per £1 spent for legacies, £8.91 for trust fundraising, £6.37 for house-to-house and £2.06 for direct marketing appeals (Fundratios Summary Report, 2007). Fundratios’ full charity reports provide ratios within charity size categories as well as generic figures. Overall voluntary income ROI is £4.44. equal to the average ROI for the health/ medical category in this analysis.
Costs of generating non-voluntary income
Part of the challenge for charities is that the public does not have a very clear idea of what it costs to provide their services. This may become a particularly acute problem in relation to social care delivery where the charity sector is playing a growing role, and where there is little articulation of general public expectations, let alone in relation to what charities can provide. Commenting on the consultation on the future of social care put forward in the Comprehensive Spending Review (CSR), 2007, John Knight (Leonard Cheshire Disability) said ‘Without an honest and transparent debate about what society expects from social care, and what society is prepared to pay for, we will end up sleep-walking into a care crisis. The costs of providing social care are going up, the demand for social care is going up and people’s expectations are rightly going up. Yet in recent years funding for social care has remained comparatively static’.
As charities’ responsibility for delivering certain kinds of care increases, the amount of money spent on raising funds to continue to provide high quality services may need to grow. From figure 5 it can be seen that there is a huge range in the proportion of total expenditure devoted to raising funds for charitable activities across causes. Figures are clearly generally higher than for voluntary income fundraising. They tend to be highest in causes where there are high levels of member benefits or participation, where a large proportion of the charities’ activities is primary purpose trading or where there is little fundraising from the general public. Only international charities spend a higher proportion of their funds on voluntary income fundraising than on other ways of generating funds, and the health and medical charities seem to be spending equal proportions of both. Charities in today’s world are increasingly faced with complex choices in relation to the best investments of their funds to achieve their mission, or ‘social return’. For some this might involve increasingly sophisticated accounting techniques, but for others it may be more about clarity of vision on what the charity should really be doing.
Figure 5: Ratios of expenditure on non-voluntary income fundraising across causes
Figure 6: Ratios of governance expenditure across causes
Governance costs
Governance costs are defined by the Charity Commission as ‘the costs of governance arrangements which relate to the general running of the charity as opposed to the direct management functions inherent in generating funds, service delivery and programme or project work. These activities provide the governance infrastructure which allows the charity to operate’.[iv] Thisdefinitiondraws attention to the importance of those functions which provide professional standards of finance and accountability in charities, traditionally referred to summarily, and inappropriately, as ‘administrative costs’, another example of how charities have sold themselves short with the public. Again the results in figure 6 show a significant range in the proportion of expenditure devoted to governance costs, possibly lowest in the international sector because of the amount of its funding now spent by grantees, and high in sectors where the need for direct beneficiary or member involvement is very high (e.g. civil rights). The figures show that, with the costs of generating funds and those related to the direct management of service delivery and programme or project work clearly stripped out, average governance costs tend to be a relatively low proportion of total charitable expenditure, and not a cost about which there is a need for alarmist messages to the general public.
ROI
Most of the analysis so far has compared the share of expenditure devoted to different types of costs across different causes, but what about comparative ROI? This is arguably a much more important measure than comparing costs per se (though perhaps finance and fundraising departments would not have the same view on this!)
Figure 7: Total cost of generating funds as a per cent of charitable expenditure
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Business/professional
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31%
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Conservation/animals
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28%
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Civil rights
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22%
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Health/medical
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13%
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Culture/sport/rec
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13%
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Social services/relief
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12%
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Educ/training/research
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8%
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International
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8%
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Housing/community
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5%
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As noted above, using basic generic cost information can provide a poor set of indicators for ROI in the charity sector, for a whole host of reasons. However, this does not mean that it isn’t useful to have some baseline information as a starting point. Figure 7 sets out the total costs of generating funds as a proportion of charitable expenditure (including any grantmaking) across our major operating sectors. It indicates a very high level of variation, and much more analysis of the reasons for this is needed.
Factors likely to be important include degree of dependence on generating funds, which are likely to be lower amongst the housing and community sub-sector whose activities are tied up in managing property and community assets, or educational organisations with fairly narrow and specific remits. They are possibly higher amongst organisations which may have to fight harder for both general public, and often state support, as in civil rights. The operating sectors in the middle to bottom end of the range such as health and medical, social services and international are likely to benefit from more diverse funding bases.
The analysis has shown that generic cross-cause cost benchmarks are not valuable, because there are significant variations between causes. The magnitude of the differences amongst such very large organisations as those included in this sample suggests the variations are systemic. The figures provide evidence of the need to appreciate the variation in charities’ activities when attempting to benchmark costs, as well as an important starting-point for individual organisations to look at and compare their own costs. However, both charities and an increasingly aware and well-informed public need to bear in mind that most of the comparative cost information available, even the very best information, is no more than indicative and should provide a guide or an incentive, not a standard or a stick to beat charities with.
[i] Ellison Research, 2008. www.ellisonresearch.com
[ii] Managing and Measuring Social Enterprises, Rob Paton, Sage Publications, 2003
[iv] Charity Commission SORP 2005, para B3, 210
Author: Mark Pincher
Mark Pincher is data editor and development manager for Caritas Data.
Author: Cathy Pharoah
Cathy Pharoah is co-director of the ESRC Research Centre for Charitable Giving and Philanthropy (CGAP) at Cass Business School.
www.cass.city.ac.uk/philanthropy
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