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Originally published January 4, 2013 at 4:58 PM | Page modified January 4, 2013 at 4:58 PM

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Op-ed: How not to measure a charity’s effectiveness

Measuring a charity by the percentage it spends on fundraising and administration is a lousy way to gauge its effectiveness, writes guest columnist William Borden.

Special to The Times

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BESIDES diet, exercise and friendships, new year resolutions often include personal philanthropy. The spirit and generosity of Seattle’s citizens are legendary: one-third of Seattle’s residents volunteer, according to U.S. government statistics, ranking us third among the 51 largest U.S. cities.

United Way of King County receives more donations than any United Way in the country. It’s in our genes: We give.

On the receiving end, there’s no shortage of needs. Preventing disease, relieving hunger, protecting our natural environment — to address a need, there’s likely a charity for you. But which charity? How can Jane Doe evaluate a charity’s effectiveness?

Here’s a lousy method: Check the organization’s overhead percentage.

An overhead percentage is typically defined as the percentage of revenue that a nonprofit spends on fundraising and administration. Overhead rates of 5 to 35 percent are common (EarthShare Washington’s overhead rate is 4 percent).

You can find overhead information for charitable organizations published through various online portals, and there has been lots of discussion lately about rating charities based upon their overhead.

Here’s why such figures don’t matter. Nonprofits are not alike: Hospitals, food banks, public radio stations, dance troupes, research institutions, and conservation organizations treat program expenses and administrative expenses differently.

When a team of physicians and hospital administrators meets weekly to discuss new therapy treatments and ways to pay for them, is this a program expense or an administrative expense? Certainly when a dance troupe performs, it’s a program expense. How about the times when it’s not performing?

An organization may receive a grant in 2012 to launch a fantastic program in 2013. That can measurably affect the overhead percentage, as funds come in one year and go out the next. Reported overhead percentages simply don’t measure effectiveness.

The truth is this: Overhead is like cholesterol: there’s good overhead and bad overhead. Most discerning donors consider expenses such as employee health care or professional development both prudent and necessary — good overhead. Rent, utilities, phones, office supplies and insurance also constitute typical overhead costs.

By contrast, extravagant décor, junkets to exotic locales and exorbitant chief-executive salaries are examples of bad overhead. (The median CEO salary in the Seattle nonprofit sector is $91,300, roughly half of its for-profit counterpart.)

So back to our question: How does Jane Doe evaluate the effectiveness of a particular nonprofit? Like most shrewd investors, Jane takes the time to do research. She visits the organization’s website. She reads its annual report. She finds blogs and articles on the Web, and speaks with friends and colleagues.

Jane may choose to visit the organization to see how it performs, or even volunteer for a project. She asks the organization about its planning process and how it’s governed.

In the case of federations (groups of like-minded nonprofits), what are that federation’s vetting and membership-selection procedures?

Obviously, if Jane intends a modest donation, she may not want to spend her time on this homework.

However, for a larger gift, Jane does herself, and the nonprofit world, a great service by her due diligence. She might glance at the overhead percentage, but Jane knows the overhead percentage really doesn’t matter.

William Borden is executive director of EarthShare Washington.

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