## An example of why the percent spent on administration is meaningless

Posted on February 13, 2011 at 11:20 am

I’ve written extensively about why administration cost ratios are a meaningless indicator and how focusing on them can do more harm than good. The World Vision controversy provides a perfect example of this issue. If you need some background, read the post World Vision, the next 100,000 shirts first.

So, World Vision is claiming that the 100,000 pieces of clothing from the NFL are valued at 2,000,000. This means each item is worth approximately \$20. I don’t know how they determined this amount and their response to the controversy did not address this issue. But somehow they determined that this was “fair market value.”

In this fundraising appeal they ask for donations to pay for the cost to ship clothes, shoes and medicine. They claim “your gift carries the impact of 11 times its face value.” So they’re estimating that the cost of shipping good averages out to be a 1 to 11 ratio of admin costs to shirt (program) costs.

Going with that average (and knowing that it would vary some depending on what’s being shipped), the cost of shipping a shirt is \$20/11 or \$1.82 per shirt. Assuming these figures are correct, this is how you would determine the percent spent on administration. World Vision spends \$1.82 (admin) to ship a \$20 shirt (program). So total amount is \$20 + \$1.82 or \$21.82. Next, to determine the percentage spent on administration, divide the admin cost by the total cost, so \$1.82/\$21.82 or just 8.3%. Using these numbers, the NFL shirt donation appears to be a very “cost efficient” program.

But this \$20 is just an imaginary number because this is a shirt not a twenty dollar bill. The only monetary value it has is tied to what someone is willing to pay for it. So what is the actual value of the shirts? It depends.

According to AERDO standard 3.5, the company must be able to sell the goods independently for the same amount they’re claiming if the goods were sold on the day of the donation.

3.5 Fair Value: GIK donations are to be valued based upon “The price that would have been received to sell an asset or paid to transfer a liability in an orderly transaction between market participants” as of the date of the donation (FASB ASC 820-10-35-2). This is known as an entity’s “exit price.” This assumes the transaction would be an “arms-length” transaction….

So can 100,000 shirts of the losing team be sold at \$20 each after the Super Bowl, probably not. According to this article:

As it turns out, misprinted NFL gear doesn’t seem to command much interest from collectors as the league may believe:
Brandon Steiner, founder and CEO of Steiner Sports, tells Minyanville that there’s “not really a market” for the items the NFL makes World Vision keep under lock and key.
“Sometimes people buy them here and there,” Steiner says. “But there’s not much value.”

Even if it was possible to sell that many shirts for \$20 each in the US, they’re not allowed to. According to a 2007 New York Times article:

The other set of championship gear — the 288 T-shirts and caps made for the team that did not win — will be hidden behind a locked door at Dolphin Stadium. By order of the National Football League, those items are never to appear on television or on eBay. They are never even to be seen on American soil.

So the fair market value, on the date of donation, in the U.S. is essentially \$0. Unless the NFL is willing to change their contracts and licensing agreements, at which point in time they could just donate the shirts locally.

The next question then is what is the value of the shirts in the countries where they will be distributed? Bill Westerly did a great job of explaining how to determine local value in this post. But for the sake of the point I’m trying to make here, let’s say the shirts could be sold on the local market for somewhere between \$1 and \$10.

If the fair market value of the shirts is \$1 then the amount per shirt is \$1 (program) + \$1.82 (admin) = \$2.82. The admin ratio would come out at \$1.82/\$2.82 or 64.5%. This exact same shirt distribution would now appear to be a horribly inefficient program. In fact they would pay \$0.82 more per shirt (\$82,000 total) more to import the clothes than to purchase shirts in the local market place.

Now let’s imagine that the fair market value is \$10 instead. The amount per shirt would be \$10 (program) + \$1.82 (admin) = \$11.82.  The admin ratio would come out at \$1.82/\$11.82 or 15.4%. Now the shirt distribution appears to have an average cost efficiency.

So, depending solely upon the illusive “fair market value” the exact same program can appear to be very cost efficient (8.3%), horribly inefficient (64.5%), or about average (15.4%). This is why one of my questions to World Vision was – how did you determine the fair market value for the NFL gear? Because it matters.

This example shows how the administration ratio can be manipulated. Placing so much emphasis on this ratio pressures non-profits to chose programs based on their cost ratio and rather than what is most beneficial to the people they’re trying to help.

Update: Here’s another example of the imaginary nature of the value of donated goods. From World Vision’s Chief Financial Officer’s Financial Assessment of 2010:

“A change in valuation methodology for pharmaceutical products donated to World Vision
lowered revenue for the year by about \$140 million. This change reflects new accounting
rules clarifying how to determine fair market value for donated goods, and applies to all U.S.
previously valued by reference to U.S. wholesale prices, are now being referenced to wholesale
prices in countries representing principal markets for those products (which tend to be lower
than U.S. prices).”

So simply by revaluing medicine based on the local market rather than the US market, World Vision lost an imaginary \$140 million.

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Related Posts:

Tracking the World Vision / NFL Shirt Donation Controversy – For links to all 26 posts on this controversy.

Don’t choose a charity based on administration costs

Cost efficient aid is not necessarily effective aid

Charity ratings based on administration costs does more harm than good

Non-profit advertising: What message are we sending?

The Worst (and Best) way to Pick a Charity This YearPhilanthropy Action

Charitable donations include overheads. Here’s whyBrigid Slipka

The Nonprofit Starvation CycleStanford Social Innovation Review (SSIR)

• TMS Ruge February 14, 2011 at 9:47 am

And it is because it matters what the determined price is that they put it so high. Surely such an organization knows that there isn’t a market for these in the US, whether it is contractually obligated to sell them here or not.

\$20 is arguably an average strike price for NFL paraphernalia and well chosen as to make it appear that the program is efficient. That, and it is a much bigger number when it comes to the taxes. I am no economist, but that’s what common sense tells me I’d do. Am I off?

• Saundra February 14, 2011 at 10:20 am

Yep, that about sums it up. Perhaps World Vision will come forward and explain to us how they determined \$20 was the correct value of the shirts.

• » World Vision Not at Fault Travis Warrington February 14, 2011 at 7:09 pm

[...] fired up. I must say that Saundra is leading the pack (but she may have a heart attack if she keeps going like this). Tom from A View From The Cave is fierce as well. I hope I can create some sort of [...]

• [...] and bear witness to the good news of the Kingdom of God.” Is supporting wasteful production, obscuring the value of these goods, and marketing harmful practices truly working to promote transformation? Would Christ be open to [...]

• Morgan February 15, 2011 at 2:01 pm

Thanks for such a thorough and clear post, Saundra! This is a perfect example of why your Charity Rater tool really needs to get more attention for those who want to know which aid organizations are worth donating to.

This is just one more example of why transparency and accountability cannot be talked about enough. It’s a shame that it’s so easy for uninformed people to look at a pie chart on an aid organization’s Web site and immediately rule out an organization based on the administrative vs. program costs ratio. It’s also just as easy for an organization, like Charity Water, to mislead people with numbers, even though Charity Water is an organization that is doing great work and deserves to be supported.

Can your Charity Rater tool be placed on individual aid organization’s Web sites like a widget? Maybe next to the pie chart of that organization’s administrative/program costs. That way a visitor to the site could see the breakdown of costs but also see how and why they rate a certain way. The hurdle would be getting organizations to actually use it; however, I think the organizations that are really dedicated to transparency and accountability would take advantage of such a tool.

• Saundra February 16, 2011 at 4:56 pm

Thanks Morgan, I’m glad to know you find it a useful tool. As soon as this whole controversy calms down I plan on doing some official ratings of the charities that users have rated the most. I’m sure a widget could be designed to go onto nonprofit websites if they’re interested, but most of them will want to include a lot more information first. Most websites have very little useful information on them.

Once I start rating NGO’s I’ll blog about it as I go and see if that gets things moving in the right direction.

• Michael Keizer February 16, 2011 at 10:07 pm

Actaually, the \$1.82 shipping costs would most likely be classified as direct project cost as well, not as ‘admin’ — at least, that is what I have seen up to now as general practice. Of course, this would make your point about the lack of meaning of admin costs only stronger.

• [...] a related post, the blog “Good Intentions Are Not Enough” estimated the cost of shipping a shirt at \$1.82 based on one of World Vision’s fundraising appeals, which stated that a donor’s gift [...]

• [...] for shipping, when averaged among all their programs, a number provided by Saundra S. at Good Intentions Are Not Enough. Which essentially means that, t-shirts are cheap to ship (their number is \$0.58/shirt) but other [...]

• [...] An example why the percent spent on administration is meaningless [...]

• FL March 28, 2011 at 2:39 am

I love your blog and wholeheartedly agree that administrative costs should not be the primary metric for deciding which nonprofits to contribute to. However, aren’t there some cases in which administrative or fundraising costs ARE indicative of effectiveness? Say for example we have two organizations – one organization fundraises primarily through the mail for individual donations and through soliciting donations on the street, and spends \$4 in staff salaries, postage, etc to raise every \$10. The other organization fundraises some other more efficient way, spending \$1 to raise every \$10. Some ways of fundraising ARE more efficient in terms of bang for your buck, so couldn’t a case be made for supporting the organization that won’t turn \$4 of your \$10 donation around to promote further fundraising? Curious to hear your response.

• [...] An example of why the percent spent on administration is meaningless [...]

• Helen February 7, 2012 at 11:36 pm

Hi Saundra, my boss recently purchased “Lies, White Lies and Accounting Practices” and shared it with the team. Congratulations on a putting together such a compelling argument. It has triggered some good discussion in our team about valuing in-kind donations and meaningful indicators that a donor should consider (rather than admin costs). My attention was also caught by a comment you make on page 17 – you explain that most of the time you don’t worry about the salaries of NGO CEOs, but you suggest that donors should look at “the percentage the director is paid in comparison to the nonprofit’s annual income/expenditures”. Would you hazard a guess as to what a sensible/acceptable percentage would be, or have you seen any figures suggested by others about this?

• Saundra February 7, 2012 at 11:43 pm

Helen,

I’m afraid I don’t know what that percentage should be. The only study of NGO CEO wages has been done by Charity Navigator, but that doesn’t take out the amount of revenue from valuations of donated goods. However, it may give you at least a little more information to go on. http://www.charitynavigator.org/index.cfm?bay=studies.ceo

• Charities and Overheads -- a Nadder! February 8, 2012 at 7:39 pm

[...] field as overhead, another as part of the “program”. A lot is subjective too. Sandra considers the WorldVision tshirts debacle where WorldVision shipped 100,000 unwanted tshirts from the US to developing countries. Shipping [...]

• [...] try to explain it. To learn more, read about why looking at administration costs is meaningless via this example from Good Intents, or buy her paper on the subject of why non-profit overhead doesn’t mean what you think it [...]