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Study Suggests Charities Could Save $100 Billion

WASHINGTON (AFP eWire - May 16, 2003) - A new study by the consulting firm McKinsey and Company, co-written by former Sen. Bill Bradley, says that the American charitable sector could save more than $100 billion through program reforms, improving effectiveness and cutting back on fundraising costs.

The authors of the study used information from IRS Forms 990 filed in 1999 from 200,000 charities, as well as other supplementary data from the IRS and sources such as the Urban Institute. The study notes five areas where a variety of cost savings and reforms could be implemented by charities:

  • reducing fundraising costs
  • distributing holdings faster (aimed primarily at foundations)
  • reducing program service expenses
  • trimming administrative costs and
  • improving sector effectiveness.

The report seems deliberately provocative and intended to create further discussion than to be used as a measure of public policy. In an interview with The New York Times, Les Silverman, a co-author of the study, indicated that 'some will quibble with them [the numbers], but we think they will call attention to the real opportunities there are for improvement.'

Study Proposals

Under fundraising, the study found that the average cost for each organization was approximately 18 percent. The authors believe this cost to be too high and indicate a key problem of too many charities spending too much time and resources soliciting 'large volumes of tiny contributions.'

Several solutions are offered to bring fundraising costs down to the 5 percent to 10 percent range and save $25 billion. The solutions include making better use of the Internet, encouraging the growing popularity of donor-advised funds and urging foundations to make larger grants.

The study also maintains that by reducing program service costs and trimming administrative expenses, the sector could save $62 billion annually. While the study spends much time comparing the differences in cost per client of similar types of organizations, it is somewhat thin on specific solutions for streamlining service expenses. However, benchmarking and the proliferation of best practices are mentioned several times.

Foundations are also urged to increase their pay out rate from 5 percent to 7 percent, creating an additional $10 billion per year, while improving overall sector effectiveness by 1 percent would net another $20 billion annually, according to the study.

Questionable Effectiveness

AFP continues to analyze the statistics used in the study and consider how the proposals put forth might be realized in actual practice but is skeptical of the overall impact of some of the ideas.

'While I appreciate the study's purpose in raising attention to the important issues of efficiency and accountability, I think in many areas, it does something of a disservice to the sector,' said AFP President & CEO Paulette V. Maehara, CFRE, CAE. 'The fundraising proposals, in particular, are questionable as to whether or not they would be effective or even practical.'

Maehara said that while everyone in the sector would love for online solicitations to grow, it is as much a question of donor interest and comfort with the Internet as it is a question of nonprofits not spending enough resources in that area. She was also very concerned that the study seemed to indicate that charities should focus more on major gifts and move away from annual solicitations.

'Of course every charity wants to get major gifts, but that's not how the giving process works,' she continued. 'The co-authors of the study don't seem to have any idea about donor cultivation. The costs of annual giving ultimately bear fruit with major gifts, but they don't happen overnight.'

The study was published in the May 2003 issue of the Harvard Business Review.

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