Friday, May 05, 2006

Addicted to Admin Costs

Over the past few years, I've watched more and more funders, regulators, media and online watchdogs become more and more addicted to admin costs and admin percentages as the preferred (and sometimes only) measure of nonprofit excellence, competence, or even morality.

I've seen senators ask nonprofit execs about their admin costs. I've talked with reporters who focus on that number. I've read funding requirements that push the allowed admin costs down, down, down.

Now we have accounting firms who are helping nonprofits adjust and move costs around to make their admin costs come within the "preferred" range.


OK, let me be clear:

Using admin costs as a metric is dumb. It doesn't tell you anything of value, unless you look at the number over time for the same agency. Comparing your agency to mine on the basis of admin percentage is meaningless.

Using admin costs as your only metric is really dumb. As I said to an audience recently, it is about as good as deciding whether to buy this car or that one based on the weight of the vehicles. What do you learn? What do you ignore?

Pushing down admin costs with no idea what a good number is, is ignorant. I have yet to have anyone tell me what a "good" admin % really is, have anyone define how to calculate the % consistently, have anyone be able to defend their choice of a good admin % at say 18% or 25%. What's FedX's admin cost? Or Southwest Airlines? They're unarguably well run organizations. What are their admin percentages? Take a look -- they're more than 18%....

My observation is that most nonprofits are under-administered, not over administered. The relentless push to lower admin costs is resulting in less and less management hiring, overworking senior managers who are leaving the sector....and this is a good thing? How? I hear from execs constantly that they would love to do x or y, but can't since it will raise their admin costs above the allowed percentage....

This is weakening the sector. It is not making better, more effective organizations.

The reason people focus on admin costs is that it is quick, easy, simple, does not require a lot of differentiation and thought. But its worthless as a measurement of goodness, of efficiency, of good stewardship. Even in franchise nonprofits like the YMCA's or Easter Seals, one organization is different from another. Moreover, there is no really accepted way of measuring these costs. So apples to apples? Ha.

Enough on this for today. It makes my head hurt.


Anonymous said...

thanks for your POV, I agree. What can we do about it?

John O'Connor said...

I completely agree with you. Everyone's is trying to lower admin costs, but at what price? You hit it right on the head.

Peter Brinckerhoff said...

Sida and John,
Thanks for your comments. I think what we can do about it is to point out to our funders the truth: that comparing admin costs between nonprofits is fruitless, but year over year numbers for a single nonprofit is valuable.

Keep commenting!