Taking a swing at big charity

One of the interesting conclusions that you get from reading the Cause report (1) is that the authors are not fond of how charity money is distributed right now. It’s right in the executive summary:

“Although funding has also grown strongly, there is a concentration of income and assets in the top 10% of organisations. This effectively means that the vast majority of organisations are operating at a scale that does not allow them to convert their time, energy, passion and ideas into concrete, measurable results.”

It goes on to state that 92% of both assets and income are controlled by the largest 8% of organisations, and that there hasn’t been a significant change in which organisations fall into this category over 20 years. They suggest that this means “the ability to innovate and grow is limited” in the charity sector. They also point out that 2/3 of large charity assets are in property, raising the question of “how mission serving that asset mix may really be”.

All interesting criticisms. So why is the charitable sector this way, and will it change?



Why big charities survive

The charity sector is unique in that what people ‘buy’ when they donate is only tangentially related to the charity’s day-to-day operations. I’ve written about this before, but unlike in most businesses, charities often don’t actually earn money from achieving their mission (2). In the commercial sector, everything a company does is based around a single aim – to create a product that someone will purchase. For charities, by contrast, people pay for other reasons related to altruism, or reciprocity, or a dozen other factors that are not strictly related to what the charity actually does with its money. It is the perception of what the charity does, rather than the exact nature of the service they provide, that the charity must trade off.

The charity sector is simply less bloodthirsty than its corporate cousin. While ‘creative destruction’ (i.e. new companies outcompeting and killing off old companies) is the mainstay of how business works, charities simply seem less prone to it. How often do you see charities fail? The fortunes of charities rise and fall, of course, but aside from truly spectacular implosions it’s quite rare to see large charities go into liquidation. Good data is hard to come by, but a UK pension fund found that charities are four times less likely to go bust than companies.


The large charity advantage

Why was all this navel-gazing important? Because it illustrates why, without a universal way to compare impact between charities (which doesn’t exist and may never exist (3)), large charities have a significant and permanent advantage over younger rivals. Because reputation is so significant in charity, and part of that reputation is related to longevity and brand recognition, there are significant barriers to newer charities reaching any kind of scale. You mostly can’t say that X charity did a better job than Y charity with any certainty, so you have to rely on marketing. This means it is extremely difficult to unseat big charities by being better than them at their core mission – you need to be better than them at marketing instead.

Barriers to entry are of course not unique to charities – there’s a reason why the car industry didn’t have any successful new entrants for a few decades, and it wasn’t a lack of attempts. But because the normal rules of markets aren’t really applicable to charities, you’re even less likely to see broad turnover in the charity space.


Donations aren’t everything

This isn’t just true for donations. Indeed, it’s very easy to overstate the importance of donations to charities. A quick look at the ACNC Australian Charities report for 2014 reveals that on average, donations contributed only a quarter of charities’ total income (26%).  Some 35% of charities reportedly received no income from donations at all. These organisations fund themselves by charging for services (e.g. aged care), government grants, fees from members, and so forth. Of course, these proportions vary wildly be sector and by the size of the charity. For many charities, government grants are a far more significant share of income than donations. Indeed, for charities that have more than $10m in income, only 8% of revenue on average was donations, compared to 40% government grants and 52% other income. (4).

Yet large charities have an advantage here too – grant applications are long and thus expensive to write, making them difficult for small charities to do effectively. They often require charities to show evidence of previous successes, making it harder for new entrants to prove their worth.


Innovators dilemma

There’s also a question of how to encourage innovation in the charity space. There’s no question that innovation is needed – we’re not even close to finding the perfect way to deal with most charity causes, from homelessness to habitat destruction. Yet the disconnect between fundraising and actual impact is important here too. Because fundraising helps keep charities alive (and is, importantly, almost the only area in which they compete with each other), it’s also the area that often gets the lion’s share of innovation. In any charity, if you look at the areas with the most digital integration and the most shiny toys, it’s likely to be the fundraising division.

Why? Well, charities are rewarded directly for successful innovation in fundraising; i.e. they get more money. They are only rewarded indirectly (if at all) for innovating in achieving their stated goals as a charity (5). Thus the idea that the normal rules of business and creative destruction apply here is off the mark. That is not to say that innovation doesn’t happen – in some charity sectors new and exciting ideas that crop up often. But it is something that charities do often because they want to, not because they have to, and that slows improvements.

So how can we encourage innovation in charity delivery, rather than fundraising? Realistically, the only way is to reward charities for it. Informed giving (by both individuals and governments) could help, but we rapidly run into the same problem as before – there’s no easy way to measure how impactful a charity is.


Changing the charity sector?

Unfortunately, I don’t have any easy answers to how to change the nature of the sector to encourage more change and innovation. Indeed, I’m not entirely convinced that this would have benefits – innovation brings risk, and charities and philanthropists tend to be rather risk averse. As internal impact measurement, randomised controlled trials and ‘big data’ change the charity sector we may see a shift in how dynamic the sector is. I’m hopeful, but not holding my breath.