Which Would You Rather Be as an Organization -- Efficient or Effective?

This post is authored by Erik Daubert, Chair, Growth in Giving Initiative, Affiliated Scholar, Center on Nonprofits and Philanthropy, The Urban Institute

A 2001 survey reported by the BBB Giving Alliance found that: "...Over half of adult Americans felt that nonprofit organizations should have overhead rates of 20 percent or less; nearly four in five felt that overhead should be held at less than 30 percent. In fact, those surveyed ranked overhead ratio and financial transparency to be more important attributes in determining their willingness to give to an organization than the demonstrated success of the organization's programs."

Which would you rather be as an organization -- efficient or effective?

"Effectiveness" is how good an organization is at accomplishing its goals, objectives and mission while "efficiency" is how money is spent based on costs expended versus results obtained. The difference between these two issues has been a point of contention within the sector over the last several years and the conversation is far from over.

So, back to the question:

Which would you rather be as an organization -- efficient or effective?

In actuality, most organizations would like to be both... but if you could only pick one, wouldn't you choose to be effective?! This is where the challenge over the last several years has come. The pendulum for many years swung so far to the efficiency side of the equation that charities have under reported their overhead and fundraising costs and under invested in their organizations -- especially due to the scrutiny of sector watchdog groups like Charity Navigator, GuideStar and others. This issue pushed the envelope of fundraising efficiency so far that the groups themselves spoke out against their original stance. Check out this letter! Also, check out www.overheadmyth.com for more information on how far this agenda has moved organizational thinking over the last decade.

On the other side of the issue is the effectiveness side. Nonprofit expense advocates like Dan Pallotta believe that it is critical for nonprofits to spend more to get their messages out and their missions accomplished.

Have you ever heard of St. Jude's Children's Hospital? This charity was highlighted as one of Forbes' least efficient charities in a recent study. While they have grown their fundraising from $13 million in 1977 to more than $698 million in 2012, they also grew their fundraising staff to more than 1,000 people -- all at a hospital with a medical staff of approximately 1,500. The fundraising staff is two-thirds as large as the hospital staff itself! Is this a good use of resources? Ask yourself if you would likely have ever heard of St. Jude's or their work without these investments.

The effectiveness vs. efficiency dialogue is healthy as we continue to balance what is the "right" amount to spend on overhead and administration. Too much overhead is undoubtedly wasteful and there are nonprofit organizations who embarrass themselves and the sector by spending inordinate amounts of money on overhead to the point of being a disservice to those they are supposedly "trying to help". For example, I got a call this week from a paid telemarketer who, after questioning, admitted that 92 percent of my gift would go to overhead if I gave... This is truly disgusting.

By understanding how effective an organization is in utilizing their resources, we can better understand the dynamics of overhead costs in a given charity. In the words of one emergency room physician to a potential donor, "Oh, you don't want to support overhead costs here at the hospital and want all your money to go only to support direct services? Then I will just have to do surgery without electricity or lights or custodial services... I don't think the surgery will go too well."

What are your thoughts? How should the sector and/or the government or other entities deal with these issues?

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