Charities’ reactions to concerns about overhead costs fuelling an “innovation slowdown”

The way charities react to public concerns about spending money on their fixed costs could be fuelling an “innovation slowdown” in the voluntary sector.
Speaking at the Fundraising Insights conference in London last week, Warwick University’s Kimberley Scharf told delegates that fixed costs “present no special challenges for the private sector”, where the need to incur them in a competitive business is well understood.
But she said the “peculiar way” that donors believe that charities ought not incur fixed costs, and that only variable costs are a measure of actual programme activities, “makes no sense from an economist’s perspective”.
Fixed costs (or overheads), as opposed to variable costs, are those – such as IT and salaries – that do not scale up with output, but can nonetheless lead to efficiencies.
Scharf, a professor of economics, said: “If donors are reluctant to pay fixed costs, and this is a situation that charities are faced with, then there is no guarantee that the most cost-effective charities are selected by donors and this leads to overall inefficiencies in the charity sector.
“And if charities respond to donors’ concerns with inefficient strategies, we will see an innovation slowdown in the voluntary sector.”
Scharf also presented results of laboratory experiments in which subjects had been given the option of donating to two charities where one was more effective than the other but incurred higher fixed costs to achieve that level of effectiveness. In only 63 per cent of cases did people give to the more efficient charity (the one with the higher fixed costs).
Scharf told delegates this was because the public perceived fixed costs to be a “riskier” use of their donation. “It’s not the fear of the fixed cost itself, it’s the fear of how other donors might view them. If others don’t give to a charity with high fixed costs, then a donation you make to that charity could be inefficient.”
As a result donors spread their donations across efficient and inefficient charities, even though those with the higher fixed costs could actually be the more efficient ones.
Scharf said the way charities had responded to donors concerns in the past had been “mostly reactive”. She concluded: “If we know what donors’ problems [with fixed costs] are, then we can target what they really think, rather than what we think their perception is.”