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

- Link: https://fundraising.co.uk/2014/04/09/charities-reactions-concerns-overhead-costs-fuelling-innovation-slowdown/
- Published: 2014-04-09T00:04:08+01:00
- Author: Howard Lake

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”.

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[Fixed costs](http://en.wikipedia.org/wiki/Fixed_cost) (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.”

 * **[Innovation considered essential to charities’ survival, says Charity Innovation Report](https://fundraising.co.uk/2014/06/10/innovation-considered-essential-charities-survival-says-charity-innovation-report/)**(
   10 June 2014)
 * **[New £10k grant to encourage social innovation in not-for-profit sector](https://fundraising.co.uk/2014/08/06/new-10k-grant-encourage-social-innovation-profit-sector/)**(
   6 August 2014)
 * **[British fundraising suffering from an ‘innovation deficit’](https://fundraising.co.uk/2014/10/28/british-fundraising-suffering-innovation-deficit/)**(
   28 October 2014)