Italian Philanthropy Forum

Effective philanthropy - things to know for a start

When asked directly: “Would you like to be effective in your philanthropic giving?” donors tend to respond affirmatively. Sure, who wouldn’t? Yet, relatively few of them really do follow through. Effectiveness is a complex, multilayer term and we are struggling to unpack it. Some philanthropic funders define it only in terms of effectiveness of their grant recipient organisations. Some others think only about cost-effectiveness or cost-benefit analysis. But there is much more than that to it. As a donor you can actually be ineffective even though you donate to most impactful charities or if you’re funding projects with administrative cost close to zero.

So what does it really mean to be “effective” in giving? Effective philanthropy is a result-based approach to the creation of positive social impact. It aims at maximising social value - identifying and pursuing “the most good possible”. It is result-oriented and performance-driven and it seeks to fully maximise the social impact created through its philanthropic activities.

Effective donors are impact-driven. They care about the scale, quality of change created, transformative character of their actions and cost-effectiveness of the interventions. They make impact considerations even before choosing a philanthropic cause that they want to pursue. In practice this means that they focus on topics and invest in organisations that are most impactful, even if this means working on areas that are far from their personal interests and passions.

In a broad sense, philanthropic effectiveness can be assessed on two levels: when choosing a cause area (problem to work on) and choosing an intervention (solution to tackle the problem). The first takes into consideration three elements: importance, tractability and neglectedness of the cause. This means in particular:

  • Scale of the change you are achieving with your philanthropic intervention - how much “good” will be created or many people will actually be helped by your actions?
  • Degree of solvability of the problem - is there any firm evidence that your intervention will lead to a transformative change?
  • Level of neglectedness - how many donors are already working in this space in proportion to the needs that exist?

The above framework can be considered by donors when selecting areas of engagement. Effectiveness in philanthropy means asking ourselves whether the philanthropic cause we intend to pursue is actually impactful. Philanthropic causes that involve limited numbers of beneficiaries, with no evidence of impact and with plenty of donors already engaged in dealing with the same cause are generally considered as ineffective. 

When it comes to evaluating effectiveness of the interventions or single nonprofits to which we donate our philanthropic resources, the following 4 criteria might be taken into consideration:

  1. Evidence for effectiveness - what is the proof of impact in terms of quality of evidence that the organisation uses to conduct their interventions and quality of actual actions?
  2. Cost-effectiveness - what is the value provided to beneficiaries per every euro/dollar donated by you to this organisation?
  3. Room for more funding - how much extra impact can be created for an extra dollar/euro donated to this particular organisation?
  4. Transparency - how open is the organisation about communicating their weaknesses or unexpected negative developments in their activities?

While cost-effectiveness forms part of the effective philanthropy, these two terms are not equal. Nonprofit organisations may be not cost-effective for two basic reasons: they might implement interventions that don’t work well, or they might implement interventions in ways that don’t work. One way of answering the question whether the intervention is cost-effective is considering whether there is a clear better alternative. This means for example comparing it to a peer-organisation which pursues the same philanthropic objectives. Last but not least, philanthropic effectiveness has little to do with the proportions between how much funds are directly provided to beneficiaries and how much of them are invested into the organisation’s overhead (administrative costs, research and development, skill training of the staff etc.). Plenty on this topic has been written by nonprofit experts and academics within the last few years, but the argument tends to come back like a boomerang. The real point of cost-effectiveness has little to do with direct vs indirect cost ratio. What is at the center of it instead is the value that the organisation manages to create for the beneficiaries. And in order to be able to create this value, overhead is required. Underinvested organisations, with incompetent staff and relying on obsolete infrastructure by no means should be entrusted with resolving significant social or environmental problems, as they risk to do more harm than good. Luckily enough, more and more donors realise that the question to ask is not “how much of my money will be spent on staff salaries?”, but “in what way this infrastructural investment transforms lives of the beneficiaries I have chosen to help?”. And as evidence shows, it is the latter to lead towards truly impactful and effective philanthropy.

Why effectiveness matters in philanthropy?

There are plenty of reasons why we should care about effectiveness in philanthropy. To start with, because the resources we have at hand are limited and therefore we should try to maximise the amount of good created by them. Secondly, because the difference in impact created by effective and non-effective organisations can be huge. With the same 100 euro committed to philanthropic causes, we can make hundreds or even thousands time more difference if we choose to donate it to an effective charity. And lastly, some people argue we are morally obliged to choose well where we donate our money. Our failure to prioritise where the funding should be going to may result with some serious negative consequences for the beneficiaries that are left with no help at all. Effective philanthropy is slowly gaining ground, as more and more donors decide to pursue it. For anyone interested in the topic of using evidence and reasoning in order to help others as much as possible, you might want to have a look at the Effective Altruism movement.

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