Expectations Scale with Scale – We Should Be More Scope-Sensitive in Our Funding
TLDR: The shortest version of this argument is very simple: your expectations for an organization should be higher where their budget and staff size are higher. In other words, we should have different expectations for a 20-person organization with a $1.5 million budget than a 2-person $150,000 budget organization.
While this seems pretty clear in the abstract, I find that people tend not to update nearly enough on this when they should. For example, I often see people comparing the total research output of two organizations, yet when I ask about it, they will not know the yearly budget or staff size of either. This is a big problem. As a movement, we want to support efficient and effective organizations, not just organizations that are the biggest, most salient or currently the highest funded.
Budgets and staff
When considering how impressive an organization’s output is, one useful framing is the following:
1) What has this organization accomplished over the year (perhaps pulling this information from an annual report)
2) How much budget and how many staff would I expect the organization to need to do what they are presently doing.”
It is easy to then look up an organization’s budget or staff size and adjust your conclusions accordingly. If the budget and staff size are much lower than expected, you end up being impressed with the organization. On the flip side, if the organization and its budget are much higher than expected, it makes sense to be less impressed with the organization. Budgets are often public or findable, as are the organization’s activities over the last year, so it is quite possible to compare them.
To pick on my own organization as an example, you could think about the actions and activities of Charity Entrepreneurship/AIM over the last year. Most significantly, we’ve launched ~13 charities, built out our 2 other new programs (grantmaking and research training), and laid the foundations for a fourth program (our Founding to Give incubator launching early next year).
Intuitively, what might you expect a reasonable budget and/or staff size to be in order to accomplish this work? You do not need to have an amazing sense of organizational budgets to do at least a rough estimate. I am pretty sure that if AIM/CE achieved these outcomes with an annual budget of $100k, everyone would (rightfully) think that is an amazing deal, and perhaps one that is too good to be true. On the other side, if it cost us $20 million, I expect people would generally (again rightfully) be a lot less excited.
Comparative size
Another way to get a sense of this is to look at comparative size. If you have a bunch of donation options you are considering, you can map out their comparative size and think about how they directly trade-off.
For example, let’s take a hypothetical funding proposal I receive for something costing $450k. I know the average seed grant for the CE incubated charities is about ~$150k. This means that a useful way of assessing the value of the funding proposal is to think of this as the equivalent of three seed grants. Thinking about the proposal in this way is crucial: it’s easy to compare two funding applications 1:1, or at least not adequately scale expectations with the scale of difference in funding ask. If I was not careful, I think my default would be to compare that $450k application 1:1 vs one of the seed grants when this is not the accurate point of comparison at all. This is true even if I am only covering a portion of the funding, as the net funding is still typically pulled from sources that fund other promising projects. This difference in expectation can be even more dramatic with organizations that have budgets that are different by orders of magnitude.
In theory, organizations with ~2x the budget should produce about ~2x the output. There are, of course, reasons in practice to believe that output does not scale quite so linearly with increases in resources. However, these reasons crucially fall on both sides of our possible expectations, suggesting a linear increase in outputs is a reasonable base expectation. Perhaps cofounder staff tend to be stronger than later hires, thus resulting in less output per budget with bigger organizations. On the flip side, principles of specialisation and economies of scale from the for-profit world suggest we might expect growth in outputs to outpace increases in budget size.
Why this matters
Personally, I tend to find that smaller organizations are effectively penalized by people not really having a sense of what the costs of a given organization are in comparison to each other, or not adequately factoring in this information when comparing outputs.
Grantmakers and donors being more sensitive to organizational size could lead to a more effective marketplace for donations. I’d expect people’s exact judgments on how growth output and resources correlate will vary a lot depending on breadth vs depth intuitions and several other such differences. Regardless, having more direct comparisons and explicit consideration of resources relative to impact should lead to more informed donation choices.
P.s. If you found this interesting, you may want to check out Ambitious Impact’s Impactful Grantmaking Training Program or our Charity Start-Up Incubation Program.
Good post, thanks for writing it!
A quibble:
I know this is a sketch, but even if 100% of costs are labor both of these come out to fully-loaded costs of $50k/employee which seems quite low to me?
We had a budget of around 100k at more than 20 employees, depends on the country the employees are in!
Good thought I like putting things into close to life scale—made the change to $1.5m and $150k to be in line with ~average CE/AIM charity.
This is a fantastic post and I (unusually) think I agree with basically all of it.
Although I agree with this in principle...
“principles of specialisation and economies of scale from the for-profit world suggest we might expect growth in outputs to outpace increases in budget size.”
I can’t think of many non profit organizations that I’m convinced become more cost effective as they grow, especially when compared with the first 100k-300k they spend. It’s often very hard in the non profit world to take advantage of efficiencies. Also there’s a problem I think as funding increases orgs kind of find ways to spend it to justify those donations.
Often bigger scope means more middle management, higher salaries at the top and less efficiency, while also as organisations grow with mission creep and widening of scope can also often introduce interventions which might be less cost-effective than what they did originally.
Many non profits as they grow claim second order effects to justify these extra costs, like influencing government or building up other organizations doing similar things. The community health worker organizations are classic for this.
“I can’t think of many nonprofit organizations that I’m convinced become more cost-effective as they grow in their core job.”
I can’t say I have many great examples of this either, at least past the first ~3-5 years or ~$1-3m budget. With AIM/CE charities, I think they tend to become more cost-effective in years 3-5 than they are in years 1-2, so there are some gains from very early-stage growth.
Although, I guess one mitigating factor here is that I think early-stage organizations are sometimes effectively cost-offset by a dedicated, high-talent founder. So maybe early ‘on-paper numbers’ don’t fully reflect the counterfactual costs, and that cost would reduce with growth.
Aren’t both AMF and GiveDirectly examples of charities that became more cost effective after scaling into the $millions?
That’s a good shout thanks Ian. From having a brief look, I would say they’re decent examples of orgs that have maintained their cost-effectiveness fairly well but I really doubt they’ve become much more cost-effective over time. They’ve done this through continuing to do 1 thing and 1 thing well which I love. In AMF’s case the cost have nets have come down which helps their cost effectiveness, but that’s not much to do with specialisation or economies of scale within their org specifically..
My sense is that AMF has gotten a little less cost-effective over time due to working in slightly less ideal countries. GD might be pretty close, as I am less sure how the low-hanging fruit affects them. It looks like their percentage of funding that goes to beneficiaries has been pretty similar over time from a quick Google search.
I’d say this is missing where GiveDirectly is extremely cost effective.
Their corporate and government friendly brand.
If they can turn the tide on cash-transfers being the benchmark for foreign aid (and maybe even internal government policy) then that might change the game in terms of political efficacy.
Maybe less so in EA than in other charities, but at the ~100K point a hypothetical charity may rely more significantly on volunteer labor compared to the ~1M version of that charity. One could argue that the volunteer labor is a non-economic cost that should be factored into the cost-effectiveness analysis, or could view it as essentially a freebie. From a counterfactual perspective, the correct answer will probably vary.
I think that’s a factor like Joey says between the early and mid stage mark. But after that it’s more the beuracracy, bloat and mission drift which honestly are hard to avoid.
Useful post.
I think basic accounting ratios and financial analysis are quite helpful for getting a basic view on return on donations and high level valuations of charities.
This is a decent high level overview: https://www.investopedia.com/terms/f/fundamentalanalysis.asp
However, I do think this post underrates the value of assets.
Increased cost effectiveness over time usually comes from investment in quality assets (I’d include staff costs as assets - for management accounting purposes not for external financial reporting purposes).
Does AIM publish any estimates on the valuation of its IP and other intangible assets?
I think there was a conservative counterfactual estimate of the value of a founder somewhere too.
I’d say there’s a decent number of highly effective charities with very valuable IP that are too leveraged on the output of very few staff members.
This makes them riskier and more exposed to shocks.
Quite frankly I’d rather they fundraised more than they needed and hired extra staff / had more in reserves for contractors than continue to run lean.
I’d phrase this section a little differently. I think as a prior you should assume that charities become less cost-effective as they scale. However, the organisations that do grow should be the ones with above-average cost-effectiveness for their size. So even if a charity is less cost-effective than when it was smaller, if funders properly consider size, an average large charity should be equally cost-effective to an average small charity.