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Doing the math

Quite a few people in the replies to Dan Pallotta's talk have noticed that the math shown is somewhat odd from time to time.

So let's discuss this in a seperate conversation rather than in the video thread.

My personal opinion (in this post) is irrelevant, I'll take a possition myself in the debate though but want the starting post to be as neutral as possible.

Because I would like everyone to use the same numbers I've went through the vid and wrote down all numbers he uses on his slides (I made the 'topics' of the slides myself as his slides didn't have any topics):
12% poverty in the USA

Salary in profit vs non-profit organisations:
Stanford MBA (at age 38) = 400.000 $
CEO of a medical charity = 232.658 $
CEO of a hunger charity = 84.028 $

AIDS rides bicycle (over a course of 9 years):
182.000 cyclists raised 581.000.000 $

Charitable giving in USA:
2% GDP (300 billion)

organisations crossing the 50M $ annual revenue barrier since 1970:
144 non-profit
46136 profit

Launch AIDS rides:
50.000 $ (risk capital)
108.000.000 $ after 9 years (and after expenses).

Breast Cancer 3 days:
350.000 $ investment
194.000.000 $ after 5 years (and after expenses).

5% overhead for a bake sale.
40% 'overhead' (or investment in growth) in a company.
(would anyone know what a non-profit organisation spends on average on 'overhead'?)

Current charity balance (where the 2% GDP goes to):
20% of charity goes to Health and Human services. (60Billion $)
80% of charity goes to Religion/Education/Hospitals. (240Billion $)

3% GDP (450Billion or an added 150Billion ontop of the before mentioned 2%).

  • Mar 14 2013: Dan also talks about "what makes more sense for a philantropist".
    Give the best doctor out there 350.000$ or give him/her a fundraising department worth 350.000$ who will multiply that into 194.000.000$ (over 5 years).

    This makes it sound as if when you market people will give more. Which might be the case (but there is no evidence for this).

    However if something can grow with a factor of 554 then it can only mean 2 things.
    1) It was REALLY tiny to begin with.
    2) it gets it growth off of 'competitors'.

    Also everyone can see that a growth like that is unsustainable.
    Heck if it would (linearly) continue it's rate of growth for another 5 years at the same rate... We would get 107.476.000.000$ which is around 0.7% of GDP.
    A few years later we'll have more than 100% GDP spend on his charity.

    Now both 1 and 2 are valid explanations... and I would like it if I knew that 1 was the "truth".
    But something inside me tells me that it's not... This is heavily supported by Dan's own graph that spending on charity has been stuck at 2% of GDP since measurements started.
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    Mar 14 2013: Despite their different missions, the Disabled Veterans National Foundation, a veterans charity, and SPCA International, an animal charity, have a lot in common.

    They have both received F’s from CharityWatch, the charity-ratings group, because most of the money they raise from the public pays for direct-mail operations.


    How to Calculate a Charity Program Spending Percentage
    Divide the amount the charity spent on programs by the total amount it spent, and multiply the result by 100.

    For example: If an organization reports spending $750,000 on programs while spending a total of $1,000,000, dividing $750,000 by $1,000,000 produces the decimal number 0.75, and multiplying that by 100 produces the result of 75% (its program spending percentage).

    Financial Ratings Tables
    At Charity Navigator we recognize that different types of organizations work differently. This variation isn't a bad thing. Rather, different types of charities have different resource and spending requirements. For example, our research shows that museums exhibit above-average administration costs as compared to other types of charities.

  • Mar 13 2013: CEO of Autism Speaks - $750,000 base salary only (not including perks)
    CEO of Unicef - $1, 200.000 base salary (not including perks)
    CEO of American Red Cross - $700,000 base salary (not including perks which includes 8 weeks of paid vacation/yr)
    CEO of Goodwill - $2.5 million min
    Top 25 Medical Charities - CEO base salary runs from $700K to $2million

    That's about 3 times what was put out in this lecture. When U add in TOTAL COMPENSATION - it's usually about double their "base salary"
  • Mar 26 2013: I must say... the more time passes.
    The more I'm sure that what Dan really does is out-compete his fellow charities by using more money in organisation of fundraisers than the other charities do.
    Which eventually leads to "less money to the needy" than if he does not do this, as well as quite a few jobs in marketing / promotion / other jobs related to the events (like security/catering etc.).
    • Mar 30 2013: It is too speculative to presume that the revenue growth of one charity is to the detriment of others. While cannibalism within the charitable sector occurs, it isn't the sole means of growth, nor are these mutually exclusive.

      If marketing efforts can persuade a person to redirect some funds toward a cause, rather than toward any other purpose - whether that be entertainment, savings, etc., but not from pre-existing charitable behaviour (such as payroll deductions) - than the growth isn't from out-competing fellow charities. This form of growth is certainly achievable.

      Whether the lion's share of growth originates from within the charitable sector or external to it, will likely vary on a case by case basis. Speculation and generalization isn't constructive.

      Ideally, surveys and studies would accompany such charitable endeavours to uncover whether a donor redirected funds from one charity to another or increased his/her overall contribution. Again, ideally, an emphasis would be placed on those marketing efforts that result in the latter.
      • Mar 30 2013: My conclusion is more plausible than Dan's is though. Sure it's a bit speculative but at least it's supported by the figures that Dan shows.

        Dan's charities grew like crazy while % of GDP spent on charity stayed the same.
        So where did that money come from if not from the competitors? (One might say that his charities are too small to really make a significant difference in the % of GDP... but then there is not enough evidence for either conclusion which wouldn't make what I write any less likely than what Dan is talking about)

        His conclusions are a lot more far fetched than my own though. Where he sais that "giving a doctor a fundraising team which can use the 350.000$ makes more sense than giving the doctor 350.000$ for the research.".
        Say that you're a really smart doctor.... and rather than thinking "I really need that money" each year you use the generated $ to give another doctor a fundraising team which can use 350.000$. And he then does the same (so 1 doctor in the 1st year, 2 in the next, 4 at the 3rd year etc.).
        As according to Dan's numbers each of those will (after around 5 - 6 years) "make 200 Million $". (That is if they do not cannabalise eachother).

        You can already see that this isn't going to work... As within around 12 years spending on those charities will exceed GDP. (I didn't really do the math precisely for the '12 years' though but it feels correct as 2^(12-5) = 2^7 = 128 which then means that "at the very least 25,6 trillion $ is spent on gdp")
    • Apr 1 2013: This is true if the marketing does not bring in more money overall to charity. This is what he is talking about when going from 2-3% GDP. There are "windows of opportunity" that are frequently missed because no charity is there with open hands when a person is motivated to give. Kind of like how close a starbucks is has something to do with how many latte's you might buy.

      I think people want to help others and that motivates many of us. We look for opportunities, but need to be presented with them to act. Maybe you have Saturday free, and just heard a charity is doing a fundraising nearby. THe advertising got you to get involved. If there was no advertising, you would not have heard about it.

      In sales, it often takes 5 repeat visits to close a deal. Those first 4 visits are overhead. Getting people to realize that they can give and it makes a difference costs money. The more you spend, the more you make. Will there be mistakes? Certainly. But that is how you learn.
      • Apr 1 2013: Ah but he himself presents data which sais that the % of GDP never grew over the course of 20 years.

        While I'm sure that, because of the spread of televisions and computers, awareness of charities has grown significantly through the years.... Heck a lot of the "large charities" are so well known that they are considered to be common knowledge at quizes.

        So it cannot be that "if we just know" -> "we will spend more on it".
        • Apr 1 2013: Yes, but there is no law of nature that says it must stay there. This is what marketing is all about.
      • Apr 1 2013: You claim that when people become more aware of charities they will spend more on charities.

        I give you a logical conclusion of data that tells you that is not true.

        You re-state that it is true....
        If that is what marketing is all about then I suggest marketeers take courses in economics and logic
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    • Mar 18 2013: They are not my slides I reference but Dan Pallotta's?

      I don't say the USA has any problem.... I am sceptical of Dan Pallotta's talk though.

      Actually the more I think about it the less I'm convinced that he is justified in his beliefs.
      I do however think that he has his heart on the right place... but, to me, his economical views on charities don't make any sense.
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        Mar 18 2013: This was a reply to Random Chance sorry
        • Mar 18 2013: Ah ok no problem,
          I was confused by it though haha :D
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    Mar 14 2013: Poverty in the usa?
    Who is doing with out can't stay out of simple trouble and the rest get government assistance. I don't feel sorry for the people that can't stay out of trouble sorry!!!
    I'm also from the show me state, so show me somebody that is doing with out essential needs to life that is not voluntary!!!
    • Mar 14 2013: Are there any good psychiatrists in the "show me" state?
      You are in serious need of one.
      Do you have a good job?
      Give it to 30,000 people who are out of work, lost their jobs or graduated and now their major is not applicable, but most importantly, let's throw everyone in to the same stereotype and blame them for having any kind of difficulty in life.
      So you see some people as valuable and others as not valuable, yes?
      Why don't you, quit your good job (if you have one) and take a menial, low-paying job cleaning out toilets, in a poor section of some big city? Would you think that job is not of value, not important and by association of having it, neither is the person who does it, and cannot survive on it? From your comment, I assume you would. So if you took that job, you are not important
      Donald Rumsfeld announced the day before 9/11 that the Pentagon could not account for 2.3 trillion dollars in transactions. Was it investigated, discussed, questions raised and pursued? No, because the next day he and his gang attacked the WTC and it got buried with all the other BS. That, is the welfare system and it hurts everysingleAmerican.

      Yes, people actually don't eat voluntarily, or have warm clothes or medical and are poor only by choice.
      You sir, are what is wrong with America. You and your mental illness that is Artificial Intelligence on display.
      A mental robot, a Manchurian Citizen.
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        Mar 18 2013: I'm the problem with the United States? What a laugh. I'm the one with the mental illness but your the one with the conspiracy theories. I wish only 30,000 were out of work. True Poverty is not in the USA, its only in third world countries, where people are with out essential living needs.

  • Mar 14 2013: Another really stagering issue is that multiplication of money which Dan seems to be able to pull off.

    As the slides say that he used 50.000$ in order to raise 108.000.000$.
    Which is ofcourse a very misleading number because over 9 years the "charity grew". And Dan actually told us by how much because it's total was 581.000.000$ over a course of 9 years.
    So if 40% of that went into "overhead" assuming again (like last time) that the last year is excluded from this 40% rule as each time you take 40% of the "profits" from last year.

    Then we get that over these 9 years ( (581.000.000 - 108.000.000) * 0.4 + 50.000 = ) 189.250.000 was spend on "overhead".
    Ofcourse we know that the growth is not linear... heck the 1st year we even only had 50k as input.
    If we assume however that growth is linear 189.200.000 / 8 (I exclude the 1st year and subtract 50.000) was used per year which is around 23.650.000$ each year for advertisement... over a course of 8 years. To get the revenue of 108.000.000 annually.

    Which suddenly sounds a whole lot less impressive (although it is still impressive).
  • Mar 13 2013: I guess I should give a good example.

    One of the things that struck me as odd is that if you compare the overheads and his own ambition. That there is hardly any difference in eventual money going to 'the cause'.

    As I also wrote in the main post I am not sure which % of regular non-profit organisations leads up as overhead but I'll assume it's 10% (just because I assume that it's more than a 'bake sale').

    However if we take 10% overhead over 2% of GDP. (which is to say we add all overhead of 'old fashioned' non-profit over all non-profit spending)
    We obviously spend 30Billion in overhead on a total of 300Billion.
    So (300 - 30 =) 270Billion goes to 'The cause'.

    Say that if we use 40% of that which leads to an increase of 1% GDP to a grand total of 3% GDP.

    If (in the best case one could think of) we use 40% of the 300Billion in order to get 450Billion.
    We would use (300*0.4 =) 120Billion in overhead to get 450Billion. In this situation (450 - 120 =) 330Billion goes to 'The cause'.

    This is obviously a (330 - 270 =) 60Billion increase but it seems a lot less impressive than the addition of 150billion.

    If we would actually use 40% of the 450Billion (as some people do in their calculations) it would be even more grim as 40% of 450Billion is 180Billion in which case you would even end up on (450 - 180 =) 270Billion which is exactly the same as you had before with just 10% overhead and 2% GDP.

    So what basically happens is that a shitload of people can go into marketing jobs... who would all be funded by people who support a good cause. Which will lead to an maximal increase of (60 / 270 =) 22.222% more money on the cause while expenditure for the whole organisation goes up 50% (2% GDP to 3% GDP)
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      • Mar 14 2013: Well ZX Style,

        I'm not so much fiercely against the ideas in this TED talk.

        I do however feel that a major part of it is based on thin air and/or wrong ideas on the economic system (or wrong ideas on marketing).

        There are however also a few points which should make sense to people... for instance that it's insanely stupid to not allow non-profit organisations to make a profit off of certain projects.

        For instance say that a non-profit organisation would teach Africans how to best maintain their land and help them to grow stuff on there. Why not "re-use" that knowledge of those who you thought in order to further your cause?

        Why not say to the "farmer" we will take 20% of everything that our help and knowledge adds on your production for the next 10 years. And we will use that money / those products to help erradicate hunger while teaching more people how to farm.

        Then he has a choice if he wants to parttake in the project and while he does most of the work... you get a 'profit for the cause'.
        This way the organisations who are "better at helping people" will gain revenue through the economic markets.

        Now we go there... help a few... and leave when the money runs out. Which is a rediculous way of thinking.
      • Mar 14 2013: yep that's a lot better concept for 'charity'.
        Although in my view they can keep the 2% and re-invest it in themselves (they could even keep more for a certain time).

        Main concept is though that you can use the markets for good.
        It's why green energy will be abundant in the near future... markets will be able to make a profit (or well they make less loss) by using green energy over certain other types of energy.
    • Mar 18 2013: Well, you forget the idea of exponential growth (edit: sorry for my wrong wording, should be closer to what I mean now): even if the amount spend on the cause in the first year is the same as it is now, it will be bigger in the years to follow. This is mentioned by Pallotta with the example of amazon, which didn't make any profit in the first years.
      I think the only thing that could be problematic lies in the question why is spending on charity stuck at 2%? Palottas answer obviously is because charities do not have the means to grow (i.e. they can't take the money from the competitor, the for-profit-sector). But it also could be that this number won't grow no matter what you do - it could be a constant (under current ethical standards etc.). We can't know unless it is tried - a community-based experiment would be really interesting. I actually doubt that it is a constant.
      • Mar 18 2013: Hello Juliane,

        Thanks for your reply.

        However you have a strange idea of what the term inflation is (don't be discouraged). Because say that inflation is 1% that means that to buy the same thing you bought exactly 1 year ago, you now need 1% more money to buy.
        So if your salary goes up by 1% then you can buy exactly the same stuff you could last year (given that you do not have any savings and spend all the money you make... which I know sounds silly but otherwise the explanation becomes needlessly complicated :D).

        What inflation means is that the total value represented by your amount of money drops as time passes. That is if you have 1000$ now you can buy 1000$ of products now. Then in 1 year from now (given the 1% inflation) the same products would cost 1010$.

        What you probably mean is that (in general) the growth of GDP > inflation. And therefor the value gained by the charities is slightly higher even though it is still 2% of GDP.
        Which is often true. But is not the point I'm making.

        To get to the point I am making:
        You say that "the for-profit sector" is the competitor of the "non-profit sector".
        What I say is that ALL evidence I can see in his talk points to the "non-profit sector" being the competitor of the "non-profit sector".
        Added to that it seems like competition between charities is heavily skewed towards the charity spending most on advertisement (that being almost equal to "Least on helping people!").

        Also the "for-profit sector" is what makes up the GDP.
        So the relationship between the for-profit and the non-profit sector is complex.

        Now Dan does not say ANYTHING about this in his talk... which strikes me as odd.
        • Mar 18 2013: short answer first: I just confused wording - I didn't mean inflation - I meant exponential growth (the concept that growth induces more growth etc.) - I somehow seem to connect that with inflation :S

          for the rest, let me try to sort this a bit: the GDP is the total income of the population (it we put it simple), which can be spent in different ways. thus it can either be spent on non-profit or profit (e.g. you can either buy a coke or donate the same amount of money). in this way profit and non-profit-sector compete. what makes it complex is the fact that the money you donate does not directly contribute to the economy (even though indirectly a lot of charities do).
          and of course he did not talk about this as he does not have any data supporting thesis 1 that non-profit-sector and profit-sector compete. however, there is also no data supporting thesis 2 that more advertisment leads ONLY to competition among charities (I think there already is a minor competition among charities). Both of theses theses are logical and he supports the first. as I said it should examined experimentally. I think he just did not consider this. The data he gives lead neither in the one nor in the other direction.
      • Mar 18 2013: Well the data he gives is that "his charities did awesome" while "spending on charities remained on 2% GDP".
        His conclusion then is "More charities should do what I did".
        While if spending remains at 2% (which he sais it does) it basically means that you must be getting the $ from your competitors.
        Which then means that nobody should do the stuff he did.

        Now I'm not saying which it is.... I'm just saying that it needs to be thought of.
        He can say he's the new messiah of charities... but he won't convince me untill he can show where I'm wrong.

        First things last ;)
        I kinda figured you meant growth of GDP. So I guess I answered that.

        Second point on that though.
        If you buy a coke then that coke had to be produced, if it was produced in your own country then your money actually adds to the GDP of your country.
        Now if you give money to a charity... then it becomes more complex, part of that will also add to GDP as they have to buy stuff themselves. But a lot of money actually gets spend in the countries that need the aid.

        Now ofcourse you only spent your money once... But when you poor it into the GDP then it pretty much only moves within your country.

        Say that you buy a piece of furniture in your home town. The guy who sold you the thing takes a % the country takes part of it as well. Then the guy who made it gets a piece and then eventually whoever made the fabrics used in it gets something (this is usualy in another country).
        So let's say that 60% of the money you spent actually attributes to the GDP (assuming that most products you buy are from your own country).

        Then all these guys get an income... and the economy forms a somewhat closed loop. (the usa is fairly open and I don't really know the %'s.. I'm not some professor in economics or anything).

        But I really do not see how the "non-profit sector" must compete for your money with the "profit sector", as the profit sector means that money is added to the GDP.
  • Mar 13 2013: Must depend where you live. In my neighborhood, going door-to-door during the day would not yield much since most people are working, or sleeping because they work at night. And also there are neighborhoods that are not conducive to walking. In my in-laws neighborhood, many of the streets don't have sidewalks. And of course if you live in a rural area, the homes could be widespread. I might get a kid selling candy for school, but I have never had a registered 501(c)(3) charity knock on my door.

    Do you give to each and every charity that knocks on your door? And do you still do due diligence to see if the local arthritis chapter does indeed make good use of your collection.

    But you know somtimes local station donate local air time to charities, or give a reduced rate. One billboard company will put up a billboard for a nonprofit if it has no commercial customer for it. There are ways to be more efficient and creative, but even those that seem simple do have some kind of cost. Maybe minimal, but not free.
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    • Mar 13 2013: Concerning free publicity: Someone has to organize a flash mob, get the word out, figure out what's going to happen, get permission at the location you're going to have it. So you are still paying for this.

      Door to door knocking: Again, someone has to recruit volunteers for this, train the volunteers, provide them with the materials they need, organize the day so the volunteers know what routes to take and doors to knock on, probably want to supply volunteers with t-shirts and some kind of credentials so the homeowners realize this is a legit thing. You're probably going to have to provide snacks and drinks as well, or put in the time to get sponsors to do it. Are you just sending volunteers out willy-nilly or have you got a targeted area? I don't know about you, but I don't have many charities knocking on my door.
    • Mar 14 2013: "My money is going to a charity who is helping the cause, and not a charity who's main goal is tripling it's money and after that they might look at the cause."

      With all due respect, I think this is short-sighted view and Pallotta addresses this type of thinking directly. You seem to paint people whose goal if tripling money for the cause as somehow not caring about the cause. NGO's NEED some business-minded people who can raise revenue to support the cause.

      Here is a hypothetical question I would like you to answer, pulled directly from Pallotta's talk: Which charity is doing more to solve an issue: The charity that spends 10% on overhead/fundraising and 90% on solving the issue, but never nets more than $5,000,000 total, or the charity that spends 30% on fundraising/overhead and 70% on solving the issue, but each year they grow by $5,000,000? In 10 years, the 70/30 charity is putting $35,000,000 toward solving the issue, while the 90/10 charity is still only putting $4,500,000 toward the same solution.

      So which charity is spending it's money more wisely? 70/30 or 90/10? For me, the answer is clear.
      • Mar 14 2013: The question is where is this extra money coming for the 70/30? If the donation pool is fixed at 2% then you have to assume that the 70/30 makes more by redirecting money that would have otherwise been given to another charity, possibly a 90/10 charity. In fact very likely if your spending alot more on marketing then the 90/10 charity. If this is the case then you have just taken money out of the charity system and put it in to the marketing industry.
        • Apr 1 2013: The point is that with effective marketing, the donation pool would grow. That this is not a zero sum game.