03/18/2010 05:12 am ET Updated May 25, 2011

The Tyranny of the Pie Chart: How Unrealistic Operating Budgets Starve NGOs and Prevent Optimal Performance

Executives at companies as diverse as Wal-Mart, FedEx, General Electric, Toyota, McDonalds, Disney and Costco know that in order to achieve business success, they not only need to win the hearts and minds of customers, they also need to operate efficiently. Often the two go hand in hand. Companies spend on operating infrastructure because they know that having good information and good information tracking systems will help them make and implement better decisions across crucial areas including inventory management, marketing programs and cost management.

In the NGO (nongovernmental organizations) world, things are decidedly different. A recent article in the Stanford Social Innovation Review highlighted the results of a 2008 study by the Bridgespan Group, a consultancy to NGOs. Bridgespan found that while most businesses devote 25 percent of their budgets to operating expenses, nonprofits typically spend only 10 to 15 percent. In one study (2004 Urban Institute survey) cited by Bridgespan, more than one-third of the 220,000 NGOs in North America reported no operating costs.

Within the nonprofit world, we call this the "tyranny of the pie chart." It stems from the fact that donors often stipulate how much of their contribution can be applied toward an organization's overhead costs. It's largely because donating toward operating expenses isn't considered emotionally fulfilling, and many donors simply don't understand the difference that "smart overhead" can make.

Unfortunately, NGOs are partly responsible for the quandary they're in. Year after year, they've succumbed to donors' expectations by under-spending on overhead in order to give a more flattering picture of operating expenses. Such expectations are unrealistic.

Nowhere is this more evident than in the realm of technology. A recent NetHope member survey found that the average NGO invests somewhere between 0.5 percent to 2.4 percent of its annual revenues in information and communications technology while Gartner, Inc. recently found that similarly sized public and private corporations invest roughly four times that amount. Today, the average level of corporate Information Communications Technology (ICT) investment hovers around $13,000 per employee.

International NGOs face challenges that are often more daunting than those facing global corporations. For three years I've served as CEO of Washington D.C.-based NetHope, a technology-oriented collaboration of CIOs and senior technical specialists from 28 leading international NGOs that work in 180 countries around the world. We're big believers in open innovation models. NetHope members share information and technology resources across their organizations in order to better support health care, education, agriculture, natural resource management, emergency response and microfinance programs. Often NGO field staff are operating in conditions such as conflict, famine or natural disaster with limited or nonexistent infrastructure. Because of these challenges, it is imperative that donors and NGOs shift their focus from only looking at costs to looking at both costs AND outcomes.

Appropriate ICT investments are an important part of being able to do that well. Not only does better use of technology enable NGOs to share information internally, it makes it easier for them to coordinate efforts with other groups, improve sector efficiencies and more closely measure outcomes. The challenges of understanding, implementing and sustaining complex IT solutions also loom large in the NGO community. Technology companies are stepping up to help; for example, Microsoft holds NGO Connection Days to bring together local IT partners, nonprofit leaders and industry experts to share information, best practices and guidance for nonprofits to help them use technology more effectively. But those efforts alone can't compensate for the systemic lack of funding for IT.

Increasing the dollar investment in technology is one step toward greater efficiency within the NGO sector. At NetHope, we also believe it's crucial to harness the power of collaboration. NetHope members share resources with each other and work collaboratively with foundations and companies that recognize the impact of making smart investments in technology. Today our supporters include the Rockefeller Foundation and the Michael and Susan Dell Foundation, as well as Microsoft, Cisco, Accenture and Intel. Through grants, gifts in kind and shared expertise, the capacity of NetHope's members has increased in a very measurable way. For example, a NetHope supported PDA-based solution helped food distribution centers in Bangladesh and Bolivia increase the number of people they serve each day by 39 percent and 57 percent respectively, with little to no increase in budget. Similarly, a single Shared Services initiative has reduced help desk costs for participating member organizations by as much as 40 percent.

Used properly, technology has the potential to help NGOs increase capacity, operate more effectively and make significant progress in the fight against global poverty. What's more, utilizing emerging collaborative models puts participating organizations on a path toward powerful and innovative shared solutions.

As results-oriented donors pull out their checkbooks this month to make annual end-of-year contributions, they should consider two specific ideas: Designate funds, or a portion of funds, for technology investments that can yield operating efficiencies. The other is to give to collaborative efforts in the humanitarian sector so donations are leveraged across multiple organizations. These simple ideas will stretch all donor dollars further and achieve much greater impact, something both emotionally-oriented and results-oriented donors can feel good about.