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Ryan Jones April 10, 2013

There's a common belief that giving money directly to someone in need is ineffective and generally not a "good way" to help the poor. The argument follows that the poor, for a variety of reasons (societal, health, addiction, and so on) are ineffective at managing their way out of poverty and as such charities are better vehicles for benevolent giving. Charities, the argument would follow, can provide services like addiction recovery, soup kitchens, shelters and longer term continuum of care that an individual could or would source and pay for should they be provided the financial capabilities to do so.

Having spent most of my career working for charities of one sort or another, the argument makes intuitive sense. There's economies of scale, best practices, and a breadth of services that a charity can supply and can do so cheaper than a direct to consumer world.

Data from a startup nonprofit called GiveDirectly is challenging this notion - if "only" in a very localized context. Harvard Business Review writes, "Paul and Michael started GiveDirectly in 2008 while pursuing advanced degrees in economics at Harvard. Their graduate research had uncovered multiple reports demonstrating the effectiveness of cash transfers as a model to alleviate poverty."

Through using randomized control trials (a lottery system similar to medical trials) and comparing it with the developmental outcomes of households who have received direct cash payouts against those who haven't, they found that the recipients who are often living on less than 65 cents a day invest in everything from food for starving children to long-term assets like land, livestock and housing.

Their data shows that cash transfers have long-term impacts on the recipients (one study found that men's annual income five years after receiving transfers had increased by 64% - 96% of the grant amount) and that the poor do not abuse cash as predicted by derogatory stereotypes. "Across a range of studies, spending on alcohol and tobacco either decreases, stays constant or at most increases in proportion with other spending (typically 2 - 3%). Similarly, most studies find no effect on the number of hours worked. In fact, some studies show increases in hours as household members migrate to obtain better jobs."

Four interesting lessons that Paul and Michael of GiveDirect are presenting with their charitable experiment.

1. The idea of "charity" as mutual fund, and a "direct to client" as straight stocks.
If you think of a charitable org as a managed portfolio of services delivered on behalf of a donor and compared the portfolio's performance against the return that giving money directly to the end user would have (deciding in advance, of course, how you define return) could you create a benchmark index by which you could judge your charitable impact? What if every nonprofit that focussed on poverty alleviation had to prove they could do more for the poor with a dollar than the poor could do for themselves? Obviously this has context limitations; however, principally it's a good conversation to have.

How are you tracking the successes and failures of the charities you support or work for?

2. A ruthless commitment to the end cause.
A board that routinely  asks "What's best for our organization?" is more concerned with promoting bureaucracy over mission. You exist for the end problem you are trying to solve — not to perpetuate programs or fill seats, but to solve the very real problems that prompted you to start the charity in the first place. Paul and Michael have built a lean, data driven, start-up charity that focusses only on what will solve the end problem most effectively.

If you had to rebuild your charity tomorrow, what would you cut, change or add and why? Where are the unnecessary programs and who are the redundant people? Your cause is too important to promote anything but solving the end problem. 

3. Data drives decisions.
To a startup charity run by two Harvard Economists, you would expect nothing less than this commitment to data as driving their efforts. Hypothesize, test, examine and repeat. There's nothing wrong with strategy, experts, and learning from the "best practices" of the past, but if they're standing in the way of the best ideas rising to the top, and from us really understanding what is and isn't working then they need to go. To quote HBR "as funders, we need to support non profits like these that use data-driven approaches, especially randomized control trials where possible, and we must challenge conventional wisdom on what works."

How are you letting the data you gather speak, influence and challenge the decisions you are making about the charities you support?

4. We all assume something about the problem we're trying to solve.
Paul and Michael started by assuming that the poor in Kenya were not poor because they were stupid or lazy, but that they were circumstantially poor and could, in most cases, manage themselves just fine. We all have assumptions about the clients we're serving. Really understanding the assumptions that are hurting our ability to solve the end problem we care about is essential to moving towards solutions that work.

What are the assumptions the charities you support are making about the problem they are trying to solve? How do these help and how do they hurt the solution?

GiveDirect isn't the only solution, but the principles they are testing and the boundaries they are pushing have relevant implications for donors and charity professionals right now.

Jeff Golby is the Director of Operations at Chimp. You can find him Tweeting, guest blogging and on LinkedIn.

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