Nonprofit Overhead Efficiency in the Israeli Welfare Sector: How Economies of Scale Could Lead to Administrative Savings

Abstract

Third sector scholarship has long neglected the issue of excessive organizational duplication and its possible negative effects on efficiency. With the Israeli third sector ranking among the largest in the world and at a time in which the government is looking to further empower Israeli NGOs, it is important that third sector scholars consider how organizational crowding and network fragmentation may hinder the sector's ability to cater effectively to its beneficiaries. After providing theoretical background on organizational duplication, overhead, and the specific context of the Israeli third sector, this study focuses on a subsection of Israeli NGOs — welfare organizations — and examines how overhead rates (treated here, with qualification, as measures of efficiency) fluctuate according to four variables: size (measured by revenue), age, service type, and geographic peripherality. T-tests and multivariate regression analysis reveal that only size affects efficiency, with larger NGOs generally operating with lower overhead rates. Consequently, in addition to urging more in-depth research on duplication and factors influencing efficiency, the authors conclude that new policy relating to service organizations should facilitate NGO mergers, administrative consolidations, and other forms of restructuring that can help to streamline the sector, encourage collaboration, reduce the proliferation of small and redundant organizations, and achieve greater economies of scale.

Keywords: Nonprofits, Efficiency, Overhead, Economies of Scale, Welfare, Israel

JEL Classification: L31, L32, H41, I38