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The Not-For-Profit Overhead Myth

The Overhead MythFor years I have regularly questioned the concept that a not-for-profit organization’s effectiveness can be summed up by one number. A number that is calculated by how much the organization spends on infrastructure and logistics to deliver a good or service effectively. We have wrongly come to depend on such a number as the sole piece of information to make our support decisions.

The result has been called the “not-for-profit starvation cycle” and often leads to the diminished effectiveness and sometimes, the demise of what were once good organizations. I knew of one cancer charity that increased the amount of their organizations donation to their recipient six-fold over 5 years from $8 million to $54 million. But because their overhead increased to the mid-30% range, they were classified as excessive and irresponsible by the press. The resulting fallout led to the closing of their doors 2 years later. A potential $54 million (and maybe more) annually gone from the coffers of a research institution.

But the worst part is that this story is seen as a cautionary tale by many in the not-for-profit world. The terrible fear that someone might see their overhead as too high leads to a choice to pass on needed training, technological updates and facility improvements that eventually leave them in a tough spot. A spot that almost always leads to diminished effectiveness in helping the people they exist to help.

GuideStar, Charity Navigator and several others used to be the worst offenders in propagating the overhead myth. They have not only moved away from overhead as an absolute measure, but recently they released a letter recanting their past position on overhead as the main factor in giving choices. You will find the body of the letter below and the full PDF is linked at the bottom of this post. I applaud their courage in speaking out on this issue and hope others take note.

Overhead can and should be a part of your decision-making process. And it can be a good indicator of inappropriate accounting and practices. But please keep it in perspective and don’t allow it to be the only thing considered.

The following is the main body of the letter:

To the Donors of America:
We write to correct a misconception about what matters when deciding which charity to support.
The percent of charity expenses that go to administrative and fundraising costs—commonly referred to as “overhead”—is a poor measure of a charity’s performance. We ask you to pay attention to other factors of nonprofit performance: transparency, governance, leadership, and results. For years, each of our organizations has been working to increase the depth and breadth of the information we provide to donors in these areas so as to provide a much fuller picture of a charity’s performance. That is not to say that overhead has no role in ensuring charity accountability. At the extremes the overhead ratio can offer insight: it can be a valid data point for rooting out fraud and poor financial management. In most cases, however, focusing on overhead without considering other critical dimensions of a charity’s financial and organizational performance does more damage than good. In fact, many charities should spend more on overhead. Overhead costs include important investments charities make to improve their work: investments in training, planning, evaluation, and internal systems—as well as their efforts to raise money so they can operate their programs. These expenses allow a charity to sustain itself (the way a family has to pay the electric bill) or to improve itself (the way a family might invest in college tuition).
When we focus solely or predominantly on overhead, we can create what the Stanford Social Innovation Review has called “The Nonprofit Starvation Cycle.” We starve charities of the freedom they need to best serve the people and communities they are trying to serve. If you don’t believe us—America’s three leading sources of information about charities, each used by millions of donors every year—see the back of this letter for research from other experts including Indiana University, the Urban Institute, the Bridgespan Group, and others that proves the point. So when you are making your charitable giving decisions, please consider the whole picture. The people and communities served by charities don’t need low overhead, they need high performance.

Thank you,

Click to download Full PDF of The Overhead Myth

Scott Wilson is the Director of Communications and Technology for The Urban Child Institute (tuci.org), a not-for-profit dedicated to improving the development and well-being of children. He is also a marketing and business strategy consultant for small businesses and writes regularly about Leadership, Communication and Marketing on his blog, scottkwilson.com.

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