I’ve been asked this question many times.
One of the ways I’ve answered is with my own questions:
- If you could invest 20 cents to get a dollar, would you?
- If you could invest 50 cents to get a dollar, would you?
- If the dollar you got was old, wrinkly and ripped, would that matter to you?
- If the dollar you got was mint, would it be worth it to you to pay a bit more?
Maybe the return on your invesment doesn’t matter to you. But maybe it does. In the case of the wrinkly vs. mint dollar bill, it would matter a lot if you’re a collector. Change that to 50 cents to buy a bag of fresh, nutritious produce that will last a full week vs. 20 cents to buy a bag of old, rotten vegetables, and you begin to understand.
All things are not created equal.
That’s true, in spades, for what folks consider ‘appropriate’ overhead.
What’s Appropriate? The “Overhead Myth.”
This has been a topic of discussion in the social benefit sector for many years, but especially since Dan Pallotta’s 2013 TED talk, “The Way We Think about Charity is Dead Wrong.”
“Social problems are massive in scale, our organizations are tiny up against them, and we have a belief system that keeps them tiny. We have two rulebooks. We have one for the nonprofit sector, and one for the rest of the economic world. It’s an apartheid, and it discriminates against the nonprofit sector.”
— Dan Paliotta
Too many nonprofits, Palotta says, are rewarded for how little they spend — not for what they get done. Instead of equating frugality with morality, he asks us to start rewarding charities for their big goals and big accomplishments. Even if that comes with big expenses.
Things were supposed to be getting better.
Yet things have not appreciably improved.
Despite the fact several years back there seemed to be a movement towards acknowledging the real problem with trying to keep overhead lower than 10 – 20%, the MYTH you can reasonably evaluate an NPO’s performance and trustworthiness by evaluating just what they spend on administrative expenses, including fundraising, prevails.
Measuring overhead does not neatly correlate with a nonprofit’s impact or effectiveness
A charity that spends 40% on overhead and knocks its mission out of the ballpark is not less worthy of support than one that spends 20% on overhead but helps relatively few people. It’s one way of assessing things, but not necessarily the most meaningful.
This is one of the reasons Charity Navigator agreed to change the way they award stars. And it’s why way back in 2013 Guidestar and BBB Wise Giving Alliance with Charity Navigator in writing a Letter to the Donors of America stating:
“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.”
So, there we have it. Right from the watchdogs’ mouths.
Here’s more – directly from the watchdogs:
“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.”
For a hot minute it looked like we had a movement to change things up!
There was even an online “End the Overhead Myth” campaign supported by the watchdogs.
Well, fast forward to today and guess what? Charity Navigator ‘tweaked’ their formula for awarding stars (up to 4) and not much changed. The “Program Expense Ratio” (including administrative and fundraising costs) remains prominently displayed and contributes significantly to each charity’s star rating.
While Charity Navigator claims it is “Your guide to intelligent giving,” it really is more “Your guide to giving … assuming you’re content to base your decisions on shallow and unsophisticated measures that account for nothing worthwhile in the real world.”
– Tom Ahern
And then there is Charity Watch, which rates charities from A to F almost completely by financials, believes the Overhead Myth is itself a myth, and allows no input from charities. They’ve doubled down on the “financial efficiency formula” as a means for donors to assess whether their philanthropy will be well spent. And their argument that too often charities misreport the amount spent on direct vs. indirect costs is well taken.
Part of the problem with measuring overhead is every nonprofit does it differently.
So we’re comparing apples to avocados.
Some put a bunch of salaries into “program,” while others consider salaries and/or benefits “administrative” expenses (aka overhead).
Some put a percentage of “fundraising” into “program”, rationalizing that some of this is “marketing” and a way to support/get the word out about their services.
Some claim they have 0% overhead, because they ask sponsors and major donors to specifically underwrite their administrative expenses so “donors’ gifts go 100% to program.” This model was pioneered by Charity: water. It’s so seductive numerous “copycatters” have emulated them. Within Reach Global speaks of yearning to adopt the model but, gee whiz, they still need a way to fund personnel. Thrive promotes the model, but admits: “Like every organization, we still have operational needs that exist. Since day one, we’ve had a small group of generous private and corporate donors that fund all of the ‘not so fulfilling’ expenses.”
If you dig deeper you’ll find Charity: water spends between 23% and 31% on operating costs. You can’t tell, however, because they divide costs and donations between “The Spring” (public donations) and “The Well” (25% of all funds, which are contributed by a small group of private donors). And there are no uniform standards for counting these things.
The problem with all this game playing is the myth that overhead is yucky (who in their right mind would want to fund it?) is reinforced. It sends the wrong message to donors.
And, ultimately, it hurts the sector.
When nonprofits continue to feel forced to find ways to lower their expenses, the ultimate result is less gets done.
Resist the Temptation to Starve your Organization
You either grow, or die. The Stanford Social Innovation Review calls this phenomenon The Nonprofit Starvation Cycle.
Don’t shortchange those who rely on you by focusing too much on your overhead percentage.
Consider Dan Pallotta’s argument that we’re not spending ENOUGH on overhead.
It costs money to build programs. It even costs money to fundraise.
And simply splitting your budget in two into “overhead” vs. “not overhead” (as “100% model” charities do), does not change the fact that administrative expenses still exist. And they’re essential to your ability to deliver impact. Charity:water couldn’t raise money to fulfill their mission without their fundraising, marketing, website and finance staff.
Resist the Temptation to Collude in Perpetuating the Myth
When you tout a 100% model…
When you tout how little you’re spending on overhead…
When your board celebrates every time your financials reveal your overhead percentage has gone lower…
When you wear how little you spend as a badge of honor…
All of this makes people erroneously believe:
- Overhead expenses are bad.
- “Lean and mean” is the preferred nonprofit business model.
- Minimal administrative and fundraising costs mean a more effective nonprofit.
- Everyone should adhere to the same average (arbitrary) expense ratio.
- Investing in nonprofit staff development is unnecessary.
- Innovation and risk-taking are nonprofit “no-no’s.”
- it’s possible to fund non-profit work without funding overhead and administrative expenses.
The Overhead Myth is neither true nor logical
“Anyone who thinks of fundraising and administration costs for charities as a waste needs to take a moment to rethink.
Imagine a charity helping feed hungry children in an East Africa famine.
They have an overhead of 10% and fundraising costs of 30%. (This is about right for a stable, established charity that is not on a new growth spurt.)
They might ask you to donate £100. You might ask, How much goes to help starving people?
The answer is 100% helps the starving people.
Why not 60%? What about the 40% fundraising and administration?
Without that 40%, no help would be going to the starving. The charity couldn’t have existed, couldn’t have asked you for the money, couldn’t have people on the ground, would have no programs to do anything at all.”
— Sean Triner, Moceanic
In fact, it’s downright non-sensical
“In the private sector, we see that companies with high-quality training and development programs generate 26 percent more revenue per employee and realize 40 percent less voluntary turnover than their peers. What if we translated this to the nonprofit sector? If we invested in the training and developing staff who deliver these critical programs, would we see 26 percent or more impact per staff member? Would nonprofits achieve greater success because they could focus their people, time, and money on mission-driven activities rather than covering the cost of turnover?”
— Julie Brandt, in Stanford Social Innovation Review
If, in the end, you create more value by having slightly higher overhead, then why not?
Plus there’s the fact that a start-up or younger organization will have a higher overhead than a large, well-established one. It takes the same amount of time to write an appeal letter that will be mailed to 200 people as it does to write one that will be mailed to 30,000 people.
So, there’s really no one simple answer to the overhead problem.
It’s like the Goldilocks story. You don’t want to spend too much or too little.
You need to spend the “just right” amount to get the job done well.
What is that amount? Hard to say. But businesses are willing to accept a much higher rate of investment to attain their ideal profit. In fact, very few businesses work on a ration better than two to one.
When I worked in the trenches, I often calculated an ROI of greater than 1000% for our fundraising expenses. You’d think folks would be doing cartwheels! But, no. Every year the board would ask us to see if we could shave a percentage point off of our costs.
Hold your Nonprofit to a High Standard, not a Double Standard
The myth of nonprofit overhead needs debunking. Now.
If you’re a nonprofit leader, do what you can to lead the charge to focus on the right things.
When donors ask you what you spend on overhead, tell them the truth. Explain that fundraising is not so much a “cost” as an “investment.” And explain the return you get on that investment in terms of mission outcomes.
Stop bragging about how little you spend. Start bragging about how much you achieve.
Nonprofits still are held to a different standard than for-profit businesses—and often the folks who work in the social benefit sector are among those holding themselves to this “higher” standard.
- Founders go for years without taking any salary.
- Executive directors don’t ask for a raise for fear of it appearing unseemly, given their line of work.
- Staff brag about being “underpaid and overworked,” as if it’s a badge of honor.
- Board members find no need to hire essential staff, suggesting they can run the financial/fundraising/marketing operations as a volunteer (even though they already have full-time, day jobs).
- Donors threaten to stop giving when they find out the organization has more than five staff members making more than six-figure salaries.
Donors need to focus on evaluating charities based on leadership, transparency, governance, and results.
Cutting corners just to “look good” to your donors is not going to get the job done.
It’s like cutting your medications in half because you can’t afford them. One aspirin won’t take away your head-ache if you need two.
I recently listened to a webinar on this subject offered by Kiersten Hill of Firespring. She made an analogy to the Wendy’s Hamburger chain:
“Asking us to spend nothing on overhead is like ordering a burger but saying you’ll only pay for the meat and bun. No building costs, staff costs, cash register, drive-through… Completely unrealistic! No business can provide goods and services without including the cost of doing business.”
The overhead myth is at the heart of the problem. All these misplaced, harmul notions need to be retired:
- Salaries shouldn’t be too high.
- Investments in staff benefits are frivolous.
- Marketing and fundraising expenses should be kept at a bare minimum.
- People who work for charities should wear proverbial hair shirts; some suffering should be involved.
- No one should complain about being overworked because, after all, nonprofit work isn’t really “work”—it’s a joy and privilege.
Does anyone tell sports celebrities or rock stars they shouldn’t get paid because they’re having too much fun?
Our generation does not want its epitaph to read: “We kept charity overhead low.”
— Dan Pallotta
The overhead myth is the “pig,” and putting lipstick on it won’t change that.
What do you think? How do you answer donors when they ask how much you spend on overhead? On fundraising? What would you like your organization’s epitaph to be?
Want to develop the necessary mindset, and supporting infrastructure, to show donor-investors what’s in it for them to affiliate with you?
I encourage you to take some time to evaluate the value you offer, and why is it better than what anyone else is offering. That’s why I created the 7 Clairification Keys. Use this guide to unlock your nonprofit’s fundraising potential through a series of “clairifying” worksheets and exercises. (1) Values. (2) Stories. (3) Brand. (4) Social Channels. (5) Support Constituencies. (6) Engagement Objectives. (7) Resources and Systems.
Like all Clairification products, this comes with a no-questions-asked, 30-day, 100% refund guarantee. I hope you’ll dig in, refresh your thinking, and refresh your plans.
Spend some time to bring your work to new life!
Photo by salvatore ventura on Unsplash
This article is an update of one that appeared originally on Clairification 11-3-2013.