Finally – An Effort to End the Overhead Myth Once and For All?

The topic of nonprofit overhead – the amount a charity spends on administrative expenses – is almost always a hot topic, but this summer it’s even hotter because three of the nation’s biggest nonprofit information providers: GuideStar, Charity Navigator and the BBB Wise Giving Alliance, have issued an open letter to donors calling for an end to the obsession with using a nonprofit’s overhead costs as a sole measurement of an organization’s performance. Several years ago, the Stanford Social Innovation Review called this “The Nonprofit Starvation Cycle” and the topic has been the focus of more than one KNN blog, including one just several weeks ago following a survey we conducted of KY Gives Day participating charities. Like many, I was relieved to see these leading organizations recognize what a dangerous myth this overhead myth has become – actually discouraging many organizations from investing in their own success and sustainability.

In my regular discussions with KNN members, in my consulting work with organizations across Kentucky and in the courses I’ve taught at the University of Kentucky, the issue of what is and is not an appropriate amount of administrative overhead is a frequent topic. Typically, I find that students as well as new board members and some donors are looking for a very clear and set percentage that defines acceptable overhead. Since these individuals are often new to the nonprofit world, this search for an arbitrary yardstick could be expected. My assumption was that most nonprofit executives understand the real costs of doing business and were simply struggling to effectively communicate with donors and some board members that investments in overhead were actually a good thing. Unfortunately, I learned after a recent survey of charities participating in KY Gives Day that isn’t entirely accurate.
While only a handful of nonprofit executives responded negatively in the survey about the KY Gives Day 5.9% credit card and event management processing fee, it still left me wondering: if we as nonprofit leaders cannot or will not understand the investment of time, money, resources and strategy required to generate needed funds for our missions, will we ever be able to help the public understand and really support the work of the nonprofit community? Given that Charity Navigator reports the average charity spends $1.33 to raise $1 with a special event and acquiring new donors via direct mail typically costs over $1 for every dollar raised, we knew that the KY Gives Day investment was incredibly affordable. I was frustrated because if we as nonprofit leaders (staff, board members, etc.) don’t understand that money doesn’t just fall from the sky, programs don’t just run themselves and lives aren’t just “changed” – can donors or prospective donors truly understand and advocate for those we serve? Nonprofits have to pay staff to do the work – create and implement programs, serve people, pay the bills, clean the place up, coordinate efforts to raise money, handle communications, etc. These tasks all require resources. Even if you are trying to pull it off with only volunteer labor, some money is essential. And furthermore, I challenge each of us to consider: if an organization is continuing to scrape by on a shoestring, how effective is it – really?

Of course, I realize that not all nonprofit leaders feel this way – most nonprofit leaders get it, they understand that running a nonprofit is running a business. My concern is those who don’t get it. Their lack of understanding that it costs money to run a nonprofit organization (especially an effective nonprofit organization) hurts all nonprofits and more importantly, it hurts the communities and individuals we serve. Bottom line: until we stop undervaluing ourselves, we will continue to be undervalued. Until we stop pretending that the real work of our mission can be done on a shoestring, it will be expected that we pay our staff less than a fair wage, operate in facilities that are crumbling around us, belabor the type of paper we use for our brochure because it might look “too nice” and more. The nonprofit sector has important work to do and it requires resources to do it. We cannot let a few bad apples who have abused their positions and the investments of their donors push the rest of us to the other end of the spectrum – trying to operate with little to no overhead. We also can’t let the belief of some of our nonprofit peers – that charity must also mean poverty – keep our nonprofit sector from doing its best work. For the sake of our communities and our ability to continue to improve the quality of life in this Commonwealth, we’ve got to help bring them along.

Let me be perfectly clear, I am not saying that transparency, fiscal oversight, being good stewards of donor dollars is not important – of course it is. But I am saying that it doesn’t mean that being transparent and fiscally responsible means we should be starving our organizations to try to meet some arbitrary yardstick. There are many ways to evaluate the effectiveness of a nonprofit and no one way will give you a complete picture. I wish it were that simple, but it’s just not.

The open letter about the “overhead myth” from GuideStar, Charity Navigator and the Better Business Bureau has produced a lot of buzz and that’s good news because it’s a discussion that needed their input. The Nonprofit Quarterly said it well when they said that for this effort “to be effective, it is important that people share it in every way they can.” So I hope you will do just that – go to overheadmyth.com, sign on and share the letter with your board members, volunteers and donors. More importantly, I encourage you to read and digest this letter yourself. If it’s a shift in thinking for you, please consider what an investment in overhead might do for your organization. And if you were already on board with this issue – please make a commitment to reach out to a colleague who may not be and help bring them along. The letter states that “the people and communities served by charities don’t need low overhead, they need high performance.” The nonprofit sector has got to believe this first – only when we as nonprofit leaders understand and embrace this can our donors and volunteers do the same.

Download KNN, Inc.’s KYc3 Summer 2013 print newsletter.

DC headshot 2013

Danielle Clore

Executive Director

KY Nonprofit Network

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