The Overhead Myth
Jun 19, 2013
Here at First Nations Development Institute, we have always believed that a productive and ethical nonprofit must have adequate management and administrative support personnel in order to effectively conduct its mission-driven work, and must be able to sustain itself through its marketing and fundraising efforts. This hasn’t always been easy given the persistent focus on “overhead” expenses, but it appears the tide is turning.
In a historic move this week, the leaders of the country’s three leading sources of information on nonprofits – GuideStar, Charity Navigator, and BBB Wise Giving Alliance– penned an open letter to the donors of America denouncing the “overhead ratio” as a valid indicator of nonprofit performance.
The letter, signed by all three organizations’ CEOs, marks the beginning of a campaign to correct the common misconception that the percentage of a charity’s expenses that go to administrative and fundraising costs — commonly referred to as “overhead” — is, on its own, an appropriate metric to evaluate when assessing a charity’s worthiness and efficiency. The nonprofit sector, which all three organizations provide information to and about, has too often erroneously focused on overhead over the past few decades, which has starved nonprofits from investing in themselves as enterprises and created what the Stanford Social Innovation Review calls, “The Nonprofit Starvation Cycle.”
The organizations are asking for your help in eradicating the “Overhead Myth” once and for all. “In doing so, we will help to ensure that nonprofits have the resources to invest in their own sustainability and success!” they noted.
Here is their 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.
Art Taylor Jacob Harold Ken Berger
President & CEO, President & CEO, President & CEO,
BBB Wise Giving Alliance GuideStar Charity Navigator
Learn more at this link.