Commentary: The 'third rail' of nonprofits: overhead

Veronica Dagher, The Wall Street Journal, 11/28/11

Overhead is a touchy subject for many nonprofits. Donors who want most or all of their contributions to support an organization's cause may be overly critical of administrative costs and other overhead. Nonprofits, in turn, often feel pressured to keep overhead down and so may misrepresent those costs, reinforcing donors' unrealistic expectations. Tom Tierney, chairman and co-founder of Bridgespan Group, a nonprofit consultant to nonprofits, has written a paper, "The Donor-Grantee Trap," with Richard Steele. Mr. Tierney spoke about how a "starvation cycle" is dangerous to charities and the people they serve:

"Nonprofits should be clear about their definition of success, articulate their strategy for achieving success and be up front about what that costs. That includes understanding the organization's true overhead costs and making a case for funding good overhead. If an organization needs a new IT system to properly track program results, then it needs to be clear about that when making the case to donors. [Also,] organizations need to be willing to invest in overhead. As much as an organization might want to give every last dollar to the beneficiaries it's serving, investing in a new IT system may make it more effective, with greater impact in the long run. [Last,] nonprofits need to engage their board so the board champions the organization getting the right resources [and] organizations need to educate their donors. Be honest with donors about what it takes to get the job done, why the expenditure is required, and be transparent in where the dollars are going. Donors need to let go of an arbitrary overhead figure of 10% to 15%, for example, and rather focus on what costs are necessary to get the job done."

Commentary: Asking the wrong questions about nonprofit overhead

Nell Edgington, Social Velocity blog, 12/1/11

It's that time of year when donors make key decisions about their end of year giving. But a recent post on the Social Earth blog advising donors about questions they should ask nonprofits perpetuates thinking that actually hurts, rather than helps the nonprofit sector. The author, Tarini Chandak, asks "How do you know where your charitable dollars are going? Are they going to the cause you want to support or are they going to administrative and fundraising expenses?" In reinforcing old, and destructive binary thinking about program vs. overhead expenses, Tarini is doing nonprofits and their donors a real disservice.  Tarini lists 4 key questions she thinks every donor should ask of the nonprofits they consider donating to:

1. How much goes to the cause? How high are their expenses?
2. How efficient is their fundraising? What is their cost-per-fundraised-dollar ratio?
3. Is the charity run properly? How efficient and effective is their human capital? 
4. Do they even need your money? Will your money just be lying around in their reserve?

I think questions #2 and #3 are excellent, but questions #1 and #4 perpetuate thinking that holds the nonprofit sector back. Let's start with Question #1. As I've written before, the distinction between program and administrative expenses is meaningless at best, and destructive at worst. How can a program run if there is no financial engine (fundraising) to fund it? We must move beyond this distinction and encourage nonprofits to raise (and donors to give) more capacity capital, or the money that nonprofits so desperately need to create effective and efficient organizations. Tarini's Question #4 is equally troublesome because it reinforces the backward notion that nonprofits should not have a reserve fund. As I (and others) have written before, we have to get away from the nonprofit taboo that operating reserves are wrong. Nonprofits cannot plan for the future, have a sustainable financial model, experiment with program changes, take risks, or any of the other things that are absolutely necessary to creating social change, without some operating reserves. If nonprofits are continually forced to go month to month without any cushion they will never emerge as strong, sustainable organizations capable of creating lasting change.

Commentary: The philanthropic-consultant industrial complex

Jan Masaoka, Blue Avocado blog, 11/11/11

You've probably heard of the 5% payout requirement for foundations...but most people mistakenly believe this means that foundations must grant out 5% of their assets each year. Actually, foundations must spend 5% of their assets each year...which can include their own salaries, office rents, and so forth.  But perhaps the least examined of all foundation spending is what they spend on consultants, such as consultants to themselves and their initiatives, contract staff, consultants to nonprofits (the $200K strategic planning grant that goes 100% to the consultant, none to you), and so forth. In fact, in the blink of 15 years, we've gone from a time when there was hardly any nonprofit infrastructure support to one where it feels as if the infrastructure -- we coined the term Philanthropic-Consultant Industrial Complex -- outweighs the nonprofits doing the actual work. Even more than the money, the philanthropic-consultant infrastructure is changing who's running the show: rather than supporting nonprofits, foundations and consultants are increasing telling nonprofits what nonprofits should be doing. These days when a foundation announces it is starting an initiative for low income seniors, we now assume that much of the money will go to regrantors, researchers and consultants rather than to on-the-ground nonprofits and the seniors themselves. And doesn't it sometimes seem as if the best and the brightest young people in the nonprofit sector want to be foundation program officers, consultants, or donation app makers? To tell the truth, we have enough program officers, enough (so often unsatisfying) consultants (really!), and enough start-up apps. We don't have enough people who aspire to run homeless clinics, to raise money for ethnic theaters... Our sector is in danger of hollowing-out. In fact, innovation comes from the ground up, and that's also where the real work takes place. Let's start by honoring, celebrating, and paying more to the people on the ground above how much we honor and pay the people in the infrastructure.

Commentary: I am overhead and proud of it.

Nonprofit Nate blog, 9/4/10

If you've read any of Dan Pallotta's work you know he'll take a public opportunity to ruffle some feathers and make people think. I had the pleasure of hearing him speak at Art Council of Indianapolis' Start with Art luncheon. Here's my summary of Dan's presentation: Charity salaries are low because we're told they're supposed to be. Marketing is considered overhead and nonprofits are scared to do it because it drives up that number. Amazon.com took 6 years to return revenue. No charity would be allowed to wait 6 years before showing any impact, and a small one at that. Donors want immediate return on their dollar or they're out. The sector knows this and reacts accordingly. Organizations start working their books to show as little overhead as possible. In fact, a study by the Center on Philanthropy at Indiana University surveyed 125,000 nonprofits (reporting at least $50k in annual revenue) - one the largest samplings (around 10% of organizations) found that 37% reported NO OVERHEAD. The media, attorneys general, many donors and organizations have perpetuated this idea that overhead is bad, should be small, hidden, unseen, tucked away, etc. According to Dan, what can we do?

1. Stop using the word overhead - call [it] "great people doing great things for the cause"

2. Stop asking questions about overhead

3. Build a magnificent assessment apparatus that focuses on the impact the organization is making, not solely what it's spending to make it - Dan's leading the charge towards a National Charity Defense Council that takes out ads showing people with a shirt that says "I am overhead" and helping spread the message to the public.

I like that he's challenging the norm and I'm going to start by having this conversation with my executive team, board and donors that ask me questions about overhead. I'm not sure that donors will buy it and I'm not sure nonprofits are willing to have that conversation and risk losing donors. The media, AGs, watchdog groups and others have taken a long time to develop this stance and it won't unravel overnight. However, I'm going to start anyways.