Nonprofit Overhead Myth: Are You Colluding in its Persistence?

If you work in nonprofit, you may agree with Dan Pallotta, who in his famous TED Talk said:

Our generation does not want its epitaph to read: "We kept charity overhead low."

That’s because you understand that measuring overhead does not neatly correlate with a nonprofit’s impact or effectiveness. A charity that spends 20 percent on overhead and knocks its mission out of the ballpark is not less worthy of support than one that spends 10 percent on overhead but helps relatively few people. It’s one way of assessing things, but not necessarily the most meaningful.

Why do donors still look at 'overhead' as a measure of nonprofit effectiveness?

Three years ago GuideStar and BBB Wise Giving Alliance joined in, with Charity Navigator, in writing "Letter to the Donors of America," stating that "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." They also noted:

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.

At this time, Charity Navigator changed the way it awards stars to focus more on results than costs.

Then why do so many donors persist in saying they want their contribution to go directly to help people, and not to "overhead" costs?

A recent Fast Company article, "No One Wants to Donate to Pay for Overhead—So We Need to Call It Something Sexier," caused me to ponder this question anew. They suggested the problem may lie with the words we use to describe these pesky costs. Here’s what they did:

We asked some branding experts to tackle a new name for "indirect costs" to help stop the chronic underfunding of nonprofits by wealthy donors who put restrictions on their gifts.

Hmm, this assumes that giving overhead a new name will, in fact, help stop chronic underfunding of nonprofits. The type of underfunding that leads to a chronic "starvation cycle."

Hmm, Shakespeare famously wrote that "a rose by any other name would smell as sweet." Will overhead by another name smell less sour?

Hmm, the branding experts couldn’t really answer the question. They came up with a number of alternatives. (The top eight were: circle funds, encompass funds, vessel funds, core funds, operations costs, operational costs, direct operations costs and general operational costs) In my mind, none of them really will move the needle.

Words do matter, but that’s not where this problem begins or ends.

The overhead myth is at the heart of the problem. The notions are that salaries shouldn’t be too high; folks who work for charities should wear hair shirts; and 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?

The overhead myth is the "pig," and putting lipstick on it won’t change that.

A big part of the problem is the nonprofit sector’s collusion in allowing the overhead myth to persist.

I led fundraising efforts for nonprofits for 30 years before opening my own business. During that time, I became accustomed to celebrating how "lean and mean" we were, boasting about our low overhead and bragging about our four-star rating on Charity Navigator (largely, at the time, based on low overhead).

Everyone did that—if they could. But bragging about low overhead is a thoughtless practice. If you do stop to question it at all, it makes little sense because:

• Nonprofits just starting out necessarily will have higher overhead than those that have been established for a long time.
• Smaller nonprofits will have higher overhead than larger ones, who can benefit from economies of scale.
• There’s no uniform practice of measuring overhead, so often we’re comparing apples to avocados.
• Spending 50 cents to buy a bag of fresh, nutritious produce (that will last a full week) versus 20 cents to buy a bag of old and rotten vegetables, might just be a really good idea.
• People don’t get therapy without therapists, healing without social work and medical professionals, research breakthroughs without scientists, and on and on.

Work—whether nonprofit or for-profit—doesn’t get done by itself without workers; without buildings for them to work in; without computers for them to work with; without supplies for them to build with; and without cars, boats, planes and camel caravans for them to get to their places of work.

But here’s the rub. While few would likely say they believe the people (staff) helping the people (beneficiaries) are somehow not necessary, or that the work could get done without them, they might be likely to say that these "helpers" should be low paid. Or, even that they should, ideally, be unpaid volunteers.

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.

Promotion of the nonprofit starvation cycle is insidious.

Nonprofits, and the professionals who work with them, have bought into the myth of low overhead for so long, many don’t even recognize how this holds them, and the entire sector, back.

This includes the following four examples:

1. A food bank included this as the P.S. to its fundraising appeal.

If you've spent any time at all in fundraising, you should know that the P.S. is the most important part of your appeal. Ninety percent of people read it first; it should contain your most important point (I usually use it to restate the ask, and what giving will accomplish).

This P.S. reinforces the myth that the less spent on overhead, the better. Is this the most important part of your mission? While exorbitant, unnecessary spending is wasteful, the same cannot be said for extra spending that helps more people at a somewhat more expensive ratio. Would you not spend 15 cents on the dollar to cure cancer if 10 cents on the dollar couldn’t yield that result? Of course you would!

2. The consulting organization included this in its otherwise spot-on infographic about what to include in email thank-yous.

The first paragraph of this piece of advice suggests that so-called "indirect" expenses don’t contribute, equally, to the support of your mission. This reinforces the idea that other nonprofits (the bad ones) are bloated.

3. The much-admired nonprofit proudly claimed that 100 percent of donations made will go directly to its work (because it gets other donors to cover overhead).

Though Charity:Water presents this model in just about the best way one could possibly imagine doing so (and I admire its fundraising/marketing skills greatly), it still creates a pronounced divide between direct and indirect outlays. These costs are really a continuum; one can’t exist without the other. So why bow to public pressure to separate them and fuel the perception that one is better than another? Why hold other smaller charities, who don’t have private backing from major donors and sponsors, to this unrealistic standard?

4. The highly esteemed nonprofit consultant suggested that 0 percent to programs is an offer worth trying.

Jeff Brooks is brilliant and knows better than anyone how to create a compelling fundraising offer. (As a general rule, I adhere closely to his advice.) And he cited studies that indicate that following the Charity: Water model will work. However, at what ultimate cost to the sector and to charities who don’t have access to donors who’d be willing and able to contribute solely to underwrite overhead? It's time for:

• Nonprofit consultants and board leaders to stop condoning this irresponsible behavior, which works against nonprofit sustainability.
• Nonprofits to stop turning against themselves and each other.
• Nonprofits to stop seeing themselves as bloated when they’re really not.
• Nonprofits to stop cutting corners just to "look good" to donors.

This behavior is not going to get the job done. It’s a bit like anorexic behavior. It’s unhealthy and creates a negative role model.

It’s a bit like cutting your medications in half because you can’t afford them. One aspirin won’t take away your headache if you need two.

It’s going to take a concerted effort on the part of nonprofits to overcome years and years of pounding the overhead myth into people’s heads.

For nonprofits to be healthy they must begin by showing donors what healthy means. Gaining donors’ confidence begins with helping people understand how complex and multi-layered the work of the public benefit sector really is.

As long as nonprofits, like Charity: Water, put forth the notion that they’re a better option because philanthropic gifts to them go 100 percent to "projects" versus "overhead," there will be too many who see the choice as either/or, rather than both/and.

• Today, 75 percent of all U.S. foundation grant-making is restricted, according to a National Committee for Responsive Philanthropy report
• Today 62 percent of Americans earning at least $75,000 believe nonprofits spend too much on salaries, administration and fundraising, according to a Chronicle of Philanthropy poll.
• Today 41 percent of Americans think nonprofit leaders are paid too much, according to the same poll.

It will take a village to overcome the negative public image of charities’ financial efficiency and programmatic effectiveness. This means we need:

• More transparency.
• Better communication.
• Less sloganeering based on outdated notions of what type of overhead is good/bad.
• Fewer people within the sector buying into black/white concepts of indirect versus direct costs.

Giving 100 percent to work in the field is not really possible.

Sometimes giving even 80 percent to so-called "direct costs" is not possible (e.g., when nonprofits are young, small or in growth phases). So adhering to a strict rule that overhead greater than 22 percent is a red flag (the percentage most Americans believe is reasonable) is dangerous and irresponsible.

Nonprofit work is multidimensional. There are all sorts of different costs. It even costs money to raise money! The fact that these different costs exist does not mean they aren’t desirable. They’re essential.

I fear the more we play this obfuscation game, the more folks will continue to believe that having overhead is a "bad" thing. If some charities tell donors 0 percent of their gifts go toward overhead (because the overhead got underwritten), then everyone else feels they have to do the same to be competitive.

But it's really just a trick. A bit of smoke and mirrors. And if that charity (yes, that includes Charity: Water) is asked what percentage of their budget goes toward overhead, they still have to answer truthfully. And the answer won't be 0 percent.

If my money doesn't go toward overhead only because somebody else's money went 100 percent to overhead, it doesn't change the fact that overhead's existence.

Please, folks. Stop perpetuating the myth that overhead is somehow different, or not as necessary as other expenses. You need to spend enough to get the job done. That’s what will get you to the epitaph Pallotta suggested, which is preferable to the one with which I began this article: "We want it to read that we changed the world."

Perpetuating the overhead myth doesn’t help change the world. It’s harmful to the sector as a whole.

Spending less on fundraising doesn’t translate into spending more on programs.

If it were a zero sum game. that would be true. But it’s not. In an interesting article for the Harvard Business Review, Dan Pallotta made this point:

Imagine a $10 million pie, with $8 million going to programs and with the 20 percent fundraising slice taking $2 million away from programs. The last thing we want to do is make that a $3 million slice, leaving only $7 million for programs. But that’s not how it works. If done correctly, the extra million enlarges the pie—substantially. A $10 million pie becomes a $15 million pie, and the $7 million available for programs grows to $12 million.

Let’s all stop playing these games, working together with the charity watchdogs toward a shift in perception—one where overhead is appreciated for the "bang for the buck" it truly offers.

What do you think? Please leave your comments.