So, you’re talking to a donor and the first thing they want to know is: How much of this donation goes to the cause?
This has become the only standard by which a nonprofit is judged deserving of funds. And this is truly sad.
In 2004, the research firm of Wing, Pollak and Rooney undertook to create a report called “The Nonprofit Overhead Cost Project.” They asked, “Why do funders who want grantee organizations to be successful fail to fund their administrative or infrastructure costs at levels that would permit them to be effective?”
They found:
“Nonprofits in the arts, community development, and human services describe how their development efforts were hindered by inappropriate donor database software. One site described the unproductive downtime and frequent maintenance associated with free but mismatched, outdated computers. In agencies where key positions such as development director either did not exist or were filled with inexperienced staff, the CEO had to fill that role, thereby neglecting parts of the leadership role. Sites without experienced finance staff had only rudimentary financial reporting and had limited ability to involve program managers in financial management, perform more sophisticated analysis or identify financial issues for board and senior management. Backup for key roles was nonexistent, leaving basic functions like payroll, benefits, and network support depend on a single person in even the largest nonprofits with which we spoke.”
“Based on our research, nonprofits are clearly struggling with inadequate administrative and fundraising infrastructure and it is having an impact on their organizational effectiveness. Nonprofits clearly implicate the fundraising preferences of their major funders as part of the causal mix…If our model is close to correct, then the nonprofit sector is facing a very troubling situation, in which the level of infrastructure spending preferred by major funders is a key driver of nonprofit effectiveness, but the particular level preferred is not set with reference to a level of desired effectiveness, but through fundraising dynamic where nonprofits in effect compete on a price for funding by having low infrastructure costs, and exacerbate the problem by reporting even less than the minimal amounts they actually spend.” -Pg 167, Uncharitable, Dan Pallotta
So you’re applying for a grant. And they want to see your organizational budget, to see how much of your donations are going for “overhead.” Well, if there wasn’t an office, we wouldn’t have program staff to meet clients there, so offices are part of overhead. If we didn’t have a administrative assistant/bookkeeper, people wouldn’t get paid, so that person is part of overhead too. Electricity, computers, phones, someone to manage it all, all of the things that make our charity work are overhead. Everything is overhead!
And if we’re supposed to get it all donated, that doesn’t mean it doesn’t cost anything. It just means we’re passing on the cost to someone else. Overhead still exists. All of this means that fancy accounting and hair splitting will be employed to make sure that your nonprofits LOOKS like it’s meeting some arbitrary efficiency standard.
And on top of that, the foundation only wants to fund “new projects, not overhead.” Nevermind that what we’re doing is working. We need to package it in a way that looks new. We need to hide our costs and try to get our needs met without a grant. But since grantors also want instant results for their grant, we’ve got to make sure our results look good too. This system sets us up to fail. What if it takes five years to see a result from programs, because in the first four years we’re doing research on what has worked, systems creation, and advertising our program to those who can use it?
Common Misconception: Charities should maintain a low overhead percentage. This is the only way to know that any good is being done. Low overhead is moral. High overhead is immoral. -Dan Pallotta
As long as the only thing we look at is what’s on the 990 form, we can’t really start to help charities find solutions to the world’s problems.
What if we developed a series of metrics for nonprofits ability to help the world, instead of looking at overhead?
What if we Changed the definition of the cause, and then we changed the definition of how much money went to the cause?
Why should only food for the hungry be the cause? Why can’t your annual report, or a newspaper ad that helps you get more donors be the cause too?
“The more liberal an organization is in defining the cause, the higher percentage of your dollar it will be able to tell you goes to the cause. It is unfair to compare financial results between different fundraising efforts without knowing the differences in their accounting.” -Dan Pallotta
In conclusion, a charity’s overhead percentage doesn’t give you any data about the good it’s doing in the world. If charities were allowed to focus more on solving the world’s problems than on keeping overhead low, more problems would get solved.
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Excellent post, point well taken. I hope funders will become less myopic… and that various non-profit CEOs will not expect enormous salaries to compete with the Wall Street crowd. That leaves a sour taste in the mouth of many would-be donors.
Keep up the good work.
Brian
Hi Brian!
I am glad you liked the post. I think we need to look away from just salaries though, and more towards the metrics of what nonprofits are actually doing. That was the point of the post.
Believe me, I’ve been in nonprofits where I was upset about what the top executive was making. Because everyone else was making peanuts! My idea for how to solve this is make sure that the leadership is paid no more than 4x what the lowest paid staff person is paid. MAKE charities invest in their staff, and if they want to be paid more, let EVERYONE be paid more. If we allow charities to compensate people with a real living wage, instead of making a culture of destitution, we’ll all have better lives.
Mazarine
Thank you for this post! The idea that overhead & infrastructure, etc. are not worth funding irks me so much. Your title nails it exactly – it ALL goes to the cause!
Even the idea that nonprofit CEOs can’t get paid what for-profit CEOs do – that bothers me too. Because why not? Why do we allow people who work for companies that do extensive damage – to others, to the planet – to be well paid, but somehow it’s morally wrong for people doing good to be well paid? I just don’t get it, and I refuse to contribute to that mindset.
Although I do agree with you Mazarine – all nonprofit employees should be better paid, not just CEOs. And overhead shouldn’t be a consideration when it comes to funding – outcomes should. But how do we move in that direction, when there’s so much emphasis on as low administrative costs as possible from groups like Charity Navigator and big NPOs?
Dear Cherita,
Thank you so much for commenting on this post. i LOVE your nonprofit fundraising blog and your tumblr too!
Really appreciate your opinion here.
Where we need to move now, to get this ball rolling, is to START CONVERSATIONS with funders about this.
Comment on the Philanthropy journal, the Chronicle of Philanthropy, talk to foundations on Twitter, or actually call some people who say they only want to fund projects, and ask them, “Do you realize what you’re doing?”
And then start to realign your nonprofit’s accounting principles so that 100% of what people give goes to the cause. Because it’s true anyway.
We need to start getting more research and metrics firms to look at our results, but our results over a 5-10 year period, not the 1 year period after we receive a grant.
Sincerely,
Mazarine