The Overhead Myth: Moving Toward the Solution

In 2013, Guidestar, BBB Wise Giving and Charity Navigator, three of the leading sources for information on nonprofit organizations, joined forces in a campaign to promote the concept that the “Overhead Myth” was harmful to the operations and sustainability of a charity’s success. In a series of actions over the past few years, this group set out to educate nonprofits, donors, and grantors on this misconception. They sent two letters sharing how the nonprofit community can challenge the stigma that overhead is the single most important indicator of a charity’s worthiness to receive donations.

They began by sending an open letter to the donors of America, asking them to focus less on percentage of expenses incurred by administrative and fundraising costs, and more on performance-based factors, such as governance, transparency, leadership and program results. In 2014, the organizations followed up with a second open letter-- this time addressing the nonprofits of America.

In the second letter, nonprofits were asked to do the following things to help move toward an Overhead Solution:

1. Demonstrate ethical practice and share performance data
2. Manage towards results and understand your true costs
3. Help educate funders (individuals, foundations, corporations and government) on the real cost of results

While nonprofits are discussing this and progress has been made – as evidenced by the countless blogs and articles one can find regarding the “Overhead Myth” – there is more work to be done and more nonprofits need to embrace the campaign to move towards an Overhead Solution.

In the absence of alternative information, donors and grantors will continue to rely on the easily obtainable (Form 990) financial metrics showing the ratio of overhead expenditures compared to program expenditures. While this information has some value, it’s important to recognize that the allocations between overhead and program costs can be subjective, imprecise and inconsistent between organizations. In order to get an accurate picture of an organization’s accomplishments, donors and grantors need more meaningful information – and that requires a deliberate effort to organize and provide the requested information.

Here’s how you can do just that:

• Let your funders know that you have ethical practices in place with regard to governance – and be specific about those policies. Showcase an accountable and transparent organization that is worthy of their funding.

• Share statistics on your impact, such as the number of individuals served, performances produced, events held, success rates, goals met, and other important metrics. Consider developing performance dashboards, with bar charts, pie charts and line graphs to better illustrate this information.

• Take the time to analyze your real overhead costs, and be honest about how you allocate those costs between program and administrative/fundraising activities. Understand when and why you need to spend more on overhead to grow or fulfill your mission, and present those reasons.

• Share your real overhead costs with funders. Let them know what it costs to administer the programs they fund. Be willing to walk away from grants or contracts with overly burdensome reporting requirements and minimal allowances for overhead spending, but make sure you explain the reasons for your decision to your funder. If you choose to subsidize such grants or contracts with other contributions or funding sources, don’t cover it up. Disclose this with your funders.

Besides direct communication with your funders, the other way to disseminate this information is through your organization’s website and nonprofit rating and watchdog organizations. Guidestar has begun collecting more detailed and reliable data to facilitate informed decision-making by donors and the public. Their new goal is to become the premier public informational site for nonprofits. In addition to collecting more specific financial information, diversity data, programming information, opinions of beneficiaries, donors, staff and volunteers, they are asking nonprofits to answer these five questions:

1. What is your organization aiming to accomplish?
2. What are your strategies for making this happen?
3. What are you organization’s capabilities for doing this?
4. How will your organization know if you are making progress?
5. What have and haven’t you accomplished so far?

These are clearly results-oriented questions, and require serious thought and openness on the part of nonprofit organizations. Those that provide all of the requested information will be rewarded for their transparency with a gold-level participation rating.

If the nonprofit community provides meaningful alternative information with which to measure its’ effectiveness, overhead will become less relevant. This approach requires the collaboration and participation of the nonprofit community as a whole. If you’re not already talking about overhead and doing your part to refocus your donors’ and grantors’ attention on better ways of measuring your performance and worthiness, it’s time for you to start.

For more information, tools, and resources, go to www.overheadmyth.com.

You can also reach out to Audrey Sherrick directly at ASherrick@friedmanllp.com.