by Janine Vanderburg, President/CEO, JVA Consulting
In June, the heads of three large organizations that provide information and ratings of nonprofit organizations issued a joint letter and launched a website entitled “The Overhead Myth” calling on donors to reject the percentage of overhead costs as a “valid indicator of nonprofit performance.”
As a company that has worked in the nonprofit sector for over 25 years, with organizations of all budget sizes and lifecycles, JVA Consulting applauds the discussion that the Overhead Myth is generating. We know from our work that the ratio of overhead costs to overall organization costs (sometimes capped by funders at 10% or 15%) often has little relationship to the impact of the organization’s work—its outcomes.
Our clients also experience a climate in which many funders are so focused on funding programs instead of providing general operating support that the infrastructure needed to support effective programs (e.g., technology, staff development, program evaluation) simply doesn’t exist, a circumstance the Stanford Social Innovation Review covered in its article The Nonprofit Starvation Cycle.
Does that mean we believe that donors shouldn’t look at overhead? Not at all.
All donors have the right to demand transparency and accountability in use of their dollars, with the most important questions being in our view: What impact do those dollars have? And compared to what other investments?
The sector absolutely needs to have a discussion about what it takes to achieve impact, and about the huge discrepancies that currently exist between highly paid members in the sector (the 1%) and the 99%. And we applaud Guidestar, Charity Navigator and the BBB Wise Giving Alliance for starting the conversation by focusing on one element—the overhead ratio.
Please weigh in by leaving a comment below.
Overhead ratio is but one of several important keys to understanding/accessing a given nonprofit. When judging a given organization based on a single 990 in terms of program expenses compared to overhead the snapshot can be misleading. Viewing several years worth of an organization’s overhead expenses is important in terms of looking at patterns. Digging deeper into how, what, when, and who measures specific outcomes is another key element of “evaluating” an organization.
Even after doing as much as you can to determine both organizational effectiveness and efficiences if the research leaves some unanswered questions call or visit the nonprofit and share your questions/concerns directly with them.
Another major responsibility regarding this subject is our own “head burying” when it comes to developing standards of ethics that organizations not only subscribe to, but monitor as part of their internal process of continuing to build credibility/trust on the part of the broader community. Based on the fact that the federal government, with the consent of the majority of voters, have granted the 501 c 3 portion of our Sector some significant tax breaks for the “good” that we do within our communities, it puts the onus on all of us to educate others about our need for overhead.
I tend to agree that effectiveness and effficiencies need transparency.
I encourage anyone interested in the discussion about “overhead myth” to watch this thought provoking Ted Talk on the matter: http://www.ted.com/talks/dan_pallotta_the_way_we_think_about_charity_is_dead_wrong.html
[…] look at 21% of expenses towards administrative and fundraising costs and cry foul. Here, we have another debate that has been growing in the nonprofit sector: What is too much nonprofit overhead? Should overhead be considered a performance metric (many […]