In 2013, I joined with colleagues at BBB Wise Giving Alliance and Charity Navigator to write an open letter to the donors of America explaining that “overhead ratios” are a poor way to understand nonprofit performance.
As you know, these ratios—the percent of charity expenses that go to administrative and fundraising costs—tell us nothing about an organization’s performance against its mission.
We believed that the nonprofit sector was hungry to dispel this “Overhead Myth.” The field’s extraordinary reaction to the first letter has thunderously affirmed that belief.
Editor’s note: the following is a cross-post of Jacob Harold’s article in the Huffington Post’s TEDWeekends issue published September 21. You can read the original post here and the entire TEDWeekends series here. We’ve also posted this to the GuideStar Blog here.
Allow me to begin with a back-of-the envelope estimate: every year nonprofits have one billion interactions with donors in which they prominently focus on their “overhead ratio” — the proportion of their expenses that goes to administrative and fundraising expenses.
Thus, nonprofits find themselves telling the story of work to house abused children or fight climate change… through an accounting ratio. They are responding to the tragedy of the “Overhead Myth“: the common belief that such a ratio is a proxy for nonprofit performance (instead of a filter for rare cases of fraud.)
But, worse, nonprofits find that they are reinforcing that myth every time they communicate with a potential donor. Unlike Alanis Morissette’s famous song, this actually fits the classic definition of “ironic”: in order to raise money to do good, nonprofits highlight a ratio that constrains their ability to do good.
Indeed, the focus on overhead is more than ironic: it has very practical consequences for nonprofits. As described in a seminal article in the Stanford Social Innovation Review, the overhead myth creates a “starvation cycle” that undermines nonprofits’ capacity to solve our world’s most fundamental problems. Nonprofits find themselves choked by explicit or implicit funding restrictions, and sometimes even starved to death by under-investments in infrastructure.
We will continue our work to educate donors and change this conversation. But we need nonprofits’ help. We understand if they — temporarily! — feel compelled to continue sharing the overhead ratio in their fundraising materials. But if we’re going to move beyond the Overhead Myth, we need to begin to offer donors an alternative. Help donors pay attention to the factors most relevant to nonprofit performance: transparency, governance, leadership, strategy, measurement, and results.
In particular, nonprofits can join the 95,000 organizations that have shared information through the GuideStar Exchange — with 43,000 achieving one of our three levels of participation (Gold, Silver, or Bronze). Gold-level participants answer the five Charting Impact questions to populate the impact tab on their GuideStar nonprofit report. And through their own materials, nonprofits can begin to cite meaningful data about results instead of the overhead ratio. (Donors have other great resources available, too –they can find top nonprofits identified by Philanthropedia, GreatNonprofits, or GiveWell.)
The shift to a results-based approach to philanthropy will take time, but the path ahead is clear. Instead of promulgating the myth that low administrative costs are associated with high performance, let’s focus on helping donors give with both their hearts and their heads.
It’s time to retire the overhead ratio in favor of a multidimensional, impact-oriented framework to achieve what really matters: getting more money to the best performing organizations.
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Click here to read an original op-ed from the TED speaker who inspired this post and watch the TEDTalk below.
There’s the often-quoted parable of the three wise blind men touching an elephant and describing it: one touches the tail and says the elephant is a rope; one touches a tusk and says it’s a pipe; one touches a leg and says it’s a tree trunk.
This parable is usually told to illustrate the importance of perspective: individuals can perceive the same thing in different ways. But there’s another lesson here; one the nonprofit sector needs to embrace. That lesson is this: a full understanding of anything complex requires that we bring many perspectives together.
In the nonprofit sector, we’ve been blind in our sole focus on the overhead ratio. A nonprofit’s overhead ratio is kind of like the left front knee of an elephant: it’s an important part of a nonprofit’s makeup, but it’s not even close to the whole story.
In the nonprofit sector in general – and at GuideStar in particular – we face the challenge of figuring out how to articulate a holistic view of nonprofits. And if we are to truly replace the Overhead Myth, we must offer an alternative which reflects the full richness of individual nonprofits – and the nonprofit community as a whole. And, then, we have to actually collect enough data that donors and volunteers and journalists and nonprofit leaders can actually use.
Luckily, there are many efforts that are helping understand pieces of this broader puzzle: transparency (GuideStar Exchange), impact data collection and story-telling (Charting Impact—now part of the GuideStar Exchange), expert surveys (Philanthropedia), third-party analysis (GiveWell), stakeholder reviews (GreatNonprofits), star ratings (Charity Navigator), accountability standards (BBB Wise Giving Alliance), and many others. Our challenge is to take these pieces and bring them together. Our hope at GuideStar is to grow our GuideStar Exchange program into a common “profile” for the field—so that people can find what they need about a nonprofit in one place and nonprofits only have to provide their information once—and to supplement that with many types of analysis from these colleague organizations.
Over the next few months, we’ll be working to offer a clear framework for how the nonprofit sector can bring together these many parts of the elephant into a much greater whole.
Jacob Harold is the President and CEO of GuideStar. Harold came to GuideStar from the Hewlett Foundation, where he led grantmaking for the Philanthropy Program. Between 2006 and 2012, he oversaw $30 million in grants that, together, aimed to build a 21st-century infrastructure for smart giving. Before that, he worked as a consultant to nonprofits and foundations at the Bridgespan Group and as a climate change strategist for the David and Lucile Packard Foundation based at The Energy and Resources Insitute in New Delhi, India. At the beginning of his career he worked as a climate change campaigner for Rainforest Action Network and Greenpeace USA and as organizing director at Citizen Works.
Harold has written extensively on climate change and philanthropic strategy. His essays have been used as course materials at Stanford, Duke, Wharton, Harvard, and Oxford. He earned an AB summa cum laude from Duke University and an MBA from the Stanford Graduate School of Business with a certificate in public management. Harold has further training from Green Corps in grassroots organizing, Bain in business strategy, the Chinese Academy of Sciences in complex systems science, and the School for International Training in Tibetan studies. Harold was born and raised in Winston-Salem, North Carolina, where his parents ran small community-based nonprofit organizations. The above can also be found on the GuideStar Blog: http://trust.guidestar.org/2013/07/22/how-the-overhead-ratio-is-like-the-left-front-knee-of-an-elephant/.
– By Jacob Harold, president and CEO of GuideStar –
My nonprofit friends, it’s time we changed the conversation about “the overhead ratio”: the percentage of your organization’s expenses that go to administrative and fundraising costs.
For too long, we’ve let a few bad apples—the rare cases of outright fundraising fraud—confuse donors about what matters when judging a nonprofit.
This confusion is actively harming the nonprofit community, creating what the Stanford Social Innovation Review called “The Nonprofit Starvation Cycle.” Experts agree that many nonprofits should invest more in overhead, particularly administrative costs. You all know this as well as I do: you need to invest in your organization to be able to effectively serve your missions.
We’ve been calling for a more nuanced understanding for some time, as have others, and today we have stepped up the effort.
The letter, published today on a new website, overheadmyth.com, states that “Overhead costs include important investments charities make to improve their work: investments in training, planning, evaluation, and internal systems—as well as their efforts to raise money so they can operate their programs. When we focus solely or predominantly on overhead…we starve charities of the freedom they need to best serve the people and communities they are trying to serve.” The letter instead recommends that donors focus their attention on more relevant factors behind nonprofit performance: transparency, governance, leadership, and results.
I ask you today to stand with GuideStar, BBB Wise Giving Alliance, and Charity Navigator to end the Overhead Myth. You can support the campaign in four ways:
Spread the word about the letter among your networks. For those of you using social networking sites, we’ve created a social media tool kit with language that you can copy-and-paste.
Sign the pledge on overheadmyth.com and publicly commit to shifting the conversation from overhead to impact.
And, most importantly, you can offer donors an alternative by sharing detailed information about your programs, strategies, measurement systems, and governance. Tell a data-rich story about the people, communities, and ecosystems you serve. If we do that, we can end the overhead myth.
Will you join us in the campaign to end the Overhead Myth? Please leave a comment below!