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About GuideStar

Kjerstin Erickson is a Special Projects Fellow at GuideStar, where she works on initiatives to improve the effective flow of philanthropic capital. Prior to GuideStar, Erickson spent 9 years as the Founder and Executive Director of FORGE, a strategic-impact nonprofit that provides education, skills training, and entrepreneurial resources to more than 70,000 refugees in war-torn Africa. Having started FORGE at age 20, Erickson established a reputation for her commitment to bringing more frankness and transparency to the nonprofit sector. Erickson’s awards include the Do Something Award for public service, and the Stanford Haas Public Service Fellowship. She has also been named a “Top 40 Leader Under 40” by the Young Leaders Council, a “Person You Should Know” by CNN, and a “Top 10 College Woman” by Glamour Magazine.

All Overhead is Not Created Equal: Distinguishing Fundraising and Administrative Expenses in Nonprofit Evaluation

A month ago today, GuideStar partnered with the BBB Wise Giving Alliance and Charity Navigator to launch the Overhead Myth campaign: a attack on the ubiquitous use of nonprofit’s “overhead ratios” as the primary proxy for organizational performance. In response to our efforts, we’ve received an outpouring of support and encouragement from a vast range of nonprofit and philanthropic professionals.

Clearly, the social change sector has suffered under the weight of the Overhead Myth for too many years. GuideStar sees helping the donors of America move beyond overhead ratios toward better measures of nonprofit performance as one important step toward serving our mission: to revolutionize philanthropy by providing information that advances transparency, enables donors to make better decisions, and encourages charitable giving.

Launching this campaign has been a learning experience for GuideStar, too. In the course of reading and responding to hundreds of comments and feedback, we noticed a few strong patterns of public misunderstanding about overhead expenses that we want to take the opportunity to clear up. The first is the common conflation of administrative and fundraising expenses. Technically, both types of expenses are classified as “overhead” based on the IRS’s expense reporting requirements for organizations that file the Form 990. However, they represent two very different types of organizational investments.

Throughout our campaign, GuideStar has maintained that it does not believe that these two types of expenses are created equal. The Overhead Myth campaign is primarily concerned with changing the way donors understand the importance of administrative costs: expenses which generally represent critical investments in an organization’s infrastructure and operations. For example, information technology, management systems, and staff dedicated to accounting, human resource management, and general operations could all be classified as administrative expenses, as could resources spent on strategic planning, monitoring, and evaluation. GuideStar maintains that these expenditures are essential to well-run and sustainable nonprofit organizations. In our view, it is relatively rare to find an organization that over-invests in administrative expenses. As long as these expenses support a nonprofit’s mission and goals, they should be considered reasonable.

Fundraising expenses, while also crucial to nonprofit organizations, are more complicated. While there is no doubt that it takes money to raise money, there may be times when the fundraising costs per dollar raised reach proportions that are beyond a standards of a reasonable donor’s comfort range. This rare but deeply problematic scenario was captured well in the Tampa Bay Times expose of “America’s 50 Worst Charities” – a project which was made possible by GuideStar’s Form 990 data.

Still, it is worth emphasizing that these situations exist at the margin. Our own data indicates that in 2011, only 3.5 percent of all Form 990 filers reported spending more than 70 percent of their budget on overhead expenses. The vast majority of nonprofits do not spend unreasonable amounts of fundraising, and their fundraising investments can yield considerable results for their mission and programs.

Ultimately, though, outcomes tell us so much more than overhead. Donors do not need a fundraising ratio to discover that the organizations profiled by the Tampa Bay Times simply did not produce results for their communities. A nonprofit’s lack of transparency about program strategies and impact is a much more powerful sign of its failure.

Instead of scaring donors with the rare-but-true horror stories of nonprofits who are blatantly flouting their responsibilities as charitable organizations, let’s focus on teaching donors how to give with both their hearts and their heads. Let’s recognize the difference between fundraising and administrative expenses, accept that extreme fundraising expenses are more likely to be seen in fraudulent organizations, and still focus our attention on what matters: getting more money to the best performing organizations.

Kjerstin Erickson is a Special Project Fellow at GuideStar, where she works on initiatives to improve the effective flow of philanthropic capital. Prior to GuideStar, Erickson spent 9 years as the Founder and Executive Director of FORGE, a strategic-impact nonprofit that provided education, skills training, and entrepreneurial resources to more than 70,000 refugees in war-torn Africa. Having started FORGE at age 20, Erickson established a reputation for her commitment to bringing more frankness and transparency to the nonprofit sector. Erickson’s awards include the Skoll Scholarship for Social Entrepreneurship, the Do Something Award for public service, and the Stanford Haas Public Service Fellowship. She has also been named a “Top 40 Leader Under 40” by the Young Leaders Council, a “Person You Should Know” by CNN, and a “Top 10 College Woman” by Glamour Magazine. The above can also be found on the GuideStar Blog: http://trust.guidestar.org/2013/07/17/all-overhead-is-not-created-equal/.

Nonprofit Emaciation: Confessions of a Do-Gooder Who Starved an Organization

– By Kjerstin Erickson, Special Project Fellow at GuideStar

My name is Kjerstin, and I used to run an international nonprofit organization. A pretty great one, at that: my organization, FORGE, helped more than 70,000 refugees in war-torn Africa recover from conflict and prepare for a peaceful and self-sufficient future. In refugee camps across Zambia and Botswana, we built libraries, created computer training centers, provided micro-finance and agricultural finance, started preschools, ran health education programs, and more. In short, we helped refugees determine not only what they needed but how they could build it for themselves. No one else was doing what we did, and we could squeeze more out more out of our money than a souvenir penny press.

Kjerstin Erickson
Kjerstin Erickson

So…why the past tense?

While there are no shortage of reasons I could give you, the simplest one is this: I starved FORGE to death. 

When I started the organization, I was young, idealistic, and naive. Not experienced enough to know better, I bought the hype: that to be truly altruistic and efficient, we needed to operate at the highest possible levels of self-sacrifice. We needed to direct almost all money raised to buying pencils rather than building infrastructure, we needed to expect our staff to work for the lowest possible wages (or ideally none at all), and we needed to do it all with an eager, grateful smile.

If you judge a nonprofit by those metrics, boy was FORGE good. Our overhead for the first four years hovered just around 4%…most of which went to cover items like paper and stamps for the donation receipts that you are required by law to send. We didn’t invest in workspace (hello, employees that show up to your apartment everyday), we didn’t hire any development or administrative personnel (hello, 180 staff with no accountant or human resource manager), and we certainly didn’t pay money for systems that would help us spend our time more efficiently (hello, fumbling with 15,000 line items in Excel). We were the epitome of what we thought was the righteous path: an organization that is lean, mean, and ready to sacrifice for the greater good.

Here’s the rub: that didn’t turn out so hot. While our donors loved that their hard-earned money was being used for “the right things,” we were slowly strangling ourselves. We under-invested in systems infrastructure, we under-invested in fund development, and we under-invested in human resources. Because donors wanted to give to project expenses directly, we constantly added more to our portfolio without adding the capacity to manage it all. Because unrestricted funding was so hard to come by, we had to spend every last dime rather than build up a reserve. And because we internalized the message that reasonably compensating executive staff was shameful, we couldn’t hire seasoned professionals or afford a CEO to replace me.

In the end, we collapsed under the weight of our own naiveté and short-sightedness. As the founder and chief executive, I had the vision and the hutzpah to create something extremely meaningful and impactful in the world. But I didn’t have the foresight or the strength of will to see it through and fight back against the prevailing pressures constantly whispering in my ear to do it cheaper, do it leaner, and do it with lower gosh-darn overhead.

Overhead, it turns out, could have made all the difference. With the appropriate investments in efficiency-building infrastructure, administration, and development, FORGE would undoubtedly be alive today. Rather than starving a painful death, we’d be growing and thriving – a force for good in the lives of hundreds of thousands of people who have lost everything.

If you’d asked me ten years ago to name the dirtiest word in the nonprofit language, I would have undoubtedly told you: OVERHEAD. If you asked me today, I’d give you the same answer. In the intervening decade, however, the tables have turned. Overhead is not dirty because it represents inefficiency, waste, and greed; it is dirty because of the powerful myth it has promulgated. That myth – the one that equates “low” overhead with high performance and “high” overhead with greed and irresponsibility – leads to a very dangerous and unsustainable outcome. I bought into it, or at least didn’t push back on it hard enough. It pains me every day to think of what I lost, and how I could have done it differently.

It may be too late for FORGE, but its not too late for many other organizations struggling under the weight of the same pressures. Isn’t it about time that we get over overhead?

I ask you to join me in pledging to end the Overhead Myth today: http://overheadmyth.com/.

Kjerstin Erickson is a Special Project Fellow at GuideStar, where she works on initiatives to improve the effective flow of philanthropic capital. Prior to GuideStar, Erickson spent 9 years as the Founder and Executive Director of FORGE, a strategic-impact nonprofit that provided education, skills training, and entrepreneurial resources to more than 70,000 refugees in war-torn Africa. Having started FORGE at age 20, Erickson established a reputation for her commitment to bringing more frankness and transparency to the nonprofit sector. Erickson’s awards include the Skoll Scholarship for Social Entrepreneurship, the Do Something Award for public service, and the Stanford Haas Public Service Fellowship. She has also been named a “Top 40 Leader Under 40” by the Young Leaders Council, a “Person You Should Know” by CNN, and a “Top 10 College Woman” by Glamour Magazine. The above can also be found on the GuideStar Blog: http://trust.guidestar.org/2013/06/20/nonprofit-emaciation/.