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.
First, I want to a moment to say thank you. Thank you to the 2,000+ people who have pledged to end the overhead myth, thank you to everyone who has shared the news of the Overhead Myth campaign, launched in partnership with BBB Wise Giving Alliance and Charity Navigator, and thank YOU for reading this and learning more about the issue of nonprofit overhead expenses. You are the ones who are really moving the needle on this effort, and we’re thrilled that this campaign resonates with you.
We’ve talked a lot about what nonprofits shouldn’t focus on – overhead – and we certainly attempted to describe what they should focus on instead. In fact, our entire Money for Good II initiative was designed to inform nonprofits about how to better collect and communicate their impact data. However, it’s time that we dig deeper into three concrete things nonprofits should do today to move past overhead once and for all:
Giving Donors Better Alternatives to Overhead
1. GuideStar Exchange
It’s simple: give us your information and we will share it with the 10 million annual visitors we get to www.guidestar.org and millions more through the work of our amazing clients and partners. Our mechanism to do so is our GuideStar Exchange program, which is the only program of its kind that encourages nonprofit transparency on a national scale and allows nonprofits to supplement the public information that is available from the IRS. It is designed to encourage transparency, and it can help nonprofits get past their financials and administrative expenses and focus on outcomes once and for all.
We just overhauled the GuideStar Exchange to align with what we learned from Money for Good II: individual donors, institutional funders, and financial planners want basic information (mission statement, program information, key employees, etc), financial information, and impact/effectiveness information about your nonprofit.
One of the biggest improvements to this program is the integration of Charting Impact with the GuideStar Exchange. GuideStar embraces the 5 standardized questions for the sector that allow a nonprofit to report on their organizational impact to date. These 5 questions were crafted (with input from major institutional funders) so that once you’ve answered these questions once, you will have a head start on many other grant applications saving you and your staff precious time and effort.
Once you give us your information, we in turn give you a gold, silver, or bronze participation logo—a symbol of transparency in the sector—and a host of other benefits. All in all, the GuideStar Exchange is free, it’s easy to get started, and it’s truly powerful.
2. Stakeholder Reviews
GreatNonprofits provides a way for your non-paid stakeholders – your board members, volunteers, interns, etc. – to review your nonprofit, similar to Amazon or Yelp reviews. Their reviews help to tell your nonprofit’s story and explain your impact on a human scale. Using the Great Nonprofits platform, which the public will view through your GuideStar nonprofit report, you can solicit these reviews and push them out when you get glowing feedback. Again, it’s free, and it’s easy to do – we even have a tool kit to get you started. Remember – the more donors and funders know, the more they give!
If your nonprofit has received the distinction from Philanthropedia as an expert-recommended high-impact nonprofit you should be sharing this recognition with your community! Philanthropedia has a turn-key tool kit that you can use to spread the word and help impact-oriented donors and funders find you more easily. Contact Jasmine Marrow (firstname.lastname@example.org) for access to this tool kit.
I’d love to hear about how you plan to move past the overhead ratio! Leave your comment below.
Lindsay J.K. Nichols is the communications director of GuideStar, building on the organization’s strong brand to sustain awareness of its mission through relationships with key audiences. Lindsay came to GuideStar with a deep consulting background with clients such as Best Buy, Heineken, National Geographic Education Foundation, Bracewell & Giuliani, University of Pittsburgh School of Law, Pre-K for All DC, School-Based Health Alliance, the Land Trust Alliance, RugMark, National Institute of Neurological Disorders and Stroke, National Institute of Nursing Research, and others. She began her career at the American Society of Civil Engineers (ASCE), where she handled media efforts for the ASCE/WTC report on the collapse of the World Trade Center towers. Lindsay earned a bachelor’s degree in Broadcasting Communications and Women’s Studies from the State University of New York at Oswego. The above can also be found on the GuideStar Blog: http://trust.guidestar.org/2013/07/25/three-important-alternatives-to-overhead/.
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/.
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/.
– By Colette Stanzler, Director, Social Impact Research, Root Cause –
We applaud the campaign by BBB, GuideStar, and Charity Navigator to raise awareness about the lack of correlation between a nonprofit’s level of overhead and its performance. The Overhead Myth letter encourages donors to invest in nonprofits based on their results, not based on how lean they are. Root Cause completely agrees with this and was founded 10 years ago with the vision that resources allocated to nonprofits based on results will accelerate social progress. However, the question remains, where do we find the kind of information we need in order to not have to rely on overhead as the proxy for performance?
According to research conducted recently, donors are interested in indicators beyond financials; specifically on better understanding a nonprofit’s impact. Donors are also interested in seeing peer programs compared on standard indicators. However, the research further indicated that while information about financials is easily accessible, information about program performance, particularly at a comparative level, does not seem to exist for the average donor. Why isn’t information about results as easily attainable and standardized as the 990 or audited financials?
Over the past few years, Root Cause has developed a methodology to help move nonprofits to higher levels of performance and to share that information with donors. This work has culminated in the launch of Peer Performance Exchanges for different social issues. We believe that nonprofits should be able to provide, and funders should be able to request, information about program performance (or results) as regularly as they provide or request financial information.
We are currently developing three Exchanges: Youth Career Development, College Access and Success, and Healthy Aging. The Exchanges bring together nonprofits within these fields that have clear and measureable outcomes to receive a third-party independent analysis, including benchmarking, and capacity-building services. The independent analysis is at the core—providing nonprofit programs with an understanding of how they compare to their peers on over 100 indicators of organizational health (including financial stability) and program performance in their field. We also produce a summary report of the analysis, appropriately named the Transparency Report, for programs to share with key funders as a validation of their program and commitment to measurement and accountability.
We are excited that the key donor platforms where donors look for information to make confident giving decisions are focused beyond financials and on performance. And we believe that our work in providing independent analysis for programs through the Peer Performance Exchange will provide donors with the more results-oriented, comparative information they are seeking.
As the Director of Social Impact Research, Colette provides strategic leadership, oversight of SIR’s core research process including methodology refinement and product development, client management on customized research projects, and actively participates in the broader development of the social impact market through collaboration and partnerships with other players in the market. From her experience in the business sector, specifically financial services, Colette brings an understanding of capital markets, investor expectations, and how data is used to inform investment decisions to apply to SIR’s research and analysis in the social impact marketplace. While she has experience in both product development and analysis from previous experience in the business sector, she has been involved with nonprofits most of her life and brings perspective to our process from being a volunteer, consultant, advisor, board member, and social impact investor. With the SIR team, Colette hopes to build a significant library of social issue research that enables donors to make more informed giving decisions and results in more resources being allocated to high performers. This a cross-post of her article on the Root Cause blog, which can be found here: http://rootcause.org/blog/overhead-myth-response, and on the GuideStar Blog, here: http://trust.guidestar.org/2013/07/12/root-causes-overhead-myth-response/.
– By Lee T. Sullivan, CPA, CGMA, manager at PBMares, LLP –
For more than 25 years, nonprofit organizations have been measuring various aspects of their performance, all in an effort to improve services and prove to Board members, donors, and the general public that they were accomplishing the organizational mission.
These performance measures have focused primarily on transparency, governance, and financial accountability: how were funds raised and how was that money being spent? In recent years, performance measurement has begun to focus more on “impact.” Donors are interested in communication that demonstrates the significant or lasting changes that a nonprofit is making for community and society at large. Rather than simply measuring how funds were spent, mission-based performance analysis connects performance and outcomes to mission.
Mission-based performance measurement better enables nonprofits to assess their progress, determine future activities, and ultimately, gauge whether they are accomplishing what they set out to do. Mission-based performance measurement also allows nonprofits to communicate with staff, board members, and funders in a way that captures the link between investment in the organization and programmatic outcomes, and assures that all parties are in agreement regarding what the program is trying to accomplish and the most effective means for achievement.
To develop a sound mission-based performance measurement system, nonprofits should start by determining what outcomes can reasonably be measured, then specifying appropriate indicators for each of those outcomes. Creating a model of program inputs, activities, outputs, and outcomes can provide a helpful means for thinking through the changes program participants are expected to experience during and after the program. Nonprofits should also seek input from numerous audiences (staff, participants, volunteers, etc.) in identifying program outcomes.
The organization also will need to identify data collection procedures and methods for analysis then test each, revising them as necessary. Once implemented, mission-based performance measurements must be monitored regularly and improved as the program progresses.
Finally, nonprofits must recognize that while preferable to previous performance-based methods, mission-based performance measurement has its limitations. It does not eliminate, for example, the need to monitor resources, activities, and outputs, nor does it explain why a program achieved a particular outcome. Similarly, it is important to recognize that measuring and improving program outcomes does not necessarily improve community-level outcomes.
Mission-based performance measurement represents the latest tool to help nonprofits strengthen delivery of services. Used properly, it can give direction internally, focus board members on policy and program issues, and improve services. But it is important to also recognize that it is not the end of the line. Nonprofits must continue to adapt newer and more effective means for communicating and assuring that they are meeting their mission and, ultimately, making a difference.
Kudos to these three great organizations–GuideStar, BBB Wise Giving Alliance, and Charity Navigator–for taking a stand against the fixation on overhead! Yes, charities should be efficient. But, to be relevant, charities must be effective. That is what donors expect and, for the USO, what troops and families deserve.
Being effective starts with aligning priorities and allocating resources to meet the greatest needs. That process must be informed by empirical data gathered directly from those served. At the USO, we learn a lot about the needs of troops and families in the course of their 9 million visits to our centers and another 2-3 million direct service encounters we have with them each year at locations around the world. All that information feeds our annual planning, budgeting and decision-making.
But we don’t stop there. We expect every program to deliver specific outcomes. After every program activity we document the outcomes in a written after action review. That’s also how we get better—continuously. Through our annual TELLUSO survey of thousands of troops and military family members around the world, we learn what is most important to them and how well our programs and facilities are meeting their needs. We don’t just assume we are accomplishing our mission of lifting the spirits of troops and military families. We know—because 95% tell us, “… the USO lets me know that my country supports me,” and 98% say, “… the USO boosts my morale.”
Without investing in the infrastructure that makes it possible to track outcomes, we would be hard pressed to let our donors know the good their donations make possible.
We have a different view of efficiency. Donors are interested in the impact a donated dollar has on the community a charity serves. In the USO’s case, we are fortunate to have supporters who provide a range of in-kind goods and services that allow us to get greater value for every dollar donated to us. When you take into account that kind of support, including contributed goods, the value of rent-free centers around the world, contributed celebrity time and talent and hundreds of thousands of volunteer hours, we estimate that we deliver $1.52 in goodness for every donated dollar. Keeping in mind that we target those resources where they are needed most, that’s a good return on a donor’s investment!
The preceding is a guest post by Sloan Gibson, the 22nd president of the USO, a role he stepped into in September 2008, after spending more than 20 years in banking. He’s responsible for leading the USO’s mission of lifting the spirits of troops and military families at more than 160 USO locations around the world. Currently, he’s leading the USO’s efforts to support wounded, ill and injured troops and their families through the USO’s Operation Enduring Care. Sloan is a 1975 graduate of the United States Military Academy at West Point, and he earned both Airborne and Ranger qualifications as an Army infantry officer. He also earned a Masters in Economics from the University of Missouri in Kansas City and a Masters in Public Administration from the John F. Kennedy School of Government at Harvard University. This can also be found on the GuideStar Blog at http://trust.guidestar.org/2013/06/27/the-uso-on-the-overhead-myth/.
– 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.
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?
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/.
– By Paul Brest, professor of law, emeritus, Stanford Law School –
In the Overhead Myth campaign, Art Taylor, Jacob Harold, and Ken Berger outline the pernicious consequences of relying on the overhead ratio as a proxy for a charity’s performance. Coincidentally, in the days preceding their blog post, the Nonprofit Quarterly featured two writers taking the opposite view. Brian Mittendorf, an accounting professor at Ohio State University, acknowledges that overhead is not a proxy for impact, but argues that such accounting metrics are more reliable and comparable than impact metrics. William Schambra, director of the Hudson Institute’s Bradley Center for Philanthropy and Civic Renewal, asserts that donors’ desires to have as much money as possible go directly to recipients rather than to indirect costs reflects their laudable emotional connection to the objects of their charity.
Mittendorf concedes that reliance on overhead is at most a second best solution—in his words, looking for the lost keys under the proverbial lamppost. Even so, given the extent to which nonprofits manipulate overhead data (as shown in the Taylor-Harold-Berger letter), the lamp is pretty dim.
Schambra extolls donors’ common sense rejection of performance metrics, an interest that he disdainfully attributes to “experts.” Putting to one side his antipathy toward experts, Schambra’s point about donors’ empathy with their intended beneficiaries is a plausible explanation for their antipathy to overhead. But for donors who care about actually improving their beneficiaries’ lives, overhead is not merely an unreliable heuristic but often a counterproductive one. For just one example, an increasing number of charities use performance management systems to provide better outcomes for their clients; yet the costs of building and maintaining these systems all count as overhead.
I think that Schambra demeans ordinary donors when he implies that they don’t care about the impact of their gifts. The Hope Consulting Money for Good I study, which he approvingly cites, reports that 85% of donors say they care about nonprofit performance but only 35% do any research to learn about it. Given how frustrating it is to learn about performance from the charities themselves and most of the on-line rating services, 35% seems a pretty high number. In any event, there are improvements in sight, due in large part to BBB Wise Giving Alliance, GuideStar, and Charity Navigator.
Robust impact metrics are available only for a tiny number of organizations. However, BBB Wise Giving Alliance and GuideStar, together with Independent Sector, have promoted a new suite of proxies for impact that are far superior to reliance on overhead alone. Their Charting Impact standards ask organizations to answer five basic questions:
1. What is your organization aiming to accomplish?
2. What are your strategies for making this happen?
3. What are your 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?
While an organization’s ability to answer these questions is no guarantee of impact, its inability to answer them makes any pretensions to impact dubious. Without abandoning accounting measures, Charity Navigator’s CN 3.0 adopts a similar scheme, and it also takes account of an organization’s feedback from its beneficiaries.
Neither Charting Impact nor CN 3.0 is a substitute for knowledge about actual impact, and neither provides anything as simple as a single number. But they are great steps forward in helping wean donors from a metric that, alone, provides a distorted view of an organization’s success in improving people’s lives—which is what charity is ultimately all about.
Paul Brest is professor of law, emeritus; and former dean of Stanford Law School. He currently teaches in the Law School and Graduate School of Business, and is faculty co-director of Stanford Center on Philanthropy and Civil Society; From 2000 to 2012, he was president of the William and Flora Hewlett Foundation. This post can also be found on the GuideStar Blog: http://trust.guidestar.org/2013/06/19/paul-brests-thoughts/.