What Do Good Outcomes Cost?

– By Ann Goggins Gregory, Senior Director, Knowledge, The Bridgespan Group –

For several years, I’ve been interested in (many would say obsessed with) the need to break out of the nonprofit starvation cycle, where donors and nonprofits alike fixate on overhead rather than on what good outcomes cost. So I was thrilled to hear the joint announcement, www.overheadmyth.com, from GuideStar, BBB Wise Giving Alliance, and Charity Navigator denouncing the overhead ratio as a valid indicator of nonprofit performance.

Ann Goggins Gregory
Ann Goggins Gregory

What do good outcomes cost? The for-profit world does not measure success by focusing on overhead, but if it did (by looking at sales, general and administrative costs as a percent of total sales), the average rate would be 25%. For service industries, perhaps the best analog to the social sector, it’d be 34%. Intuitively, we’d expect that a high-performing nonprofit would hire the best people, train them to be as effective as could be, and monitor results to improve as it went along. That involves HR, training, and performance measurement. Overhead, overhead, overhead!

The truth is, funders love to support programs, but too many don’t understand the real cost for nonprofits to get powerful results. So if we want to move beyond “how much do you spend on overhead?” to “what do good outcomes cost?” funders must change the way they think and act.

But is there anything that nonprofits can do to speed the change?

Yes. First, nonprofits need to communicate honestly and clearly about costs. A few years ago, I was in a conference session on social media for nonprofits, and the speaker pulled up what he considered to be a great Facebook page for a big NGO. There, front and center, was the message “100% of your donation will go to support the refugees.” As a recent Chronicle of Philanthropy article points out, organizations can claim this NOT because their overhead is actually zero, but because board members or other funding sources underwrite overhead needs. This sort of communication is misleading and only contributes to the starvation cycle.

Second, nonprofits need to gain a deeper understanding of their full costs. This is hard, and funders struggle to understand the concept of “full costs,” too. What are programmatic costs? What are “indirect”? What goes in overhead? Getting this clarity is possible, and it is vital to articulating what good outcomes really cost.

Seeking to address these needs, Donors Forum, the state association of grantmakers, nonprofits, and their advisors in Illinois, recently partnered with The Bridgespan Group to have “Real Talk about Real Costs,” which brought together 300 practitioners in a near-equal mix of funders and nonprofits. The convening built on a year-long Community of Practice focused on tackling the overhead challenge. To support ongoing efforts, Donors Forum aggregated resources to help funders and nonprofits answer the question “what do good outcomes cost?” One of the most powerful and easy-to-use resources is this two-minute video with accompanying discussion guide.

Yes, this will be hard – and yes, a lot of the responsibility for ending this obsessive focus on low overhead rests with donors themselves. But I’ve come to believe that simply waiting for donors to change understates the power and responsibility that nonprofits have to create the big shift that they and their beneficiaries want and need.

The preceding is a guest post by Ann Goggins Gregory, Senior Director, Knowledge, in the San Francisco office of The Bridgespan Group, a nonprofit advisor and resource for mission-driven organizations and philanthropists. This post can also be found on the GuideStar Blog: http://trust.guidestar.org/2013/06/18/what-do-good-outcomes-cost/. Ann joined Bridgespan in 2005, spending three and a half years in the strategy consulting practice before transitioning into a knowledge role. In her position, she leads the organization’s efforts to reflect on insights emerging from strategy consulting and plays a pivotal role in identifying opportunities for external knowledge sharing that arise from client work.

In her consulting work at Bridgespan, Ann worked with a number of education clients – including charter management organizations and a statewide public/private partnership focused on reforming high school education – and also worked on business plans for several leading youth-serving nonprofits. She has been an active contributor to knowledge projects since she joined the firm, co-authoring “Nonprofit Starvation Cycle” in the Fall 2009 issue of Stanford Social Innovation Review and “How Governments Can Spur High Charity Performance,” published in the Chronicle of Philanthropy (December 2009).  Ann has helped lead Bridgespan’s national research on how nonprofits are “Managing in Tough Times.”

Prior to joining Bridgespan, Ann worked as a consultant at Deloitte Consulting and has also consulted to several large youth development organizations, including Public Allies and YouthBuild USA. Ann earned her BA in International Relations and German with honors from the University of South Carolina Honors College. Ann holds an MPA from Harvard’s Kennedy School of Government and an MBA from Northwestern University’s Kellogg School of Management.

Launching a campaign to end the Overhead Myth

– 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.

My counterparts at BBB Wise Giving Alliance and Charity Navigator, Art Taylor and Ken Berger, respectively, have joined me in signing an open letter to the donors of America denouncing the overhead ratio as an indicator of nonprofit performance—though recognizing its rare utility as a filter for fraud.  

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:

  1. Print out the letter, which is under a Creative Commons license, and include it in you donor solicitations, or on your website, or however else you wish.
  2. 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. 
  3. Sign the pledge on overheadmyth.com and publicly commit to shifting the conversation from overhead to impact.
  4. 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!

The above can also be found on the GuideStar Blog: http://trust.guidestar.org/2013/06/17/launching-a-campaign-to-end-the-overhead-myth/.