Unlike previous years when donors typically gave to organizations because they were frugal nonprofits, donors today are more interested in how their money will make an impact and the charity overhead myth.
The days of the frugal nonprofit may be coming to an end.
Recently, I had a conversation with a friend who is passionate about donating her time and money to worthy causes. We talked about the idea of operating a nonprofit like a for-profit business. I asked her how she felt about this and she told me that she is reluctant to donate to a nonprofit that spends a high percentage of its donations on administrative salaries and expenses. Before she donates, she reviews the ratios and bases her decision on these numbers. This is what is known as the Overhead Myth and this type of thinking is changing.
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Today’s donor expects measurable results from their donation.
Unlike previous years when donors, like my friend, typically gave to organizations because they were frugal nonprofits, donors today are interested in how their money will make an impact. Today’s donor is more interested in a measurable return from their investment. Bigger impact comes from a nonprofit that has more resources and capacity to achieve their mission.
Nonprofits Urged to Destroy the Overhead Myth.
Thankfully, three CEOs of popular nonprofit watchdog organizations – GuideStar, Charity Navigator and BBB Wise Giving Alliance – have issued a joint letter encouraging nonprofits to join forces and crush the false notion that overhead ratios are the sole basis for trusting a nonprofit.
To the Donors of America:
We write to correct a misconception about what matters when deciding which charity to support.
The percent of charity expenses that go to administrative and fundraising costs—commonly referred to as “overhead”—is a poor measure of a charity’s performance.
We ask you to pay attention to other factors of nonprofit performance: transparency, governance, leadership, and results. For years, each of our organizations has been working to increase the depth and breadth of the information we provide to donors in these areas so as to provide a much fuller picture of a charity’s performance.
. . .
So when you are making your charitable giving decisions, please consider the whole picture. The people and communities served by charities don’t need low overhead, they need high performance.
Their letter sends an extremely powerful, forward-thinking message to nonprofits. It reinforces the belief that overhead expenses are important, but not the only factor to consider when it comes to success. It supports the notion that nonprofits can invest in their future and have an impact on society. With the right combination of talent and resources in place, a nonprofit can build the infrastructure to make a large scale mission achievement possible.
Based on the overwhelming response to our first letter to the donors of America, we know that the nonprofit sector is hungry to dispel the Overhead Myth,” said Jacob Harold, president and CEO of GuideStar. “Our second letter, addressed directly to nonprofits, builds on that momentum by providing actionable steps so nonprofit leaders can focus on meaningful and measurable results rather than misleading, simplistic overhead ratios.
This all leads to the idea that nonprofits are real businesses and should be run like one. Running a nonprofit like a martyr tends to promote mediocracy. Whatever they accomplish will be perceived as the best that they can do. They can get away with this because, after all, it’s not like they are a for-profit business. Instead, nonprofits can achieve tremendous goals and contribute in a big way if they adhere to the Overhead Solution.
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Bottom Line
Your nonprofit can benefit from the “Overhead Solution”. GuideStar and Charity Navigator have teamed up to provide you with the tools and resources to join them in their mission. They need your help to spread the word that the percent of charity expenses that go to administrative and fundraising costs – commonly referred to as “overhead” – is not the primary measure of a charity’s performance and that results matter more.
The tools and resources provided can help nonprofits move beyond the Overhead Myth, towards the Overhead Solution, by proving their worth based on impact.
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Jeanne, thanks for your comments and insight. Old and new nonprofits need to change their mindset and start thinking of ways to be more sustainable. To do this, they need to be able to recruit the best talent to lead and manage their organizations. Relying solely on volunteers, or under paid employees with executive level talent is not the answer. The industry as a whole needs to reverse the pervasive attitude that keeping overhead low is a measurement of their success.
Couldn’t agree more. But it takes courage AND a willingness to change (two totally different things) to focus on building the capacity necessary to be more effective at accomplishing the organization’s mission. Having the whole non-profit sector start to push via education/marketing etc. re what the more valid measures of quality should be would be excellent. However, I think many would embrace the high quality measures and still try to achieve them with no money and no or inadequate staff. Perhaps they could just give up sleeping and eating!!
I could quibble with the opening bold statement a bit as i think it is quite possible to be “frugal” and still mission driven and business-like in one’s operations. That said, I absolutely agree with the article’s basic premise. The “martyr” complex among non-profits is unfortunately still quite pervasive. This problem is compounded by a priority placed on maintaining a certain comfort level or group culture. My guess is that these phenomena are especially likely to occur in smaller, older or all-volunteer organizations. Let’s face it, organizations that make the decision to do what it takes to further the mission rather than placing the priority on internal culture or traditions need to be prepared for both risk and cultural change – both of which are difficult for traditional, long standing non-profits to face. I know there are some success stories, but I would guess that many prefer to plod along being proud of what they are able to accomplish with one hand tied behind their backs. We are sometimes strangled by our own history.
The “martyr” complex among non-profits is unfortunately still quite pervasive. This problem is compounded by a priority placed on maintaining a certain comfort level or group culture. My guess is that these phenomena are especially likely to occur in smaller, older or all-volunteer organizations. Let’s face it, organizations that make the decision to do what it takes to further the mission rather than placing the priority on internal culture or traditions need to be prepared for both risk and cultural change – both of which are difficult for traditional, long standing non-profits to face. I know there are some success stories, but I would guess that many prefer to plod along being proud of what they are able to accomplish with one hand tied behind their backs. We are sometimes strangled by our own history.
In 1983, I had a dream that moved me to quit my job and start a grass-root organization called Terra-Genesis in order to try to end world hunger by using technology…I believed in it so much that I invested all of my personal savings and supported it for over ten years.
Now, I almost finished with my next dream and that is to write a biographical book, “The Urban Shepherd…from Dream to Reality”.
Here is what John G. Miller, Author of QBQ!, Outstanding!, and Parenting the QBQ Way said about the Urban Shepherd: “It’s so true that we each are responsible for our life and what we do with it. Urban Shepherd is a wonderful example of that level of personal accountability. All we have to do is dream and chisel away until that dream becomes a reality!”
Agencies listed in the Article started small and became so big that small non-profits cannot partner with them. I tried it many times with Terra-Genesis and used our slogan: Work Together and Win Together, they just do not want to hear it. Even though we have a better product than they are, they try not to talk to and sometimes they try to get you out of business. It is kind of monopoly and turf.
If you are a small non-profit trying to empower people not to depend on you, they see it as a loss of clients and loss of funding.
They don’t like the WIN-WIN, they like themselves Win and you lose… Their mission is to exist for ever… Read the “Begging for Change” book by Robert Egger. He even worked for the United Way and quit…
Ben Amor, Founder of Terra-Genesis
The title seems like a misnomer. I think non profits need to be ‘frugal’ or at least efficient as an ethical matter–you are spending money that belongs to someone or something else–the mission. To suggest that we should operate more like a business is no guarantee of quality. As Jim Collins observes, half of businesses are below average!
What I advocate is that nonprofits keep a laser focus on mission and clearly specify measures of mission attainment (and how to report them clearly.) Once the mission and the plan for attaining it are in place, then anyone can assess whether the overhead is appropriate. The message to donors is that we have thoughtfully considered the resources we need to accomplish the mission and have set them in place–no more, no less than what is needed.
We want partners in mission, not shareholders. Donors who are fixated on ratios of financial efficiency (or how to get the greatest personal payoff for giving) rather than mission attainment are donors we ultimately don’t need. How is that for nonprofit heresy?
I’ve consulted with, worked and volunteered at non-profits for almost 18 years and have found that lack of trained, experienced accounting, finance and administrative staff leads to mistakes, theft and worst of all leaving precious dollars on the table when negotiating with vendors and partnerships. The talent, drive, education that makes excellent founders and executive directors does not make them excellent business executives. Where would any technical genius be without a great business partner? Spending more on recruiting the best business and accounting teams will lead to more fundraising, lower operating expenses and a more successful operation. There is currently a glut of mid-life CFO’s, Controllers and the like looking to make a difference and perhaps this is the time we can all work together to make a difference.
I for one would work for less than a corporate salary in return to give back. How about you? Diane Wolff
I started my fundraising career with a company that was actually a for-profit benefitting non-profit organizations, and with that group successfully directed more funds to cancer research in Canada then any other events historically. So I understand and don’t disagree with these sentiments.
However, given the rash of media attention on misspending and corruption by some well known charities, the public at this time is hypersensitive to ensuring overhead remains low. I feel that the above letter misses out on the concept that smaller non-profits cannot afford to alienate their donor base with a change that, in the short term, would lessen returns to the cause despite the obvious long term benefits.
I would be interested in hearing the ideas from others on how one can make that change without negative ramifications.
You said it well Tania. How can a small non profit grow with out increasing “overhead” expenses? I struggle with the idea of adding a paid administrative person to my foundation. I work with all volunteers for our foundation who support our mission with the time they have after their paid employment and family obligations. We have been quite successful in our past seven years as a non profit foundation. However, to continue our growth, we need additional support. I find it very hard to find people who are willing to give more of themselves without pay; especially an administrative person.
We have been asked often from donors on how the funds are spent and how much is past on to our charities. We have always been proud to say the our “overhead” is very small allowing us to increase our charity support each year.
I do believe that all non profit foundations have the responsibility to manage their foundation “business” with a “frugal” attitude. As a donor myself, not only to my foundation but to others, I find myself wanting to support the charities that are frugal with their expenditures. So how can we measure this without asking the ratio?
I am faced with the decision of whether to grow the foundation and increase our mission’s support? Stay the same? Which I believe with time our donor support may possibly decrease because everyone wants to be supportive of the “winning” team.
Open to suggestions/comments…..
I heard this point made very eloquently in a Ted Talk.
Enjoyed examining this, very good stuff, thankyou. Talk sense to a fool and he calls you foolish. by Euripides. kcgkadeadaadgdkc
I agree completely! The general population needs educating as to the fact that a nonprofit MUST be run as a business, and therefore needs funds to pay the right people to run it as a business, and also to operate it’s nonprofit programs. I’ve experienced a number of very angry people that didn’t understand that. The fact is, if you don’t have funds to pay people to run it, then the doors will close. I and my nonprofit organization are a prime example! If you can’t pay people needed salaries to do the immense work required to run a nonprofit, then the burden and immense pressure falls on the Executive Director who after awhile, loses her health and has to close its doors. Very sad and unfortunate! Educating the public is key.