Why “Good” Overhead Is Better than “Bad” for Nonprofits

Print Share on LinkedIn More

June 3, 2011; Source: Businessweek.com | There ought to be a prize in philanthropy for the person who finally answers definitively the question, "how much overhead is OK for a nonprofit?" Bloomberg Businessweek columnist Rick Wartzman, who also is the executive director of the Drucker Institute at Claremont Graduate University, zeroes in on that question as the one that perplexes donors most when deciding whether a nonprofit is worthy of their support.

His comments are sparked by a review of the book, Give Smart, by Tom Tierney and Joel Fleishman. As Wartzman notes, Tierney, chairman of the nonprofit consultancy, the Bridgespan Group, and Fleishman, a professor of law and public policy at Duke University, differentiate between "good" and "bad" overhead. Or as he quotes from their book, "While it's wrong to waste philanthropic dollars on goods and services that aren't needed, it's equally wrong to limit the impact of philanthropic dollars by depriving nonprofits of the funds they need to sustain, improve, and expand their performance ('good' overhead)."

To Wartzman — as well as Tierney and Fleishman — more donors need to be made aware that nonprofits "require talented employees, procedures, and technology," costly expenditures and activity "that could be classified as 'overhead'" if they are going to succeed at their missions. While some foundations, including "The American Express Foundation, the Edna McConnell Clark Foundation, the Weingart Foundation, and others are now looking to strengthen nonprofit management skills and systems," Wartzman adds "much more needs to be done."

Quoting again from Tierney and Fleishman, Wartzman cites the pair's message to donors: "Like you, your grantees need the right capacity to deliver the results you and they expect to see . . . the right people, right processes, and right costs." —Bruce Trachtenberg

  • Ann Turner

    Without two major sponsors, Worldwide Fund for Nature and Sasol Limited, who sponsored salaries and fuel, the conservation NGO I founded and ran for 15 years would not have got off the ground. Other sponsors gave ‘things’ we needed but you do need the good hands-on people first. This WWF understood.

  • Chris Otis

    This is a long overdue and much-needed conversation. Nonprofits are held to increasingly high standards and calls from funders for “accountability” and “outcomes” — certainly reasonable and appropriate expectations. What is equally important is an understanding of the reality that nfps have reasonable and appropriate costs of doing business and, like our colleagues in the private sector, have a need to fund the infrastructure of our organizations. Many of our funding partners understand this and, thankfully, support operating costs and “overhead.” Here’s to hoping others will follow suit.

  • Maeve

    🙂 This conversation is long overdue, it is something I want to focus on, in a few years, I am putting together a business plan that looks at the needs of nfp’s in the years to come:- Infrastructure funding, the cost of doing business, coaching for nfp leaders and most importantly succession planning in nfp – however to provide for this type of education there needs to be an understanding of the importance of investment in the infrastructure which includes the people, many of whom are so invested in their cause they are willing to put up with less than they deserve – and shame on us, we allow them to do so.

  • Bob Sofsky

    It’s a mistake not to believe np organizations are not non-competitive. We compete for a limited pool of dollars from sponsors and individuals. To make best use of those dollars we need infrastructures of talented executives and technology. Like the for profit sector that comes with a price. Our products are the good we do, everything else is on par with the for profit sector. This is a good conversation to be having.

  • Ted Flack

    Two tactics in battle to win resect for “admin” costs might be useful. First, promote the “effective giving ratio” (EGR); to encourage donors to give in efficient ways. Regular giving, rather than 4 mail appeal coupons per year, etc.
    The second, is to make it “unethical” to market yourself as a zero administration/fundraising cost NPO. There is no such thing.

  • Parul

    The concern about so called ‘over investment’ in non-profit emerges when the underlying feeling within donors is “we are doing a favor to the society” which is not the case. Investment in social capital and human development helps us making world a more peaceful place where all people can maximize their potential which will pay back to business and society at large. It is very much a productive expenditure and hence rather than crying about expenses, we should look at the purposes, work towards evolving best monitoring mechanisms to ensure efficiency of the measures.

  • Wahile

    Unfortunately I do not agree, too many “high end” staff are enriching themselves at the cost of the programs or the beneficiaries, especially in Africa. If you want to earn big bucks, go and work in another sector! 🙁

  • Lois Davidson

    The question I have is when the “public” looks at a charity online they look at the Charity Navigator or Guidestar for help, both of these base their star ratings on % of budget to administration costs rather then looking at the organization has a whole with their programs vs other budget considerations. You might have an excellent organization and excellent staff but a low star rating from Charity Navigator. Although in some cases it is justified.

  • Lynn2011

    If non-profits want to maintain quality service they must have and keep good staff. That means a living wage and raises to meet the cost of living increases. The idea that anyone working for a non-profit has taken a vow of poverity keeps many good people away and can creat a revolving door with staff constantly changing as they use non-profits to create a resume then move on. If you want accountability you have to have the current tools–computers, software and staff. With the right tools you can do more work with less staff.

  • Beth827

    For years, non-profit leaders have been conditioned to proudly boast about their minimal admin costs as if it were a badge of honor. In fact, they are being asked to do critically important work with minimal resources, both human and capital. And, while the demands keep growing, the arbitrary acceptable overhead rate has not.

    This is a part of a real irony that non-profits must deal with. On one hand, they are told they should be managed more like “real” businesses. However, on the other, the outdated computers we donate to you should be good enough.

    Many for profit companies would not survive given the same admin limitations. Both non-profits and for profits need the ability to do marketing, program/product development, planning, research and evaluation, staff development, etc. Shouldn’t it be considered a good use of funds if a non-profit embarks upon a marketing campaign that ultimately results in an increase in their ability to raise funds, which therefore allows them to expand the services they provide?

    No one goes in to non-profit work thinking they will get rich, but that doesn’t mean that they should not earn a decent living, commensurate with their position and the size of the organization. Unfortunately, when the very few do take advantage (as in the case of any industry), it is generalized to all non-profits.

    I don’t think there is a definitive answer to the question, what is the right amount of admin costs? It depends upon what the non-profit organization does, and how much is needed to maximize their quality and efficiency. A homeless shelter’s needs are quite different from a symphony’s.

  • Jacques Snyman | SDC

    It is rather insane when donors are prepared to fund anything but operational costs. Overheads are what they are, and everything costs more and more each month. As frugally as one tries to be the truth of the matter is that you can only print on the same piece of paper twice…..

    Then the issue of salaries….talented staff are hard to come by, and even harder to keep, and people do have certain monetary needs, regardless of their passion and love for the cause.

    They at least deserve a market related stipend to keep them motivated and committed. Some of the big organisations and “charities” are notorious for the excess of their execs, but this is hardly the case with the vast majority of non-profit organisations that don’t know where the next funding is going to come from.