Guidestar, Charity Navigator, and Wise Giving Alliance Call for End to Overhead Obsession

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In an historic letter released today, GuideStar, Charity Navigator, and the BBB Wise Giving Alliance have joined forces to caution against overemphasis of the overhead ratio when judging a nonprofit’s quality or worthiness as a grantee.

The use of overhead ratios to judge nonprofits has probably intensified in recent years as information on nonprofit budgets has become increasingly accessible through organizations like these. One or two of them may even have encouraged that  emphasis. But the use of overhead as a primary proxy has always been intensely flawed and has brought unfortunate consequences. Organizations have starved themselves of necessary infrastructure in a misguided attempt to fit a single formula. What’s worse, many nonprofits feel that they have to fudge their numbers to fit, which means obfuscating the real information about how much it costs to serve a variety of organizational needs across size, stage of development and field. This is valuable information for comparative purposes, and it’s being obscured.

Recently, for instance, Forbes ran a series of articles about the practice of “daisy chaining” contributions of in-kind goods among some organizations doing international aid. One organization transfers medication or other goods it has received to another, counting the transfer as a program cost without having to actually deliver the material. The same goods may travel through multiple nonprofits and NGOs before being delivered to an end user. The practice makes each organization look bigger than it is so that its overhead looks smaller, with the aim of making each participating organization more attractive to donors.

Obviously, this is an extreme example, but you get our point. The use of this as a measurement, in and of itself, has caused some habits that are not particularly healthy or productive.

Need we say that the idea that you can judge an organization’s worth on how much it spends in certain categories is a bit silly? Clara Miller is fond of making the comparison to a hotel. Imagine that you went traveling and refused to take a room until you were informed about how much the inn spent on administration. Even if you were given that information, would you then compare that ratio to that of, say, your local airline?

NPQ has published a good deal on this topic, including some recent articles that promoted the continued use of the overhead ratio, though perhaps with more balance. But their message to donors regarding how donors evaluate charities for support also applies to major institutional funders, such as foundations and governmental agencies. Their practices in grantmaking can reinforce the shading some nonprofits do of their overhead expenditures. Historically, many foundations made it their policy to refuse to include nonprofits’ overhead calculations in their grant awards. The logical result is that nonprofits either squeeze out overhead expenditures or hide their administrative costs as part of programmatic expenditures.

The same signal sometimes occurs in disaster relief. Although disaster relief efforts have trended toward more openness about administrative costs, many disaster relief operations both small and large have come to promise donors that 100 percent of their donations will go to the victims or to services, with no administrative or other overhead costs. Sometimes, to hide the overhead, the coordinating agencies will do separate fundraising for administrative costs, but the result sends a signal to donors that contradicts the message of Guidestar, Navigator, and the Wise Giving Alliance.

On the governmental side, any nonprofit that has struggled with the overhead standards in OMB circulars at the federal level or the requirements at the state government levels knows how frequently nonprofits end up underfunded for their administrative costs on government grants and contracts. Here, too, nonprofit vendors find themselves in the awkward circumstance of delivering services that not only don’t pay for themselves, but also starve the agencies of necessary administrative infrastructure investment.

The cogent message of the three sponsors of the overhead myths letter will have a powerful effect on donors, but it should also be absorbed by the other opinion-setters in the industry—foundations and governmental agencies. If, either through regulation or simply through practice, foundations and governments choose to use overhead as an isolated one-size-fits-all measure of grantworthiness, or they pursue grant or contracting practices that diminish or eliminate administrative funding, the strategy they’ll be pursuing will weaken the nonprofit sector.

Guidestar, Navigator, and the Wise Giving Alliance help shape opinions in the nonprofit sector through the ratings that two of them issue and the overall analyses generated by all three. It is critically important that this letter is seen and interpreted as a clarion call to donors to look for more robust, more revealing measures of nonprofit quality. The next step would be for their overhead myths letter to be incorporated into the grantmaking behavior of institutional grantmakers, whose decisions shape aspects of public policy toward nonprofits.

—The editors of Nonprofit Quarterly

  • Timothy Ogden

    Just a note that this effort began back in 2009 with this letter/press release that included Charity Navigator and Guidestar joining forces for the first time on this issue:

  • Lisa

    I want to understand here, that you are saying stop focusing on overhead, because it is driving non-profits to commit fraud on their financials? How about rooting out and letting us as donors know about in-kind transfer fraud so we can stop funding those charities using the technique?

    Some charities do get endowed commitments that cover their overhead so that public money raised through text campaigns does go fullly to their programs. It certainly seems that this letter is a capitulation by the leading charity rating agencies that we have to tolerate badly managed organizations or those overpaying senior staff or book-cooking.

    I think to be effective, you should follow up with a new letter tomorrow with what new metrics of evaluation and review ought to be. Can you pull that together as an encore to this piece?

  • Marti Hess

    Thank you for this article and bringing this to the forefront. As a former non-profit Executive Director I experienced firsthand how difficult it was to operate a high quality organization with a small administrative budget. When funding is restricted to programs and services only, the organization suffers dramatically in areas such as HR. No other business model is expected to thrive and grow with these kinds of restrictions, much less be able to provide excellent support systems for employees.

  • Jim White

    Applause for Guidestar, Charity Navigator, and the Wise Giving Alliance for helping to shift the conversation. “Overhead” is not the ultimate measure by which nonprofits’ effectiveness should be measured. There should never be a ratio that “good” nonprofits spend 65 or 70% (or 90%?) of their revenues on programs. Let’s have the debate and reach some agreements in our sector to define impact measures that can demonstrate our effects on society as well as business performance ratios that make sense. Let’s adopt some Standards of Excellence of what it means to be a nonprofit along the lines of the initiative that the Maryland Nonprofits and others have initiated. (

    At the same time, let’s recognize that while this debate is continuing,our sector’s credibility gets eroded every time a new scammer is uncovered collecting donations from well-meaning citizens but then putting only a fraction back into the programs for which they are collecting. It was with this in mind that the Nonprofit Association of Oregon supported a new law (HB2060) to set a “floor” based on the current mechanism nonprofits are required to submit to the state for reporting revenues and expenditures. We believe this is a practical approach that does not let the perfect be the enemy of the good. Our Oregon Attorney General is now empowered to review those organizations at the extremes of the overhead ratio as reported in 990s and force them to disclose to their donors that they cannot take Oregon tax exemption. At a time when the status conveyed by the charitable tax incentive is under attack in so many states and at the Federal level, we felt that it needs to be kept sacrosanct to those organizations that are actually providing community benefit.

  • Ira Kaminow

    I hope that Charity Navigator and BBB will take their own advice and stop penalizing charities that spend “too much” on overhead in the ratings but never lower ratings for spending too little. From CN web site: “Percent of total functional expenses spent on management/general (lower is better)” or “Percent of total functional expenses spent on fundraising (lower is better)” But on the letter they admit that some charities spend too little on overhead. So, for some higher spending on management/general and fundraising is better. Similarly BBB never has an upper limit for overhead spending but no floor. The sad truth is that both BBB and CN have been contributing to “Overhead Obsession” in their own rankings.

  • Juliann Curabba

    So happy to see folks putting a light on this. As a manager in the non profit world, who relies heavily on government funds, it has become almost impossible to market, met IT needs and have a talented HR department, to name a few, to keep us moving forward in a way that meets the ever changing needs of our clients.. We rely on so many people and their donations, I am happy to see that they are getting much needed information to inform their decisions when giving.

  • Stacy Anderson

    This brings up some good points regarding nonprofit budgets and the true costs of delivering services. However, in highlighting the 50 worst charities (see“), such ratios were harbingers of poor stewardship.

  • Laura Rossmann

    It seems to me that the BBB Wise Giving Alliance and Charity Navigator should revisit their own rating standards. They seem to be saying the opposite of the letter by putting a focus on some arbitrary number.

  • Simone Joyaux

    Well finally… The damage done to nonprofits when the focus of measurement is overhead… The lack of investment in capacity and capability because that would increase overhead… The confusion of what is overhead… (Lots of insurance is part of program cost!)

    And treating donors as if they really care about overhead instead of impact.

    The nonprofit sector lost control of this topic years and years and years ago. And the watchdogs (like the troublesome three who have now moved forward) have exacerbated the situation over the years.

    Now…finally… yippee!

  • John

    The issue was never just overhead costs, but abuse of the joint accounting loophole. The professional fundraising industry does not want the loophole modified, but does want Charity Navigator and the BBB to continue to give stellar ratings to their biggest customers. Direct mail and telemarketing do serve in raising awareness, you know.

    Of course it is important to measure impact and effectiveness, but Charity Navigator’s approach is to accept at face value whatever an organization claims to have achieved, the number of lives saved, services provided and funds distributed. There are plenty of liars, narcissists, publicity hounds, credit thieves, and corporate psychopaths (using Dr. Robert Hare’s scale) running charities. Evaluating compulsive liars using the honor system. Brilliant. Charity Navigator will be rewarding them even more than it already is.

    I see this “historic” agreement as a way for the Kenny and Artie to stay relevant, even as they lead groups that jumped the shark a while ago. The media has finally been INVESTIGATING charity fundraising and the worst revelations are yet to come. The DMA pressured Charity Navigator to help push back against reform efforts that are resulting from the media doing it’s job. I find the whole overhead myth issue just a way to maintain the fundraising industry status quo in the face of tough questions. I wouldn’t bet on the hucksters and navigators in this fight, as they have little credibility. The investigators and reformers are way more intelligent, and their reputations speak for themselves.

  • John

    It is investigations like “America’s 50 Worst Charities” and the CNN Investigation of Quadriga Art that are shining a spotlight on the widespread abuses in charity fundraising, particularly by outside solicitations firms.

    The issue isn’t really what a charity itself spends on overhead, but what it gives the unsavory paid solicitation mills that are the main beneficiaries of too many tax exempt charities. A fundraiser employed by a charity is not the same thing as a commercial salesperson working for a boiler room operation. The Overhead Myth crew doesn’t want people to see that, especially while the media investigations are going viral.

    It’s also about cooking the books with fundraising expenses by calling them program services. Industry wants Charity Navigator and the other lightweight evaluators to avoid that topic altogether in their ratings.

    The media has been doing an excellent job exposing fraud and abuse in the past couple of years. And there’s much more to come. And they are following up. The fundraising iindustry – and Charity Navigator, Guidestar, and BBB – are trying to maintain their power and influence. That’s what this group hug is all about.

  • Ken Wyman

    Focus on overhead as a measure of efficiency is like looking only at MPG when buying a vehicle. If you need a bus or a truck, it is not helpful to look at the fuel data for tiny two-seater hybrid. At the very least compare vehicles for delivering charity project in categories, the way we compare moving vehicles, based on size and purpose.

    This announcement is good news indeed.

  • Barry Mey

    “more revealing measures of nonprofit quality” It is this emphasis on which nonprofits will need to focus their distinctive product offering. Nonprofits need to focus on qualitative outcomes, rather than on quantitative, something all CEOs of nonprofits battle to reach a balance with due to retaining staff compliments, developing human capacity in the nonprofit, whilst at the same time maximizing their reach within their targeted beneficiary market in order to achieve a worthwhile balance of service delivery, personnel well-being and satisfying donors with a reasonable return on investment.

  • Dan M

    Let’s give a lot of credit to Dan Pallotta and his powerful TED Talk message. The charity evaluators are not innovating, they are responding to outside criticism. Unfortunately the organizations rating NPs are not equipped, motivated or funded to truly evaluate “effective” organizations.

  • Muriel Christen

    I would like to give to safe and worthy causes. I don’t have a lot of spare money, but I don’t find it easy to evaluate your

  • Wade

    So, the fox is watching the henhouse. The CharityWatch soundly rebutted this overt propaganda: