The Overhead Myth

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Editors’ Note: NPQ is proud to highlight this important letter from GuideStar, Charity Navigator and the Wise Giving Alliance calling for an end to the obsession many have had with nonprofit overhead costs as a proxy for measuring effectiveness BUT for the letter to be effective it is important that people share it in every way they can. 

Please see NPQ’s statement on this letter here


OM

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.

That is not to say that overhead has no role in ensuring charity accountability. At the extremes the overhead ratio can offer insight: it can be a valid data point for rooting out fraud and poor financial management. In most cases, however, focusing on overhead without considering other critical dimensions of a charity’s financial and organizational performance does more damage than good.

In fact, many charities should spend more on overhead. 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. These expenses allow a charity to sustain itself (the way a family has to pay the electric bill) or to improve itself (the way a family might invest
in college tuition).

When we focus solely or predominantly on overhead, we can create what the Stanford Social Innovation Review has called “The Nonprofit Starvation Cycle.” We starve charities of the freedom they need to best serve the people and communities they are trying to serve.

If you don’t believe us—America’s three leading sources of information about charities, each used by millions of donors every year—see the back of this letter for research from other experts including Indiana University, the Urban Institute, the Bridgespan Group, and others that proves the point.

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.

Thank you,

Art Taylor
President & CEO,
BBB Wise Giving Alliance
overheadmyth.give.org
Jacob Harold
President & CEO,
GuideStar
overheadmyth.guidestar.org
Ken Berger
President & CEO,
Charity Navigator
www.charitynavigator.org/
thebestandworstwaytopickacharity

READ THE FULL PDF VERSION HERE

  • Valerie

    Tell this to someone who doesn’t work in a public university. In addition, my own experiences with too-big-to-fail charities is that they are welfare for social workers. I have stopped giving to both the Red Cross and the United Way for this reason.

  • Stan Collins, CEO

    Thank you for this great letter! We are sharing the message with the members of our Columbus Realtors Charitable Fund Advisory Board, who not only help craft our charitable funding campaigns but also help determine the nature and direction of the community support grants extended.

  • Robert K. Bacon

    Bravo! We provide insurance and employee benefit services to a number of small not-for-profit organizations in the North Florida area and I recently had this exact coversation with one of our clients. If the Executive Director is training new employees or volunteers to provide the charity’s direct services, is that overhead? After all, he’s the adminstrator. Or, is it part of the progam expense? You can’t provide the service wihtout a trained staff. This particular charity is working with its accounts to change the definition of “overhead” so as to show a lower “administration” expense. What they are doing is not misleading, it actually better reflects “overhead” vs direct services, but the change is being driven by the donor perception you describe in your letter. This is especially pronounced with “institutional” donors such as foundations and other chrities and by grantors such as government agencies.

  • Heather Peeler

    Grantmakers for Effective Organizations applauds BBB Wise Giving Alliance, Guidestar and Charity Navigator for taking this important and historic stand on nonprofit overhead. Misperceptions around overhead have harmed many nonprofits’ efforts to achieve meaningful results in their communities.

    Assessing nonprofit performance based on the ratio of overhead costs is not an effective way to understand and support the overall health of the organization and its programs. We need nonprofits to be strong, resilient and effective — that is how we will change more lives. Research shows that effective nonprofits are those that strengthen operations and impact by investing in staff development, technology and other infrastructure, as well as R&D. Funding the full costs of operating programs and organizations — including overhead expenses — is critical to nonprofit success. To that end, when donors provide ongoing flexible support, nonprofits are able to plan with more certainty, adapt more quickly, improve their programs and have a greater impact in communities (visit http://www.geofunders.org for resources on making unrestricted grants).

    Unfortunately, unrestricted and multiyear funding are some of the hardest types of support for nonprofits to come by, according to a GEO national survey of staffed foundations. It is our hope that by shifting donors’ focus to providing nonprofits with the support that they need most, this campaign can help provoke important changes in philanthropy for the benefit of all.

    Heather Peeler

  • Roger A. Lohmann, Ph.D.

    It is good to see this letter from three nationally respected authorities making a sound and fundamental point! The overhead myth and the “starvation cycle” it inspires has been plaguing legitimate fundraising for nonprofits for many decades. Everyone with an interest in public charity has an interest in getting the world of donors straightened out on this point.

  • Daniella Levine

    I am pleased to see that the very groups that have in many ways contributed to this myth recognize and wish to correct the false impression. It is also sad that many of the most zealous promoters of low overhead as a proxy for effectiveness are our fellow nonprofits who have achieved low overhead due to scale or because they are singularly focused on unit service cost at the expense of building civil society. Indeed, one of the most uplifting ideas in this regard I have heard is this: what makes a nonprofit unique is that it is taking time to engage people as volunteers, champions, board members, in order to engage them in social change. The messy business of democracy is not efficient, but it is the antidote to repression and small-mindedness.

  • Amy Coates Madsen

    Bravo to our colleagues at BBB Wise Giving GuideStar and Charity Navigator for this letter and call to action! We, at the Standards for Excellence Institute have been advocating this point that overhead is one small piece in the long list of considerations that individuals should consider when deciding which nonprofits to fund since the advent of our program (www.standardsforexcellenceinstitute.org), fifteen years ago.

    In our program, rather than provide a suggested threshold for what constitutes too little or too much overhead, we have always stated that each nonprofit’s board of directors should annually review the percentages spent on program, administration and fundraising. The Standards for Excellence: An Ethics and Accountability Code for the Nonprofit Sector also outlines a ratio for nonprofits to strive for regarding how efficient their fundraising activities should be. We also encourage donors to focus on “factors of nonprofit performance: transparency, governance, leadership, and results.” What we provide is the education and resources to help nonprofits demonstrate those qualities. The Standards for Excellence initiative focuses on encouraging nonprofits to embrace and carry out best practices in their leadership, management, governance, evaluation, transparency, financial, fundraising efforts. The effort outlines a set of standards nonprofits can and should follow, offers a comprehensive educational program, and provides a comprehensive tiered accreditation program as well. The Standards for Excellence program, which began as an initiative of Maryland Nonprofits, is now offered by nine licensed partners and promulgated by a cadre of licensed consultants across the country.

    Amy Coates Madsen
    Program Director
    Standards for Excellence Institute

  • Donna Kuzemchak

    As an independent grant writer for a few nonprofits, I have seen this work both ways. Sometimes high overhead really is a problem – part of my job is to help nonprofits get that overhead down so they are fundable. However, sometimes there is a great reason for the high overhead. For instance, the nonprofit may be looking to build a community center and their CEO is raising funds and trying to push forward on building as well as administering the daily aspects of the nonprofit. That CEO also worked hand in hand building relationships with funders, and helped them understand the high overhead costs. Unfortunately, I also work with a nonprofit that had to lower overhead quickly – The Executive Director and Development Director were eating up more in costs than they were running in programs. Now the Board of Directors is leery and I can’t blame them.

    So although I do agree communities served by charities don’t need low overhead, they need high performance; I can also see how setting that structure up for a funding entity could be difficult.

  • Stephen Slade

    I have been fundraising for more than 30 years and have never had a donor more than casually ask about overhead. I simple do not believe it is an important issue for the vast majority of donors. Those few who do raise the subject seem to do so out of some half-hearted sense that they should — and their issues show they haven’t thought about it at all. Some seem to think staff is overhead and when you explain that staff does the work, they say, oh, okay. Really, I think the overhead thing is a myth created by this charity ranking organizations and even then it has not penetrated deeply into the donor class. I also run into very few donors who look at 990s, another great myth. My experience is that donors already pay more attention to impact than to these phony measurements.

  • Frederic Day

    So….I have a list of the 50 worst charaties….where is a list of ” the Best”…i. e. where should I give? Thanks

  • Wade

    In other words, the fox is watching the hen-house. CharityWatch has a sound rebuttal to these sell-outs’ propaganda: https://www.charitywatch.org/charitywatch-articles/overhead-ratios-are-essential-for-informed-giving/133