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Demonstrating Non-profit Success and The Overhead Myth

Lori Halley 17 July 2013 0 comments

Just as we were publishing the June Nonprofit Blog Carnival about Data for Good (a round-up of posts on non-profit measurement and data) last month, three of the leading sources of information about charities - the BBB Wise Giving Alliance, GuideStar, and Charity Navigator - published a “Letter to The Donors of America” about "The Overhead Myth". In this letter, they asked that donors “consider the whole picture” when making donations” rather than focusing on the “percent of charity expenses that go to administrative and fundraising costs—commonly referred to as “overhead”—[which] is a poor measure of a charity’s performance.”

According to the statistics reported in the “Overhead Myth” letter, “62% of all Americans believe the typical charity spends more than it should on overhead.” (Giving Evidence) “In fact, those surveyed ranked overhead ratio and financial transparency to be more important attributes in determining their willingness to give to an organization than the demonstrated success of the organization’s programs.” (BBB Wise Giving Alliance)

The people and communities served by charities don’t need low overhead, they need high performance.

But, as the letter suggests, the “Overhead Myth” persists despite evidence that investments in overhead facilitate better nonprofit performance.”  In fact, the authors note, “underinvesting in overhead creates a range of negative outcomes which undermine quality and sustainability.”

“The Success Metric Conundrum”

In an article in the Nonprofit Quarterly, Richard Larkin, CPA (Technical Director for Nonprofit Accounting at BDO USA, LLP) suggests that in the business world, we’re used to measuring a “for profit” company’s success by “the amount of profit – the bottom line – that is reported in the business’s financial statements…. In the nonprofit world, however, there is no common, easily understood measure of success. In fact, having a large positive bottom line may be an indicator that the organization is not doing as much as it could to fulfill its mission. The true measures of success for most nonprofits are statistics related to its programs, but such data are difficult even for management to obtain and understand, much less outsiders.”

So unfortunately, “true success is measured only by outcomes, and these data are never found in financial statements, if they can be obtained at all.”

But it’s more than the “Overhead Myth” – “The way we think about charity is dead wrong”

But debunking the “Overhead Myth” may not completely solve the problem. In the Western world, our attitude towards non-profit business practices in general has become, as Dan Pallotta proposes, a mythologized “system of ethics” which he suggests “has a powerful side effect, …it gives a really stark, mutually exclusive choice between doing very well for yourself and your family or doing good for the world”.

In a Ted Talk back in March, Pallotta explained that the “way we think about charity is dead wrong. …We have two rulebooks. We have one for the nonprofit sector and one for the rest of the economic world. It’s an apartheid, and it discriminates against the [nonprofit] sector in five different areas”.

For example, Pallotta submits:

“we tell the for-profit sector, “Spend, spend spend on advertising until the last dollar no longer produces a penny of value.” But we don’t like to see our donations spent on advertising in charity. As if the money invested in advertising could not bring in dramatically greater sums of money to serve the needy.”
In addition, “we’ve all been taught that charities should spend as little as possible on overhead things like fundraising under the theory that, … the less money you spend on fundraising, the more money there is available for the cause.”

Since, as Dan Pallotta suggests in the closing of his Ted Talk, “Our generation does not want its epitaph to read, “We kept charity overhead low”, let’s hope that donors read the “Overhead Myth” letter and heed its message and Pallotta’s advice and “[revisit, revise and reinvent] the whole way humanity thinks about changing things, forever, for everyone.”

What are your thoughts on "The Overhead Myth" - let us know in the comments below.

Lori Halley [Engaging Apricot] Lori Halley [Engaging Apricot]

Posted by Lori Halley [Engaging Apricot]

Published Wednesday, 17 July 2013 at 8:30 AM
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