Follow Social Velocity on Google Plus Follow Social Velocity on Facebook Follow Nell Edgington on Twitter Follow SocialVelocity on Linked In View the Social Velocity YouTube Channel Get the Social Velocity RSS Feed

Download a free Financing Not Fundraising e-book when you sign up for email updates from Social Velocity.

Why Nonprofit Overhead is Destructive

By Nell Edgington



It’s that time of year when donors make key decisions about their end of year giving. But a recent post on the Social Earth blog advising donors about questions they should ask nonprofits perpetuates thinking that actually hurts, rather than helps the nonprofit sector. The author, Tarini Chandak, asks “How do you know where your charitable dollars are going? Are they going to the cause you want to support or are they going to administrative and fundraising expenses?” In reinforcing old, and destructive binary thinking about program vs. overhead expenses, Tarini is doing nonprofits and their donors a real disservice.

Tarini lists 4 key questions she thinks every donor should ask of the nonprofits they consider donating to:

As various charities vie for your charitable donations, there are many questions you can ask them directly, including:

  1. How much goes to the cause? How high are their expenses?
  2. How efficient is their fundraising? What is their cost-per-fundraised-dollar ratio?
  3. Is the charity run properly? How efficient and effective is their human capital? Management team?
  4. Do they even need your money? Will your money just be lying around in their reserve?

I think questions #2 and #3 are excellent, but questions #1 and #4 perpetuate thinking that holds the nonprofit sector back.

Let’s start with Question #1: “How much goes to the cause? How high are their expenses?” As I’ve written before, the distinction between program (or “cause”) and administrative expenses is meaningless at best, and destructive at worst. If a nonprofit organization is creating change, then everything they do is in support of that change. How can a program run if there is no financial engine (fundraising) to fund it? If there is no building or space to house it? If there is no financial management or regular audits? If there is no regular evaluation of whether the program is making a difference? How can you possibly separate “program” from “overhead?” We must move beyond this distinction and encourage nonprofits to raise (and donors to give) more capacity capital, or the money that nonprofits so desperately need to create effective and efficient organizations.

Tarini’s Question #4 “Do they even need your money? Will your money just be lying around in their reserve?” is equally troublesome because it reinforces the backward notion that nonprofits should not have a reserve fund. As I (and others) have written before, we have to get away from the nonprofit taboo that operating reserves are wrong. Nonprofits cannot plan for the future, have a sustainable financial model, experiment with program changes, take risks, or any of the other things that are absolutely necessary to creating social change, without some operating reserves. If nonprofits are continually forced to go month to month without any cushion they will never emerge as strong, sustainable organizations capable of creating lasting change.

We must move away from thinking that encourages nonprofits to scrape by without the tools and infrastructure they desperately need. We must stop measuring nonprofit performance with meaningless financial metrics and instead evaluate nonprofits on their ability to deliver change. If a nonprofit is creating real change, does the minutia of how they spend money really matter?

Photo Credit: just_a_name_thingie

Learn more about nonprofit innovation and
download a free Financing Not Fundraising e-book
when you sign up for email updates
from Social Velocity.


About the Author: Nell Edgington is President of Social Velocity (www.socialvelocity.net), a management consulting firm leading nonprofits to greater social impact and financial sustainability. Social Velocity helps nonprofits grow their programs, bring more money in the door, and use resources more effectively. For more information, check out Social Velocity consulting services and clients.


Tags: , , , , , , ,


10 Comments to Why Nonprofit Overhead is Destructive

Eliza Olson
November 30, 2011

How true. The best answer that I heard one fundraiser give to a potential donor who didn’t want any of her donation going to administration, etc. “We can do that. But the doctors and nurses will have to operate in the dark.”

My answer is that “everything goes towards our cause.”

I met with an entrepreneur yesterday who had a great fundraising idea for us. First he commented about the high wages received by staff members at some charities. I told him not to take the information seriously because much of it had been refuted.

Then he proceeded to promote a “fundraising idea” for our society. It sounded good. Then he proceeded to tell me that I would have to fundraise $20,000.00 for him to do it!

Thomas
November 30, 2011

Nell, I’d like to offer an “op-ed” if I could.

I think you both polarize a situation that calls for a combination, a balancing, of these concerns. Said differently, like the old Monkee’s song, it really is “A Little Bit Me, A Little Bit You.”

With the exception of the medical sector, I believe the animal sheltering sector (of the nonprofit “industry”)may be the most reliant upon brick and mortar facilities. In my industry the focus upon this aspect, PP&E as accountants call it, seems to ALWAYS lead these organizations astray. Their focus shifts from saving lives to building a bigger and prettier building. I call this empire building. And these new buildings are virtually unneccessary to accomplish the primary goal = saving lives.

Austin (Texas) just two weeks ago opened their new $12 million animal shelter. Boiling it down to the basics it really is nothing more than a shiny version of what they had. They rave about how “unique” and “state of the art” it is. When viewed through the eyes of this innovative old timer, it really brings nothing new to the table. Same old, same old.

The worst part? The facility caters only to pleasing people. With its huge lobby and pretty paint job, it remains an old-fashioned animal prison. It won’t do any better to save lives than their old run-down building would.

Tarini C. is absolutely correct to challenge these organizations who have shifted their focus to building these monuments to themselves. Most animal shelters in big cities are little more than costly sink holes with little emphasis on saving lives. Shame on them.

I get your points and I agree. But the reality of human nature is so important to grasp that her questions remain valid in today’s real world of greed and empire building.

Our country would not at all be in the ruined financial condition it is in today had former President Ronald Reagan’s financial advisors had had any grasp of human nature when they recommended to him two fine concepts: deregulation and free markets. They forgot to consider one human aspect that screwed everything up and lead to today’s total collapse: human greed.

I am actually saying that in our world both of your positions are correct. Tarini’s seems to come from watching people build huge, ineffective organizations. Yours, like Ronald Reagan’s advice, tends to come with a set of rose-colored glasses.

Nell, I write only on behalf of this one specific charitable industry sector. I make no application of this to any other non-profit sector. Thanks for allowing me to comment.

Nell Edgington
November 30, 2011

Thomas, I completely agree with you that there is at times unnecessary spending in the nonprofit sector. Buildings are built that provide little improvement to an organization’s ability to create change. That must be addressed, to be sure.

But what I am arguing is that focusing on meaningless metrics like percentage of overhead will not bring that waste to light. A more effective metric would be cost per outcome. So, in your example, if the new shelter could demonstrate a $12 million+ improvement in outcomes for the animals they serve, then they would have a positive ROI for their building. As you argue, I doubt that the new building provides that level of outcome improvement, so it could be that that money was not well spent.

My point is that if we only look at how a nonprofit spends money, apart from the outcomes that result from the spending of that money, we handicap the sector. Nonprofits must be allowed to spend adequate amounts of money to ensure effective and efficient operations (staff, space, technology, etc) otherwise there will be no outcomes to measure.

Tina Crouse
November 30, 2011

Hi Nell:

Move your last paragraph to the beginning of the post. ‘Nuf said.

[...] Why Nonprofit Overhead is Destructive | Social Velocity In order to move past the nonprofit starvation cycle we must stop forcing nonprofits to make a destructive distinction between program and overhead expenses. Source: http://www.socialvelocity.net [...]

[...] Why Nonprofit Overhead is Destructive In order to move past the nonprofit starvation cycle we must stop forcing nonprofits to make a destructive distinction between program and overhead expenses. Source: http://www.socialvelocity.net [...]

Brady Josephson
December 8, 2011

Great post Nell and nice to find you and your blog/site. I would go one step further in that question #2 is also not a good and destructive question to ask as it ties in to the similar constraints that #1 and #4 do in that it does not allow an organization to take a longer-term fundraising/sales strategy. If you wanted to invest heavily in raising the profile/brand of your organization to “harvest” in three years (as many businesses do and charities should also be able to) the “fundraising efficiency” would be wacked in year one because of the investment that was made. That and with the accounting practices in the nonprofit sector you still can’t trust those numbers or compare them from organization to organization properly. Great post though and thanks for sharing.

Nell Edgington
December 8, 2011

Brady,

I don’t know if I completely buy that. Not enough nonprofits analyze their fundraising efficiency. Nonprofits will hold big, expensive gala events without analyzing how much net revenue the event actually brought in. I agree with you that nonprofits need to have a longer-term fundraising strategy, but they also need to analyze the effectiveness of that strategy and ROI can help them do that. See this post on that topic: http://www.socialvelocity.net/2011/06/financing-not-fundraising-calculating-the-cost-of-fundraising/

Cathy Sharp
December 11, 2011

Thomas makes the perfect case for why Nell’s argument is so important: by stating that animal rescue organizations are one of the most dependent on bricks & mortar, he is making the very clear case that all organizations cannot be measured by one all-encompassing benchmark such as the BBB’s 25% max for overheard/admin costs. If one sector is highly dependent on bricks & mortar, another is dependent on highly trained human resources such as psychologists (mental health orgs), and another can operate effectively with a volunteer-driven program mission, then is it accurate (much less fair?) to use the overhead/admin % as a measure of an organization’s use of their funds and effectiveness? To Nell’s follow-up point, if the shelter can demonstrate that more people were coming to the new building because the prior one was a deterrent, and more people coming leads to more adoptions and reduction in killing, then won’t the $12M be worth it, over time? That said, the shelter STILL must have the infrastructure or capacity to actually measure such outcomes and THAT likely means experienced staff for tracking & evaluation as well as the technical tools to conduct and report the outcomes–all of which is typically considered overhead expenses. Not only is there the extremely detrimental effort to perpetuate the myth that “overhead” is wrong, it’s the people–primarily external constituencies–who not only use this as a punitive evaluation tool for non-profits, but also are demanding more effective use of their precious dollars. They are either not willing to acknowledge what it takes to accomplish this or are simply too ill-informed to know.

[…] spent a magic 20% or less on non-program expenses they were deemed worthy of donations. This destructive way of evaluating nonprofit organizations has been losing favor over the last few years as rating agencies like Charity Navigator have […]

Leave a comment


Share





Search the Social Velocity Blog