ABAG's BBJ Column: 'Overhead' is Over-used as a Way to Measure Nonprofits
Tuesday, September 17, 2013
Posted by: Buffy Beaudoin-Schwartz
Baltimore's ABAG chief says it's time to measure charities on their impact
September 17, 2013
A cycle of unrealistic expectations has left many nonprofits caught in a trap where they continually strive to reduce overhead — often at the expense of investment in critical infrastructure and organizational capacity development.
Nonprofits are businesses like any other with overhead costs and the need to continually reinvest to maintain effectiveness. The unintended consequence of pushing nonprofits to do more with less may result in — much less.
Funders, their expectations and their use of overhead as a measure of performance, have driven nonprofits into what the Stanford Social Innovation Review calls, "The Nonprofit Starvation Cycle.” And, funders must take the lead in breaking this cycle starting with a move beyond the overhead myth.
The percentage of charity expenses supporting administrative costs, commonly referred to as "overhead,” on its own, is not an appropriate metric to evaluate when assessing an organization’s worthiness and efficiency. Instead of focusing on the percentage of expenses that go to administrative and fundraising costs, we need to focus on what really matters. That’s impact.
In a historic move, the leaders of the country’s three leading sources of information on nonprofits — GuideStar, Charity Navigator, and BBB Wise Giving Alliance — recently published an open letter to the donors of America denouncing the "overhead ratio” as an indicator of nonprofit performance. The letter, signed by the CEOs of all three organizations, has marked the beginning of a campaign to correct this common misconception.
The letter, available on the website overheadmyth.com, states that "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. When we focus solely or predominantly on overhead, we starve nonprofits of the freedom they need to best serve the people and communities they are trying to serve.” The letter goes on to recommend that donors focus attention on more relevant factors behind nonprofit performance: transparency, governance, leadership, and results.
Associations of grantmakers around the country are sharing this information with members to drive discussion, dispel myths and encourage nonprofit enterprises to invest in sustainability and success.
The overhead myth letter is under a Creative Commons license and nonprofits are encouraged to include a copy in donor solicitations.
Celeste Amato, president of the Association of Baltimore
Area Grantmakers, can be reached at firstname.lastname@example.org.