Donors and Overhead: Maybe They Don’t Care
I’m convinced that the reason that people care about the overhead ratio of charities is because we keep telling them that it’s important. I have an announcement to make: I am a donor to quite a few nonprofits, and I don’t care what percentage of their budget is spent for overhead. I think that a lot of donors would agree.
Yet, in another article advising us about charitable giving, 5 Tips on How to Stretch Your Charitable Dollars published in the New York Times online published by the AP and picked up by the New York Times and other newspapers, overhead is (once again) emphasized:
Tip #2: EXAMINE CHARITIES CLOSELY. Do the same due diligence on your donations that you would your investments or your business…
Pay especially close attention to the overhead. Anything above 9 to 14 percent is out of line and signifies that too much money goes to staff or office space and not enough to the beneficiaries, according to Stephanie Risa Stein, managing director of New York-based Philanthropic Capital Advisors LLC.
Here’s my soapbox
I agree that it’s wise to “Do the same due diligence on your donations that you would your investments or your business.” But when I review an investment opportunity, I review based on the expected criteria for a successful business – profitability, market share, and returns. I don’t review their overhead and management costs. So why would overhead be the criteria for a charity?
I’d like to re-write this “tip.”
EXAMINE CHARITIES CLOSELY. Do some due diligence on charities before you donate, just as you would for an investment or business opportunity. Pay especially close attention to how successful the nonprofit has been at achieving its mission. Do they provide information about how effective their programs are and what impact they have on the people and communities that they serve? Do they have a way to measure and communicate progress and/or success?
I put these two types of “due diligence” to the test with five Minnesota nonprofits that I have supported in the past. I looked at the 990s on Guidestar and found that their overhead ratios ranged from 5% to 17%. Then I looked up web sites and annual reports. Here’s what I (a donor) care about:
- St. Stephen’s Human Services provided food and shelter to 6,000 very poor adults and children
- CommonBond Communities houses 7,850 residents in quality affordable housing
- Admission Possible had a 99% success rate in students admitted to college
- Ten Thousand Things presents astounding theater to people in homeless shelters and prisons
- Minnesota Fringe Festival creates connections for audiences and artists that’s the envy of theater communities in many other cities (the 2009 festival starts this Thursday).
Which of these has the “best” overhead ratio?
I don’t care.
I care that they are effective nonprofits that can tell donors what they do and why it matters. Why would a donor rather examine overhead? Before someone jumps on this point, I agree that 90% on fundraising is completely unreasonable, but that kind of organization can’t demonstrate real results anyway. So can we stop using overhead as the primary criteria for donors – please?
One positive comment about this article – Rich Cowles, Executive Director of Charities Review Council is quoted with good advice for donors about budgeting and planning their giving. Nice national recognition of the Council’s good work and solid reputation.
I agree with Kate that using overhead as a measure is overblown and that way too much attention is paid to it. The Charities Review Council, for many years, has tried to discourage donors from ranking or rating charities based on their overhead ratios. Our proposed new standard on Use of Funds takes into account the need for nonprofits to invest in its infrastructure and recognizes that in a well-managed organization, non-program expenses do, in fact, further its ability to carry out mission. We’ve seen charities make short-sighted decisions that starve its infrastructure in order to achieve a higher program ratio.
I also like Kate’s “EXAMINE CHARITIES CLOSELY” tip. WHAT a nonprofit accomplishes in furthering its mission is what matters most. But, to continue a good-natured discussion that Kate and I have had for some time, I think that donors should also care about HOW the nonprofit got there. Our Accountability Standards include a number of measures of process and efficiency that we think donors have a right to expect from nonprofits—one of which is that a reasonable level of expenses be spent directly on their programs. Given that there’s a finite amount of money to be donated, if a nonprofit achieved similar results to those of the five charities that Kate lists, but it required twice as many contributions to do so, isn’t that important for a donor to know?
Comment by Rich Cowles — July 29, 2009 @ 11:16 am
I also agree with Kate’s analysis and her suggestion to donors. When we think about infrastructure as ‘overhead’ we are encouraged to focus on the supposed extra staffing / systems as ‘waste’. However, in a number of research projects I’ve done, I’ve documented that infrastructure is a key element of management capacity. And this capacity is related to the overall organizational effectiveness.
This is not a hard concept for businesses or government to understand. By their own example, they realize that purposive investment in information technology, staff development and training, effective performance appraisal, performance assessment and learning improves overall organizational effectiveness. This is what ‘overhead’ is all about – trying to assure the organization is managed in a way to be a strong steward of its financial, personal, expertise resources. That is what is needed for nonprofits to make a difference on the important social problems they exist to address.
Comment by Jodi Sandfort — July 29, 2009 @ 4:39 pm
I absolutely agree that the administrative expense or overhead ratio is both vastly overused and vastly misunderstood. Having said that, I would also agree with Rich that knowledgeable donors should include the ratio in a comprehensive analysis. Not to measure against a generic benchmark though, but to compare the organization over time. Comparing this ratio between similar organizations can also be misleading since what is reported as M&G can differ significantly from agency to agency.
Comment by Mark Ingold — August 3, 2009 @ 10:12 pm
This “overhead vs. program” question reminds me of an argument that people often make about the efficiency of Medicare, pointing to its miniscule administrative ratio. Flip the coin over. If Medicare spent more rooting out excessive and fradulent billing practices, we’d certainly be happy, right? However, this increased level of scrutiny costs administrative dollars. Some argue that investing in a more robust auditing system would deliver a net benefit to Medicare. I echo the points made by the author and previous commenters: donors focused solely on program expense ratios are missing the point.
Comment by Bjorn Arneson — August 5, 2009 @ 6:19 pm
Thank you for that encouraging blog! As a small nonprofit organization we struggle with finding donors willing to cover overhead even though the programs we offer encompass so many facets of the population — part of it is, I’m sure, that we have been scared off of asking for what we really need to have the programs running to their highest level …. it is refreshing to hear that there are more donors out there who are willing to look at the impact versus the cost.
Comment by Linda Ball — August 6, 2009 @ 9:38 am
Thanks, Kate, for debunking the overhead ratio myth. Commonsense is, or ought to be, a major part of grantmaking. And commonsense tells us that infrastructure is esential to achieving the results that Kate rightly urges us to focus on. Language matters, too. “Infrastructure” describes more clearly than “overhead” those people, functions, and systems necessary to deliver on mission and achieve results. It’s the cost of doing business. It’s also a word that often is more meaningful to donors, especially those in the business world, than “overhead” or “capacity.”
Carol Berde
Comment by Carol Berde — August 8, 2009 @ 12:47 pm
Thanks to all for commenting. I appreciate the confirmation that “overhead ratio” is not a valuable measure of nonprofit worthiness. I think that what bothered me the most about the article that I started with was that program/overhead ratio was the ONLY evaluative criteria suggested. I just don’t believe that could possibly be the most important factor when considering a contribution to a nonprofit.
Comment by Kate Barr — August 10, 2009 @ 1:39 pm
Results. As Kate reveals in her examples she is more interested in how many received food and shelter or permnanent housing, were admitted to college, engaged in cultural activities etc. – than overhead.
I absolutely agree and wonder if we could go further? For example, measure and communicate the numbers of people who received housing against the overall existing need. Or record how the organizational results impact the community demand. Or monitor how these results compare to previous years results vs. existing need/demand. Or calculate a program’s impact on investment. (This one is more difficult and tenuous I know, but pretty important)
I have vigorously supported the notion that the value proposition of an organization depends a whole lot more on results than “overhead”…the % has always been arbitrarily determined and is not relevant as a stand alone indicator. (If overhead, ops or admin. cost could be re-languaged to capital investment, it might help some.) But more importantly, being able to report results against eixting need, community demand, and investment – over time – seems like the kind of information NP leaders/boards (not only donors) would be especially interested in and actually USE to determine new strategy, resource alignment, overall effectiveness and ofcourse, to raise funds!
Comment by Ann Johnson — August 11, 2009 @ 12:21 pm
The Bridgespan Group has a good article on this topic–”Nonprofit Overhead Costs: Breaking the Vicious Cycle of Misleading Reporting, Unrealistic Expectations, and Pressure to Conform.” (http://www.bridgespan.org/learningcenter/resourcedetail.aspx?id=252) It shares questions donors and organizations can use to help them better focus on what matters most–achieving more for their beneficiaries over the long term. I thought people reading this thread might be interested.
Comment by Carole Matthews — August 11, 2009 @ 2:34 pm
Thanks to Carole for chiming in with the Bridgespan research. I highly recommend it to everyone to strengthen the case that the focus on low overhead is destructive. I like Carol Berde’s use of the term “infrastructure” as a way to turn the discussion on its head.
Comment by Kate Barr — August 12, 2009 @ 8:52 am
Bill Enright of the Lake Institute says that donors use five criteria in assessing religious charities:
Investment: Donors see their giving as investing, not bailing out.
Accountability: They want to know how the money is used, and they expect progress reports.
Effectiveness: They want the gift to accomplish its goal.
Partnerships: They want to be partners in the process of deciding where the money goes.
Sustainability: They want the recipient to stay in business. —
Note that one of the five guidelines is NOT “keeping your overhead expenses as low as possible”! In fact, quite the opposite. “Sustainability” can only happen if organizations invest in administration and donor relations (fund raising). Organizations that don’t do this often cannot survive a crisis, and almost always cannot maximize their impact on behalf of their cause.
Comment by Dave Stravers — August 26, 2009 @ 7:59 am