OVERHEAD OR IMPACT?
January 19, 2016
ADDRESSING THE MYTH
by Ken Toll
I ran into The Myth again.
This time it was in a Facebook post, but that’s not the only place I’ve encountered it. I’ve seen The Myth in online news story comments. I’ve heard it at gatherings. I’ve had more phone conversations about it than I can count.
The Myth is this: the idea that the quality and effectiveness of a charitable organization is measured solely by its administrative costs, commonly called “overhead.” Overhead includes all the costs that come with running an organization except direct service provision; overhead include all fundraising costs, as well as personnel and administrative costs to do the financial management, Human Resources, tax returns and all the other things businesses have to do to legally operate. (Yes, nonprofits have to file tax returns. If we’re doing our jobs right, we don’t actually pay taxes, but we have to file a return every year to prove it.)
I’ve spent my entire career in the nonprofit sector, and I’ve run into The Myth more times than I can count. In fact, I reacted very strongly when a couple of self-proclaimed “Charitable Industry Watchdogs” reinforced The Myth in their materials a few years ago. Fortunately, within a year they figured it out and completely reversed their positions, now stating that overhead is a “poor measure of a charity’s performance.” Too bad they got it wrong the first time, but kudos to them for admitting their mistake.
That’s not to say that overhead shouldn’t play any part in how we measure the impact of a nonprofit. In fact, all of us at United Way of Jackson County work very hard to keep our administrative costs low-about 14%, which is well under what nonprofit watchdogs consider acceptable. That is especially impressive when you consider that one of United Way’s primary purposes is to fundraise for other organizations; we drive down all our partners’ overhead by allowing them to access funds with a single grant proposal to us.
But just because a nonprofit has a low overhead figure doesn’t mean it’s creating meaningful change in a community. Likewise, a higher overhead — so long as it’s in a reasonable range — doesn’t mean the agency is wasting donor dollars. That reasonable range varies based on a variety of factors, including the goals that program is striving to achieve, the type of work it takes to reach those goals, the target audience, and many other factors.
The best analogy I’ve heard thus far is this: When you are shopping for a new car, do you base the decision on how much the manufacturer spent per ton of steel and the wages paid to the fabricators? No, you base your decision on the outcomes you want — the smoothness of the ride, fuel economy, size, power and so on.
The Better Business Bureau Wise Giving Alliance, Charity Navigator and Guidestar now counsel the public to evaluate programs the way our United Way has done for years. Is the nonprofit transparent in its practices? Does it have good governance? Does it have competent leadership? And most critically, is it delivering results? When those things are comparable among programs, then overhead can be useful, too.
Again, our commitment at United Way is to excel at all of these measures. I am incredibly proud of the track record we have established over the past decade; our volunteers never fail to consider all the right factors and identify the best possible portfolio of program investments. We welcome questions from our donors about our practices. We actively communicate our investments, our initiatives and our results. In fact, you can check out a scorecard of results by clicking here.
I’m sure The Myth will persist for a while, and other myths will take its place as long as nonprofits have to fundraise. Part of our task, and part of our overhead, will continue to be keeping our donors informed and engaged, because donors demand it. That’s one of the most important tasks for our United Way.