Are Funders Ready to Throw the Overhead Myth Overboard?

Once upon a time – not so long ago – nonprofit organizations lived in an enchanted land where on the stroke of midnight a fairy godmother swooshed in, waved her magic wand, and – poof! – gone were all of the general operating expenses incurred that day.  

Bright and early the next morning, the grateful trustees, executive directors, and fundraisers were free to – truthfully – tell all and sundry that their donations and grants are spent on their wonderful charitable programs.

It Was All a Cruel Dream

About a decade ago, a few brave souls rode into town explaining to anyone willing to listen that none of it is true.

In Year-End Queries and The Overhead Myth, we explained that, back in 2009, “authors Ann Goggins Gregory and Don Howard published a landmark article in the Stanford Social Innovation Review. The title says it all: The Nonprofit Starvation Cycle.”

The premise was a forceful articulation of the reality that it takes money to achieve charitable purposes, and that nonprofits are correct to spend enough in overhead, including salaries, so they are not constantly in dire financial straits.

In March 2013, activist and fundraiser Dan Pallotta “railed against the demonization of overhead in a ‘lively and irreverent’ TED talk he called The way we think about charity is dead wrong.”   He called out the “double standard that drives our broken relationship to charities.” Nonprofits are lauded for “how little they spend – not for what they get done.”  

Soon after, on June 27, 2013, the editors of The Nonprofit Quarterly, posted a landmark letter: The Overhead Myth (June 17, 2013) from GuideStar, Charity Navigator and the Wise Giving Alliance “calling for an end to the obsession many have had with nonprofit overhead costs as a proxy for measuring effectiveness…” It was addressed to the “Donors of America,” and began: “We write to correct a misconception about what matters when deciding which charity to support.”

They explained that “[t]he percent of charity expenses that go to administrative and fundraising costs—commonly referred to as ‘overhead’—is a poor measure of a charity’s performance” and that more attention should be paid “to other factors of nonprofit performance: transparency, governance, leadership, and results….”

Steps to Banish the Overhead Myth

Respected commentators had taken the crucial first step: shedding daylight on the preposterous notion that a fairy godmother creeps in after office hours and makes all of the “taboo” expenses of real-world nonprofits miraculously evaporate overnight.

The second step has been educating the organizations themselves, and their key personnel, that the emperor, written up frequently in the Style section for his sartorial brilliance, actually wears nothing at all.

(Oh, wait – that’s a different fairy tale – but apt, nevertheless.) See, for instance:  Why Is Overhead Expected in the For-Profit Sector, but a Punishable Offense for Nonprofits? and How Individuals Can Help with the Overhead Myth Smackdown.

The third step is just as important as the second. If donors, funders, and government grantmakers don’t also understand that the insidious cruelty of The Overhead Myth, then there will be no progress. The newly enlightened nonprofits will still have to beg and plead for scraps to keep the organization afloat in what experts decry as The Nonprofit Starvation Cycle. We’ve also written about that in Rethinking the “Scarcity Thinking” That Holds Back Nonprofits. To the extent that “overhead” remains a taboo in fundraising and grant writing, that starvation cycle continues.

Compounding this dilemma is that “(t)here is no magic number across the board. Foundations don’t have a single industry standard percentage for nonprofit overhead.”  Of course, “(s)ome foundations, happily, will advertise what they see as an ideal ratio of general operating expenses to overall expenses.” This is “unfortunate because every nonprofit —

operates a little differently. Some are run by volunteers and have little to no overhead expenses. Others may have a lot of general operating expenses for one reason or another. It’s simply impractical to apply a single standard to every single nonprofit out there.

The “good news is that ‘more and more, nonprofits are trying to change the perception of overhead as taboo….  The other good news is that more and more foundations are open to funding general operating expenses.”

Conclusion  

In the second part of this series, we’ll focus on some groundbreaking thinking – and action – by leading foundations including the Ford Foundation, which recently announced a dramatic new grantmaking focus on general operating support.

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