How to Conquer The Nonprofit Overhead Myth – by Sarah Evans

Hello SOTGC community,

I am usually writing my posts from Austin, Texas, where my organization, Well Aware, is based.  There are almost 5,000 charities in this area alone, and an estimated 1.5 million in the US.

So, our confusion about where to give and who’s doing what for each cause is no big surprise.  If you’re considering putting your hard-earned dollar into a cause, you want to know who will be handling it and where it will go.

But, both donors and charities have been operating within a myth about how we evaluate and fund nonprofits, and it’s hurting everyone.  The good news is there’s a better way.

The nonprofit Overhead Myth stifles more good work for the cause you care about.

I recently watched Dan Pallotta’s TED talk on what he has coined, “The Overhead Myth.”  It’s just about eighteen minutes long, and, if you are interested in charity at all – in any way – it’s worth that amount of time of your life, I promise.

The too-long-didn’t-watch version is this: Evaluating a charitable organization based mainly (or solely) on how much they spend on overhead is both counterintuitive and counterproductive. In a wealthy country in which businesses are thriving, but where most nonprofits barely stay afloat, charities can’t expect to be able to have enough impact to make a dent in our world problems.  This is not usually due to lack of vision or leadership, but, rather, lack of resources.

Why?  Because nonprofits are under an incredible and unfair amount of pressure to keep overhead low.

But, you can’t grow or sustain a for-profit that way.  And, you can’t grow or sustain a nonprofit that way, either.  So, great causes, despite how truly impactful they may be, can not do more work, and they often fail completely from funding starvation.

An organization that can’t survive is a terrible place to put your money – if it’s not sustainable, your investment in their work won’t go very far.  But, the organization can’t thrive without investing in itself.

Funds are fungible, and there is no consistent practice of donation designation.

There is no regulation for how to designate funds for nonprofits.  What one organization labels as “office supplies,” another may label “project binders.”  This may seem inconsequential, but it’s not.  How charities label their expenses is what you see in their financial reports, and it reflects how much they have spent on their operations versus their programs.  But every charity designates funds differently.

The result is that, 1) comparing charities based on their financial reports can’t be an objective and equal comparison, and 2) charities are encouraged to be creative in their designation of expenses.

Donors want a true report of donation allocations, not something that was made to fit their (misguided) expectations.  The current belief system isn’t working to make fair assessments of nonprofit spending possible.

The good work of a charity can’t be found in the accounting alone.

The “Overhead Myth” has become such an obstacle for the work of nonprofits, that the presidents of the three top charity-rating companies wrote an open letter to all donors campaigning against “the false conception that financial ratios are the sole indicator of nonprofit performance.”

A nonprofit that has a very lean operating budget and team may be putting 93% of your donation into their “programs,” but if their programs are only serving a third of the people they could if they built their team just a little more, how is this a better use of funds?

The Stanford Social Innovation Review explains that the perpetuation of this myth creates a “Nonprofit Starvation Cycle: a spiral of donor demands, underinvestment in core costs, and limited results. This starvation cycle hurts nonprofits and donors, but, most important, it hurts our shared work for a better world.”

This leads me to a personal pet peeve.  The “100% Model.”

The “100% Model” distracts donors from actual contribution allocation scrutiny.

The term “100% Model” may not sound familiar, but I bet the concept is.  It goes like this: a charity says that 100% of your donation will go to “projects.”  It’s implied that none of your charitable gift will be used for office supplies or salaries.  And that might be true (though possibly only at face value, see above on fungible funds).

But, this promise distracts donors from evaluating actual efficiency of an organization.  If you knew that 100% of your donation actually was being sent to a project, but that only 50% of the organization’s overall funds were used for program work, would it still be an appealing place to send your support?

I love that more and more people are paying attention to where their dollars are going.  But, when we’re told 100% of our donation will be spent only on direct program funding, most of us won’t spend much time researching how the other organizational funding is spent.  But, this is crucial for the cause you’re supporting, and for the nonprofit industry.

A 100% model, while often well-intended, can be a smoke and mirrors tactic.  An organization could be terribly inefficient with their other spending, and few people are aware since their public fundraising touts 100% project spending.  And, what a shame for the cause, since another efficient nonprofit can do much more good work but may not be able to advertise the 100% model.  This can be a big challenge for great charities, who are fighting an uphill battle to please donors who think their infrastructure costs need to be nil.

Here’s how we can fund charitable work better.

Look at everything in a charity.  It’s important that a charity isn’t spending all of their donations on employee happy hours, but so is whether or not their projects are working and how much impact their initiatives have and will have over time.

Also, consider investing in capacity building for a charity that is doing incredible work you believe in efficiently.  The stronger that organization’s infrastructure, the more sustainable the work, and the more good work they can do.  That will amplify your giving indefinitely.

Finally, please help the nonprofit sector by educating others about defeating the Overhead Myth.  Share, post, repost, tweet and talk about it.  The future of charitable giving might hinge on this awareness.

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