The Overhead Myth
Would you fault a single parent for making time to go back to college and get a degree?
Or a church for spending money on a new roof?
Of course not. Most of us understand these expenditures are valuable ways to keep things moving forward.
Unfortunately many non-profit leaders can't seem to justify the equivalent in their own work.
They feel significant pressure to minimize so-called overhead expenses, on the simplistic assumption that it would take precious resources away from their mission driven programs.
The irony, of course, is that organizations that don't invest in education staffing and infrastructure are at risk of starving the very programs they're trying to support.
That's why three major nonprofit ratings organizations got together a while back and issued a letter to address what they call the Overhead Myth.
"We write to correct a misconception,” they say. "The 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."
They continue:
In fact, many charities should spend more on overhead. 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. These expenses allow a charity to sustain itself (the way a family has to pay the electric bill) or to improve itself (the way a family might invest in college tuition).
What's the harm of the Overhead Myth?
The letter, backed by a number of academic sources, cites a laundry list of common underinvestments:
Limited/no staff for administrative roles (e.g. finance, development, operations)
Limited investment in staff training and development
Inexperienced staff for administrative roles
Poor IT infrastructure
Poor donation management systems
Poor performance management systems
... which lead to meaningful problems for the mission:
Limited ability for organization to manage/monitor finance, development, etc.
Increased turnover among staff, particularly those looking for ongoing professional development
Difficulty building senior team from within
Poor work quality
System crashes, downtime
Loss of data/information, limited information sharing
Inability to track donors and fundraising progress
Limited ability to target fundraising
Limited ability to track beneficiary outcomes, particularly across sites
Limited ability to easily generate reports for grantmakers
In short, overemphasis on cutting overhead leads to a cycle of starvation for the organization and its mission.
Here's the thing:
Most of us have felt the pressures of the Overhead Myth — from grantors, board members, donors or other stakeholders … or even from ourselves.
Naturally we want to be careful with the precious resources that are aloted to us.
But if an arbitrary aversion to “any expenditure” is preventing you from investing wisely in your long-term mission and organizational health, that can't be good.
I encourage you to read the letter for yourself, and consider how the overhead myth may be limiting your work, and then to foster conversations about mission priorities within your own team, with your board, and with your grantors and donors.
Because your primary concern as an organization is not your so called “overhead ratio,” but the difference you’re actually making in the lives of the people you care about.
All the best,
A.