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It's Time To Start Judging Nonprofits Like For-Profits

When considering donations, people often make harsh assumptions about nonprofits that spend on marketing and overhead. But maybe those expenses means the organization is doing a good job.

Every year around this time, a batch of articles comes out talking about how to maximize your year-end giving by focusing on nonprofits with super-low overhead, so you can rest assured that every cent you donate goes directly to the cause.

But I’ve spent the better part of my career as a nonprofit tech warrior, from volunteering in the Peace Corps to a variety of domestic and internationally focused NGOs and nonprofits—small and large. I’ve had contract, full-time, pro-bono, and board positions, and have been on both the grant-requesting and grant-reviewing/giving sides of the equation, and I can tell you that this isn’t entirely fair. The problem is this overhead supports the cause, and zeroing it out means that the 99% non-overhead may be spent poorly or non-strategically, especially in smaller organizations. Programmatic costs may pay for the work, but overhead pays for the tools to do the work well.

Most year-end-giving articles point potential donors at sites like Guidestar or CharityNavigator, which track overhead and fundraising effectiveness. These sites are great for digging in to an organization’s financials, as well as providing a first pass to look at any anomalies in their numbers. If you’re simply crunching the numbers and looking for the nonprofit with the lowest overhead, though, things have gone horribly wrong. It’s a bad way to judge an organization.

Management consultant Neil Edgington eviscerates this style of giving-by-the-numbers:

If a nonprofit organization is creating change, then everything they do is in support of that change. How can a program run if there is no financial engine (fundraising) to fund it? If there is no building or space to house it? […] How can you possibly separate "program" from "overhead?" We must move beyond this distinction and encourage nonprofits to raise (and donors to give) more capacity capital.

Obviously, there are great stories of shady contracts and CEO salary scandals, but these are hardly problems unique to the nonprofit world. Organizations that are mission-focused face a dual challenge. Due to the passion around the issue, it’s hard to justify spending money on the organizational infrastructure—everything from computers that work to an HR department to competitive salaries and benefits. Organizations that also carry out donor-directed work must further defend any spending in terms of the grant agreement, which often doesn’t leave much for those same infrastructural items. Bridgespan Group’s Tom Tierney calls this the starvation cycle in his excellent paper on the topic.

The cycle begins with donors (public as well as private) who have unrealistically low assumptions about what it actually costs to run a nonprofit. Nonprofits, dependent on external funding, feel obliged to conform to those unrealistic expectations insofar as humanly possible. To that end, they cut overhead to the bone and underreport administrative expenditures in annual reports, IRS 990s, and fundraising materials to make their operations look as lean as possible. Unfortunately, this only serves to reinforce the unrealistically low assumptions that kicked off the cycle in the first place.

No one would judge a for-profit company for spending on advertising, sourcing the best hires, or using the best equipment. Indeed, these are points that a wise investor looking for long-term stability should seek out in a for-profit. This constant pressure that nonprofits feel from both their mission-driven world and the donor landscape toward minimizing anything that could be counted as "overhead" is destructive and efficiency-killing. Low overhead means burning staff out at an alarming rate, and having trouble sourcing or retaining skilled workers. It pushes organizations toward duplication over cooperation to attract and maintain funding. Worst of all, it forces a short-term view on what should be a long-term mission. This hurts not only the organizations, but the missions they serve.

But how, then, can we really measure return on donations to nonprofits?

This is, of course, the hard part. You can ask: How much time are they devoting to their actual mission versus marketing their successes? But how can you know about their impact unless they take the time to tell you about it? Here is where the marketplace for social change is inefficient, and where the individual consumer-donor either has to make a safe bet with a large, well-respected organization, or enter in to a much more complex world of mitigating their "risk."

There are multiple ways to mitigate "risk" in giving. The best way for many traditional nonprofits is to be personally involved with the organization, donating not just your money, but also your time and even your professional skillset where helpful. Seek out social enterprises—the new breed of mission-driven organizations which seek sustainability through commercial models or other innovative funding sources. Keep in touch with their social media outlets, newsletters, and other communications. Look for organizations that help mitigate risk by aggregating smaller organizations, and helping them to track and show progress and impact. Finally, do use sites like CharityNavigator and Guidestar, but please, do not be turned off by high overheads. They’re healthy. They mean the organization has a longer-term view on its role in making change.