2012-01-06

Co.Exist

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.

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16 Comments

  • Elizabeth Rosen

    Dear Alexa and Jon,

    What a great illustration of why we need to look beyond
    financial metrics when deciding which nonprofits deserve our time, money, and
    public support. In fact, I intern at GreatNonprofits.org (www.greatnonprofits.org),
    which is a site that shares your perspective.  It's the largest online
    database of user-generated reviews of nonprofits. On the site, donors can see a
    new dimension of the impact of the nonprofit - through the eyes of a parent
    whose child received tutoring, or the ex-felon who got job training, or the
    volunteer who helped write advocacy newsletters. These first-hand experiences
    help donors see the on-the-ground work of the nonprofit.

    Don’t hesitate to contact me – elizabeth@greatnonprofits.org –
    if you have any questions about the site, or just want to talk more!

    Best Regards,

    Elizabeth Rosen

  • Joel Selanikio

    I think saying "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" is as silly as saying that a high overhead is automatically an indicator that something is wrong.

    Some organizations with a high overhead are wasting money on first class travel and high executive salaries..  Some organizations with a high overhead are spending money wisely to support their mission.The point is that the overhead figure, by itself, is not useful metric.  The solution is not to switch from one broad generalization to the opposite one. The solution is to develop a set of metrics that will enable us to separate the wheat from the chaff.

  • jon camfield

    Absolutely true, and I don't mean to come off as saying that you should only look for orgs with high overheads; I just want to drive home that they alone are not the red flag that they seem in most reporting.

    Metrics of any sort in this space are challenging to make meaningful across all social-good sectors, but there are a lot of promising standards trying to tackle cost-per-impact measures gaining significant traction, like the IATI for international aid funding tracking; as well as more long-view systems (like yours) which are inherently built to gather these metrics as both their purpose and built-in function.

  • tcollignon

    Couldn't agree more. A well run business is going to be better able to effectively and efficiently use and leverage  its revenues, grants or donations.  Not-for-profit is a misnomer - NFP and charities need to generate surpluses to ensure their enduring sustainability as an organisation. I would much rather we thought of it as the Not-for-dividend sector or adopt some of the other more recent terms such as social investment, third sector etc. After 20 years in the industry I can confidently say you cannot do the "missionary" without the "mercenary".

  • Annastasia Palubiski

    Thanks Alexa and John for continuing to shed light on a huge misconception in the world of philanthropy. I often have people ask me how to know if a charity "spends too much of it's donations on administration". I always say that this is the wrong question. Instead we should ask "how do I know the impact a charity is creating? How well are they doing at achieving their mission?" I agree with you, one of the best ways to know is to get involved personally, by being a knowledge philanthropists, not just a financial philanthropist!

  • John Rougeux

    Well said! This is an issue that has irked me for a long time, especially when I see the "best non-profit" ratings that do nothing but rank non-profits by the percentage of overhead. I wrote about this in a bit more detail here: http://evolutionofphilanthropy...

  • Kyle Cahill

    Very bizarre that this article doesn't even mention Dan Pallotta and his book Uncharitable.

  • Bunmi A.

    This is fantastic. I would also add that the word "charity" does not help the non-profit sector. The phrase is outdated and completely undermines the efforts of community organizations. They have grown to become complex organizations employing various tools to address social problems. I think "charity" needs to be laid to rest for all the points raised here and for others. In my line of work (fundraising), I often get asked the overhead question by people who have never worked for a non-profit and have never taken a class in non-profit finance or management. Most donors and volunteers have a surface level understanding of how non-profits actually operate. If they knew more, perhaps they wouldn't be so quick to use overhead as an indicator of social impact. And unfortunately, a few bad apples have ruined the bunch so the scrutiny doesn't help the non-profits who are actually quite efficient and managing during these tough economic times.

    If more people held companies and government to the same level of accountability as they do the non-profit sector, I think we'd be living in a completely different world. Like companies, non-profits have to pay the light bill and pay people. You can't run programs in the dark and non-profit professionals, despite the salaries of CEOs, are still way below market rate. 

  • Helen Oppenheimer

    Ditto J1 - and how it runs itself should be under far more scrutiny. I just finished a great book: America's Real Deficit - it goes deep into how lawyers are sucking out the cash by hiding bad and/or illegal behavior by boards and staff. There is some serious funny business going on in nonprofits these days - my theory is that it is now "where the money is".

  • Jl

    Yes!  For years I have refused to donate to nonprofits with very low overheads on the principle that they _cannot possibly_ be putting my money to good use.  The best judge of how well a nonprofit runs its charity operations is how well it runs itself.

  • Katie Jeanes

    Thank you so much for writing this article. I completely agree. For non-profits to succeed, they need incredible people to run them, full time. I don't think it's unfair to pay those people what they're worth. The same goes for marketing. It costs money for non-profits to share their vision with the world. Obviously, every organization should strive to keep admin costs down, but I think the key is to connect with a non-profit that you are really passionate about and get involved in it. It's more fun than writing a cheque for a tax credit.

  • Marc Baizman

    I completely agree with the spirit of this article, but I actually think the title is misleading.  My suggestion: "It's Time to Start FUNDING Nonprofits Like For-Profits!"