Overhead Myth Gets Traction

The Percentage of charitable expenses that is a nonprofits’ administrative costs, aka “overhead” is a poor measure of a charity’s performance, according to  an effort to get donors to see the whole picture of an organizations structure and value.

A Guidestar Initiative to Improve Donor Choice http://overheadmyth.com/ jumpstarts a long overdue conversation about nonprofit overhead. The Overhead Myth takes on the notion that all nonprofits should have a super low overhead (over the recent past, for a variety of reasons, 15% seems to have become the gold standard), and demonstrates that there is not a lot of correlation between low overhead and effectiveness. In fact, this is often not the case. It is important that nonprofits have well run administrations, and not just conform to a random percentage of their budget.

Recent trends in organizations that evaluate nonprofits, tended to favor nonprofits with very low overhead, or perhaps more succinctly, organizations that are able to efficiently allocate their costs to programmatic cost centers. The focus on keeping overhead down because it makes a nonprofit more effective doesn’t really hold up, and the unintended result is that many nonprofits allocate their administrative cost across program cost centers, thus reducing their percentage. This sort of accounting doesn’t exist in the for profit world, and it doesn’t get rid of the basic costs of running a nonprofit, it simply moves the expenses around and accounts for it by showing that it is baked into the program costs (which are considered “good” costs) and not in the overhead or administrative costs (which are considered “bad” costs).

All organizations need strong administrative staff that help support the programmatic work of the organization. What that looks like to funders and how nonprofits should account for it should be opened up to more comprehensive conversation. In the end, it is important that funders not just look at one point of information when evaluating a nonprofits effectiveness. Nor should funders starve strong (and perhaps a bit more expensive) administration practices at the altar of low-overhead is better approach to philanthropy, thinking they are gaining efficiency and impact, when that simply may not be true.

What has been your experience working in nonprofits? Are administrative costs too high? How about as a funder? Do you see this as an ongoing issue in evaluating nonprofits?


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