What Is the "Overhead Myth"?

Nonprofits that spend more than a tiny fraction of their budget on administrative staff, fundraising, or technology infrastructure are inefficient, wasteful, or just plain greedy.

Good, responsible organizations — the kind that donors and funders should invest in — are those that spend only a miniscule portion of their budget on overhead. Or so many of us believe.

This. Is. A. Myth. And it's a pernicious myth that drastically limits what nonprofits, charities, and other social benefit organizations can accomplish and how much they can grow. Spending on staff, fundraising, and technology is, in fact, critical to sustaining the good work that nonprofits do.

The leaders of GuideStar, Charity Navigator, and BBB Wise Giving Alliance are tackling this "overhead myth" in an open letter to the donors of America.

In no uncertain terms, these leading sources of U.S. nonprofit information say: "The percent of charity expenses that go to administrative and fundraising costs ... is a poor measure of a charity’s performance." And therefore, the overhead percentage should not be the primary way funders and donors judge a nonprofit's worthiness for donations.

They're also working together to help end the overhead myth. You're encouraged to visit the Overhead Myth website, where you can pledge to help debunk the myth, as well as find helpful research, resources, and FAQs.

How the Overhead Myth Starved One Nonprofit to Death

Kjerstin Erickson knows what the overhead myth can do to an organization. She was the founder and executive director of FORGE, a nonprofit that provided education and resources to refugees in Africa. In a recent GuideStar blog post she says that she "starved FORGE to death," in her zeal to limit overhead.

As she says:

"We under-invested in systems infrastructure, we under-invested in fund development, and we under-invested in human resources. Because donors wanted to give to project expenses directly, we constantly added more to our portfolio without adding the capacity to manage it all. ... And because we internalized the message that reasonably compensating executive staff was shameful, we couldn’t hire seasoned professionals ..."

The end result? FORGE collapsed, unable to continue serving a community that was desperately in need of support.

Erickson's story of low overhead and under-investment likely seems familiar to many nonprofits. The Stanford Social Innovation Review even has a term for it: the nonprofit starvation cycle. So what can we do about it?

Breaking the Starvation Cycle

Here are some ways you can help break the nonprofit starvation cycle and debunk the overhead myth:

• Pledge to end the overhead myth, and encourage others to sign the pledge. I just signed the pledge myself!
• Share the Charity Navigator, BBB Wise Giving Alliance, and GuideStar open letter to funders with your supporters, funders, donors, family, and friends. To encourage people to circulate it as widely as possible, the letter is published under an Attribution-No Derivs Creative Commons license.
• Get the word out via your social media channels. The Overhead Myth website includes a Social Media Toolkit with sample tweets and Facebook posts you can use.
• Stories are powerful. Read Kjerstin Erickson's story of under-investing in her nonprofit, and share your own organization's story. How has the focus on keeping overhead low impacted your organization? What would you be able to accomplish if you were able to spend more on technology, staff, or fundraising? Tell us about it in the comments. 
• Read about a frank conversation between funders and nonprofit grantees on the topic of funding for nonprofit capacity building.
• Learn how some funders are helping nonprofits break the cycle. Idealware's Funder's Guide to Supporting Nonprofit Technology highlights ways funders can invest in nonprofit technology capacity building.