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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.
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
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?
Here are some ways you can help break the nonprofit starvation cycle and debunk the overhead
Hi Ariel, great article! And timely.
How do you feel this relates to the new law passed in Oregon today (www.huffingtonpost.com/.../oregon-charity-law-overhead_n_3528295.html) which eliminates state and local tax subsidies for charities that spend more than 70 percent of donations on overhead (management, fundraising, etc.)?
Are these organizations working with other advocates for the charitable sector, like the Council of Nonprofits, to advocate for change in state capitols?
Super interesting stuff!
The Nonprofit Association of Oregon believes that the solution to the "overhead" dilemma cannot rest on the establishment of a single numerical metric. In fact, we at NAO applaud the Guidestar, Charity Navigator, and the Wise Giving Alliance for helping to shift the conversation through their "Overhead Myth" letter. Overhead is not the ultimate measure by which nonprofits’ effectiveness should be measured. There should never be a ratio that “good” nonprofits spend 65 or 70% (or 90%?) of their revenues on programs. Let's have the debate and reach some agreements in our sector to define impact measures that can demonstrate our effects on society as well as business performance ratios that make sense. Let's adopt some Standards of Excellence of what it means to be a nonprofit along the lines of the initiative that the Maryland Nonprofits and others have initiated. (www.marylandnonprofits.org/dnn/Strengthen/StandardsforExcellence.aspx)
At the same time, let's recognize that while that discussion/debate is continuing, our sector’s credibility gets eroded every time a new scammer is uncovered collecting donations from well-meaning citizens but then putting only a fraction back into the programs for which they are collecting. It was with this in mind that the Nonprofit Association of Oregon supported HB2060 to set a "floor" based on the current mechanism nonprofits are required to submit to the state for reporting revenues and expenditures. We believe this is a practical approach that does not let the perfect be the enemy of the good. Our Oregon Attorney General is now empowered to review those organizations at the extremes of the overhead ratio as reported in 990s and force them to disclose to their donors that they cannot take Oregon tax exemption. At a time when the status conveyed by the charitable tax incentive is under attack in so many states and at the Federal level, we felt that it needs to be kept sacrosanct to those organizations that are actually providing community benefit.