by Ellen Foell, Legal Counsel

Financial services company Standard & Poor’s rates corporations and nations on the ability and willingness of an issuer—such as a corporation or government entity, to meet its financial obligations in full and on time.

Many Americans became familiar with Standard and Poor’s when the United States fell from AAA to AA-plus in 2011, reflecting the instability caused by Congress’ inability to meet budget deadlines during that timeframe.

Americans are also familiar with standards for corporations such as the Dow Jones Industrial Average, which guides our fanatical tracking of current stock prices as they roller-coaster up and down at breakneck speed. Meanwhile, medical providers are subject to a variety of standards, both specific and general, in addition to standards determined by The Joint Commission.

Standards exist on the homefront as well, where my children are judged (in a sense) on their learning capacity over the previous nine weeks by the ever-dreaded report card… which, as we know, goes on their permanent record. It seems impossible to go through life for very long without a set of standards measuring and accounting for performance, efficiency, and profitability being applied in various areas of our lives.

In the nonprofit sector, keeping an organization’s administrative overhead at somewhere between 0 and 20% has been the Holy Grail for a number of years. In other words, the “standard” has been to report to donors that less than 20 percent of all funds donated is being spent on administrative overhead, including salaries, advertising and marketing, staff training and education, costs of operation, and other less-than-exciting—albeit necessary—items.

This year, the three major evaluators and nonprofit trackers, Better Business Bureau Wise Giving Alliance, Charity Navigator and Guide Star joined together in a first-ever united effort: an open letter to donors asking donors to rethink the “overhead myth.”

Without negating the value of the overhead factor altogether, this letter asked donors to reevaluate the importance and significance of overhead expenditure in rating a given nonprofit’s value.

These organizations’ desire to put the overhead figure into a more realistic and holistic perspective is a welcome reaction to the over-estimated value many donors place on overhead, which also drives nonprofits to sacrifice mission for the sake of meeting a somewhat arbitrary standard.

According to the organizers of The Overhead Myth, the myth itself is problematic in at least the following ways:

• Starves charities of the freedom they need to best serve the people and communities they are trying to serve;
• May, at times, put organizations into the untenable, and unacceptable position of fudging numbers in an effort to meet the magic acceptable ≤20% figure;
• Limits the pool of capable and willing talent because of the lure of the for-profit world;
• Reduces the innovative risks nonprofits are willing to take simply because it is difficult to justify the risk to donors weighed against the expense, and possible loss, of taking the risk.

This discourse, of course, is not entirely new. As early as 2009, the Stanford Social Innovation Review published a critique of the unbalanced weight overhead tends to play in the measure of a nonprofit’s performance in its article, “The Nonprofit Starvation Cycle.” The article’s authors cited a few of the effects of starving a nonprofit in an attempt to keep overhead costs low.

Among their many dismaying findings: nonfunctioning computers, staff members who lacked the training needed for their positions, and, in one instance, furniture so old and beaten down that the movers refused to move it. The effects of such limited overhead investment are felt far beyond the office: nonfunctioning computers cannot track program outcomes and show what is working and what is not; poorly trained staff cannot deliver quality services to beneficiaries.

Even with the discussion brewing over the past few years, the fact that BBB Wise Giving Alliance, Charity Navigator and Guide Star have chosen to tackle this issue together is rather significant.

Another key factor in the rise of this invaluable conversation was a now-famous TED Talk by Dan Palotta, entitled, “The Way We Think About Charities is Dead Wrong,” delivered in early 2013. Although I wouldn’t by any means endorse everything Palotta has to say in the talk, he does make a strong overall argument to expose the, frankly, ridiculous inconsistency in the behavior or practices we consider acceptable in the for-profit world, yet totally unacceptable within the nonprofit world.

The very same advances, innovations, and ad campaigns which reap huge profits, accolades, and awards in the for-profit world, Palotta argues, render accusation, criticism, and—at times—character assassination in the nonprofit world.

Our apparent disconnect between the for-profit and nonprofit worlds, as well as the relevant measures of success and performance, has sparked the following challenge from the editors of Nonprofit Quarterly:

Imagine that you went traveling and refused to take a room until you were informed about how much the inn spent on administration. Even if you were given that information, would you then compare that ratio to that of, say, your local airline?

When I started the organization, I was young, idealistic, and naive. Not experienced enough to know better, I bought the hype: that to be truly altruistic and efficient, we needed to operate at the highest possible levels of self-sacrifice. We needed to direct almost all money raised to buying pencils rather than building infrastructure, we needed to expect our staff to work for the lowest possible wages (or ideally none at all), and we needed to do it all with an eager, grateful smile.

Erickson writes bluntly about her failures as the 20-year-old founder and CEO of FORGE, a nonprofit founded in 2003 to assist refugees in Zambia and Botswana, “We under-invested in systems infrastructure, we under-invested in fund development, and we under-invested in human resources.” The rest of Erickson’s article essentially analyzes reasons for the demise of her once-successful nonprofit organization, and her lament for the “could have been.”

If not Overhead… Then what?

The rising chorus of these voices raises the legitimate question: If not overhead, then what metric? What measure? What standard by which to judge efficiency and performance? Surely, it would be unwise to give to an organization spending 50 percent of its funds on overhead. How can a donor choose wisely?

Surely overhead has a place as a factor to consider… Right?

Absolutely.

The three major organizations recommend consideration of factors such as “transparency, governance, leadership, and results.” While, a thorough discussion of each of these factors is impossible in this forum, they do serve as a prompt to a full-bodied discussion at your pregnancy help organization’s board table.

Indeed, Heartbeat International seeks to steward every dollar donated with utmost wisdom and care. We recognize we are but servants, and are accountable to our donors, to our Board, and—more importantly—the Lord for our overhead costs. And, as we state specifically in GOVERN Well: Your Personal Board Member Manual™, and elsewhere, we expect the same from our affiliates.

Nonetheless, as boards and executive directors go forward into a new fiscal year, it is perhaps worth considering and discussing how to balance the dream, vision, and mission to which God calls each affiliate with the inevitable, less-than-pleasant, yet no less necessary, discussion of how to fund the dream and mission by which we expect God to work His Kingdom values on earth as it is in heaven.

Let the discussion begin!

 For more views on this topic, see:

• Six Reasons Non-Profits Fail, Reason #4: Obsession with Percentages: Although this article is from February of 2012, the author candidly points out how some nonprofits respond to the pressure of maintaining low overhead.
  
  
• What Do Good Outcomes Cost?: Nonprofit advisor Ann Goggins Gregory discusses different ways nonprofits can address the overhead myth.
  
  
• Overhead Ratios are Essential for Informed Giving: CharityWatch presents a view to keep overhead as a significant factor to consider a nonprofit’s effectiveness.