Commentary - January 24th, 2014
12:37 pm
Fri January 24, 2014

Let’s Put an End to the Overhead Myth

Nonprofit leaders joke that Missoula has five seasons:  winter, spring, summer, fall – and fundraising.  We’re in the thick of that season now at United Way of Missoula County.

We’re not alone.  All over Missoula, banquets are being planned and grant proposals submitted.  And donors – faced with a plethora of worthy causes – do their best to figure out which charities are most deserving.

“What’s your overhead?” is a common question donors ask, meaning “how much of my gift will go to programs, not administration?”  It’s understandable.  Donors want their dollars to do the most good, and we’ve come to believe that viewing nonprofits through the prism of low overhead is the best way to judge them.

But there’s growing sentiment that looking only through that prism gives donors a distorted view.  

Dan Palotta got this ball rolling.  He’s the activist and fundraiser best known for creating multi-day events like three-day walks and bicycle rides to benefit charities.  In a TED talk last year, Palotta said that donors place far too much importance on overhead costs.  Essentially, this rewards nonprofits for how LITTLE we invest in the people and systems that could actually BETTER EQUIP US to effectively address societal problems. 

We spend too little to do too much.  

In the last 10 months, Palotta’s TED talk has been viewed nearly 3 million times.  Clearly, he struck a chord.

Many nonprofit leaders agree with him.  Our social problems are large in scale, in Missoula and around the country, and our nonprofits are minuscule in comparison.  Even in nonprofit-rich Missoula, our sector is dwarfed by the issues we face.  Using super-low administrative costs as the sole measure of nonprofit worthiness can actually prevent us from having the high impact we seek. 

Too many charities are rewarded for how little they spend – not for what they accomplish. 

Palotta says that too many donors equate frugality with morality.   He goes even further:  he calls this “economic apartheid.”  

And the three most respected national charitable watchdog groups have listened.

GuideStarCharity Navigator, and the Better Business Bureau’s Wise Giving Alliance have penned an open letter to the donors of America denouncing the “overhead ratio” as the sole valid indicator of nonprofit performance.  Donors can view and sign that letter on line at overheadmyth.com.

After 25 years of reviewing grant proposals, I’ve learned to look warily at financial statements claiming very low overhead.  I ask myself, “What AREN’T they doing? 

Have they invested in systems that ensure proper fiscal controls and financial oversight?  Do they have an annual audit or independent review?  Are they providing their staff decent wages and benefits so that nonprofit service is a valued and viable career path?  Are they thoughtfully evaluating the results of their work, or simply counting the number of people who come through their doors? 

A nonprofit cannot plan for the future, hire and retain excellent staff, take risks, have a sustainable financial model, or do ANY of the things that real change requires, unless they invest in themselves.  But the constant pressure to reduce overhead means that far too many us scrape by with the absolute minimum, fearing donor disapproval.  We are usually expected to nickel and dime our way to great results.

This is ironic in part because so often we hear, “nonprofits should be run more like businesses.”   Businesspeople want us to adapt some of the best practices of their world – and we should.  One of those is investing in infrastructure. 

I know that many Missoula nonprofits operate at a level of performance and cost-effectiveness that any business would envy.

“Money should go to programs,” we hear.  Well, at nonprofits, people ARE the programs. 

Abused women seeking help from the YWCA; people lining up at Missoula Food Bank; kids living in Youth Homes; elders whose lives are enriched by Missoula Aging Services – they’re not thinking, “what great PROGRAMS”; they’re thinking what great PEOPLE are changing or saving their lives. 

If we don’t invest in ourselves, and educate our donors that doing so makes us more effective; then we perpetuate the myth that nonprofits can do more with less.

Certainly, we need to keep our expenses in line.  But results require resources; and programs that produce results – in terms of lives changed and conditions improved – they’re worthy of investment.  Without money for salaries, benefits, rent, equipment – the much-reviled “overhead” – charities cannot fulfill their missions.  No money/no mission.

So, during fundraising season and throughout the year, let’s remember that the health of our nonprofits depends in part on what we invest in ourselves, and that without investing in ourselves, we will never meet the needs that we want to meet, and that our community expects us to meet.  Let’s put an end to the overhead myth.

Susan Hay Patrick is the chief executive officer of United Way of Missoula County.