Beware the Overhead Myth

With “Giving Tuesday” coming up tomorrow, followed by the end-of-year giving season for so many donors and nonprofits, I wanted to re-share this important joint letter from GuideStar, the Better Business Bureau, and Charity Navigator (the country’s three leading sources of information about charities), titled “The Overhead Myth.”  PLEASE take a look.

The three organizations are working to move donors away from looking at fundraising and administrative costs (or overhead) as a negative measure.  I am so grateful for these organizations’ work in this area – so thought I’d join them briefly on their noble soapbox with a little holiday-season rant, if you’ll indulge me.

Because nonprofits invest donors’ money into the choices we make to accomplish our missions, I have always felt that we have a particular and fundamental obligation to be focused, strategic, intentional, and well-managed – to work diligently to maximize the impact of every dollar raised.  Financial management and organizational focus matter.  But, although it is often used that way, “overhead percentage” is not a measure that indicates whether an organization is prudent, focused, well-managed, or has an impact.

  1. Overhead is not a bad thing – at all.  Overhead is the investment a nonprofit makes in the organization-wide staff, facilities, and systems/infrastructure it needs to accomplish its mission and have an impact.
  2. Overhead is not an indicator of impact.  The only indicator of impact is impact.  Does the organization do work that meets a deeply meaningful need?  Do its programs make a difference in people’s lives?  Need, quality, reach, outcomes – those are the building blocks of impact; overhead is irrelevant in the equation.
  3. Overhead is not an indicator of the quality of management or the efficiency of the organization.  It’s not an indicator of anything other than that organization’s investment in its own overall capacity to accomplish its mission.  Different organizations, missions, sectors, geographic locations, and programs all require different types and levels of overhead investment.  There is no magic “right percentage.”  In addition, it’s worth noting that there is no consistency in what nonprofits classify as administrative and fundraising (“overhead”) expenses, as the IRS grants enormous leeway in their definitions.
  4. Overhead percentages do not indicate how much of your donation goes to the cause you’re trying to support.  100% of your donation goes to support the cause.  There was an era where some nonprofits contracted with outside fundraising companies and that third-party company would keep a percentage of every donation and give the nonprofit the remainder. That era is long past, and the practice almost never happens today.  But the language of that era has remained, and overhead is inaccurately being inserted into that language.  For example, let’s say that a nonprofit spends 20% of its budget on overhead costs.  People will sometimes look at that and say, “80% of my donation goes to support the work the organization exists to do.”  Maybe they think that’s high, or maybe they think that’s low.  But, either way, it’s nonsense.  First, to reiterate, the overhead costs are essential to doing any meaningful work (see above), so investments in overhead are also supporting the work the nonprofit exists to do.  And second, whatever the organization has determined it needs to spend on overhead in order to accomplish its mission, it has already made that decision and spent that money – whether or not you make any gift or not.  Your gift has no impact on how much money is invested in overhead.  Give a nonprofit $100, and they have $100 more than they did before to do the work they do to achieve their mission.
  5. In reality, far too many nonprofits spend way too little on overhead – specifically because they are afraid of people looking at them negatively for spending it.  The result of avoiding overhead spending is that nonprofits perform their work more poorly, reducing their public-benefit impact and impeding their ability to achieve their mission.  Here’s a stark example: at the height of the obsession with overhead percentage as a negative indicator, the New York Times discovered and reported that highly respected medical research nonprofits were having their scientists spend a substantial amount of their time writing grants, rather than working on research to cure the diseases the organizations existed to cure (research that only these scientists could perform).  They did this because grant-writer salary was counted as “overhead,” and scientist salary was counted as “program” – and they felt pressured to get their overhead percentage lower, at any cost.  

I’m not saying that there are no bad-apple nonprofits out there, but overhead percentages tell us nothing about whether an apple is bad or not.  If we’ve never heard of a nonprofit or are worried about whether it is legitimate, we can do a Google-search for the organization’s name and “complaints,” or “investigations,” and we’re likely to find out if there have been any potential problems.   But it’s important for us to remember that the vast, vast majority of nonprofits are completely legitimate - and using their resources well.  In my opinion, the best approach to whether nonprofits are worthy of our giving is to look at their website and materials, looking for the solid information on what they’re doing and what impact they’re having.  If their programs and impact line up with what we value, what we think is important in addressing a need/cause that matters to us, then they are good nonprofits for us.  If we aren’t moved by the work that they’re doing, then we should look for other organizations that do move us.  For information from an impartial outside source, I do recommend Guidestar, which shares solid information on programs and results, as well as financials and operations.  Overview information is available to anyone, and if you create a free account, youll have access to additional information and the organization's financial data in their annual IRS-990s.   If you decide you want to really dig into a 501(c)3s financials, here's a primer: "FINDING 'THE BOTTOM LINE' IN NONPROFIT FINANCIALS".