Buzz, Featured, News You Need to Know, Opinions

How a focus on low overhead caused this nonprofit to shut its doors

Photo credit: bioraven, Shutterstock

Photo credit: bioraven, Shutterstock

Since Dan Pallotta’s TED Talk a few months ago, the sector has been debating whether our focus on low overhead might make it difficult for us to achieve our missions. To explore this topic more, three organizations—GuideStar, Charity Navigator, and BBB Giving Alliance—recently launched The Overhead Myth. The goal is to demonstrate how, “The percent of charity expenses that goes to administrative costs—commonly referred to as “overhead”—is a poor measure of a charity’s performance.”

To help illustrate how damaging the pursuit of low overhead can be to organizations, they share the story of FORGE, an international nonprofit that helped refugees, that eventually went out of business.

If you judge a nonprofit by those metrics, boy was FORGE good. Our overhead for the first four years hovered just around 4%…most of which went to cover items like paper and stamps for the donation receipts that you are required by law to send. We didn’t invest in workspace (hello, employees that show up to your apartment everyday), we didn’t hire any development or administrative personnel (hello, 180 staff with no accountant or human resource manager), and we certainly didn’t pay money for systems that would help us spend our time more efficiently (hello, fumbling with 15,000 line items in Excel). We were the epitome of what we thought was the righteous path: an organization that is lean, mean, and ready to sacrifice for the greater good.

Here’s the rub: that didn’t turn out so hot. While our donors loved that their hard-earned money was being used for “the right things,” we were slowly strangling ourselves. 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. Because unrestricted funding was so hard to come by, we had to spend every last dime rather than build up a reserve. And because we internalized the message that reasonably compensating executive staff was shameful, we couldn’t hire seasoned professionals or afford a CEO to replace me.

In the end, we collapsed under the weight of our own naiveté and short-sightedness.

Read the rest of FORGE founder Kjerstin Erickson’s story here.

However, some readers wondered if we’re thinking of overhead too simplistically and chimed in at Guidestar.

From Charles Tsai:

Honestly, I don’t think the public cares much about overhead, despite what surveys show. They are moved to donate for many different reasons, few having to do with how little overhead an organization has. The ones who care are the foundations.

From Michael Eriksson:

Your take is very black-on-white. In reality, it is not a question whether overhead, in it self, is good or evil, but of what level of something (this applies to many, many other issues) is appropriate. You may have starved your organisation; many other charitable organisations err severly in the other direction. Indeed, the reason why I do not give to charitable causes is simply that there is a too great risk that my money is wasted on something entirely unworthy—or, worse, hijacked by some dictator or bureaucrat on the way.

From David Meyer:

Organizations (as well as individuals and societies) rise and fall by the same virtures. All the comments above have elements of veracity. Michael Eriksson’s comment in particular captures the nuance of the overhead v. mission dynamic. How does one build an organization for the long-term while guarding against calcification, self-indulgence by leaders, etc.? The high-profile excesses of non-profits led to strengthened accountability, which then became an end unto itself. Peformance metrics are often applied to nearly every activity of an organization, rendering them meaningless. The same can be said of strategic planning, and the list goes on and on. There is no easy answer, but striking that balance is the mark of real leadership.

What are your thoughts on the overhead debate?

4 Comments

  1. This is an insightful write-up, Allison.

    Full disclosure: I work within the Nonprofit and Government Practice at Wipfli, LLP, a CPA and Consulting firm. Our clients are units of governement and grant-funded organizations, who are constantly fighting to stay financially solvent but erroneously assume this means minimizing expenses at all costs.To the contrary, budget management, accounting/HR software, strategic HR, management, and process-improvement solutions like firms like ours provide require an investment but yield enormous cost- and time-saving results.

    Many of our lives are integrated with our work, particularly if it’s centered around a mission in which we strongly believe. So, at the risk of sounding like a shameless plug for our practice, I concur with your points and appreciate you dispelling this important myth!

    • Thanks for sharing your resources and ideas, James! The more people engaging in this conversation, the better!

  2. zyxw

    The “overhead” that many donors are worried about is excessive pay and perks for management. Having recently been laid off at a nonprofit I experienced first-hand management’s focus on keeping overhead low by constantly cutting back on equipment, employees, pay, and perks for lower-level staff, while at the same time increasing compensation and benefits for upper level management that was very close with the board. In turn, to keep the books balanced, further cuts throughout the organization were made, while the board kept hearing about how great cost cutting was going due to management’s firm hand. The reality was that programs were failing due to lack of resources.

Trackbacks / Pings

Leave a Reply

Your email address will not be published. Required fields are marked *

You may use these HTML tags and attributes: <a href="" title=""> <abbr title=""> <acronym title=""> <b> <blockquote cite=""> <cite> <code> <del datetime=""> <em> <i> <q cite=""> <strike> <strong>