A Different Take on Funding Nonprofit Overhead

Friday, March 04, 2011

"I'll take 'Evaluation of Nonprofit Organizations for 400', Alex."

"Answer is, 'The overhead costs on this grant are too low, we should give them more than they are asking for.'"

"What are, 'Words you never thought you'd hear from the staff or board of a philanthropic organization!'"

Several years ago, I had a major paradigm shift in my thinking about overhead costs. A colleague recommended that I read a series of briefs published by Indiana University's Center on Philanthropy and Urban Institute's Center on Nonprofits and Philanthropy titled "Nonprofit Overhead Cost Project". These papers challenged my position (and what I would venture to guess is the commonly held position among many foundations) that the lower the overhead cost of a nonprofit organization the better. As funders, trying to squeeze the most good out of every dollar, the push to minimize overhead cost is very logical. We want as much money as possible to go straight to the ground. The motives and intentions here are great, but we all know that the best motives and intentions (and 79 cents) will only get us a cup of non-fair-trade coffee! I would actually argue that if you restrict overhead costs too much, you could potentially impair organizations from operating at their peak.

Could there be something more important than the ratio of overhead and fundraising costs? 


"Of particular concern to us is the use of overhead cost and fundraising cost ratios as stand-ins for measures of program effectiveness. No organization in our study was an extravagant spender on fundraising or administration. Yet contrary to the popular idea that spending less in these areas is a virtue, our cases suggest that nonprofits that spend too little on infrastructure have more limited effectiveness than those that spend more reasonably. Thus, in addition to the ceilings on these cost ratios that many watchdogs set, floors should perhaps be introduced as well. Although our study does not specify where those floors should be set, it is an issue the sector needs to reflect on and address."

By demanding lower overhead costs we can actually  participate in perpetuating a vicious cycle within the nonprofit community.  Upon trying to meet these demands, organizations may implement negative changes such as underreporting, or even pay cuts which can severely hamper effectiveness. Again from the briefing...

“When funders provide restricted funding, they tell the recipient organization what the money can be spent on, and often severely limit the portion that can be spent on overhead. To deal with the inadequate funding for administration, organizations resort to the strategies of low pay, make do, and do without that diminish organizational effectiveness.”

So, what should we do as donors?

"Among our cases, large grants for program services, whether from the public sector or foundations, tended not [emphasis mine] to include their fair share of the organization’s administrative costs. Organizations that relied on this source of income, particularly small organizations, were less effective as a result. Funders who appreciate the link between the impact they seek and the organizational effectiveness of grantees may wish to reconsider their policies and practices with respect to funding overhead costs on project grants or providing operating support. [emphasis mine] Private sector funders may wish to consider funding advocacy efforts aimed at changing public sector practices for funding overhead."

A real life example:
Recently we began a relationship with a great organization which focuses primarily on education in Haiti. They were seeking funding from us for a new project that would establish a graduate scholars program slated to ramp up over the next four years. Eventually, the project would become sustainable through a scholarship sponsorship system. However, in the first year there wouldn't be enough students to cover the true cost of the project. After further conversations, we suggested that they increase how much they asked of us (by just over 11%) to cover the total cost. On the surface, it may sound odd for us to ask them to ask us for more, but in reality it only makes sense to add an additional 11% to a grant that significantly increases the chance of success of this new program.

As donors, we need to move past the notion that with overhead, less is always more. Instead, we need to focus on impact and effectiveness of grantee organizations. More on impact and effectiveness to come...


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05-Mar-2011 10:22 AM

Thanks for this... it is bang on. It bothers me that most casual donors (and even some professional ones) penalize charities for having high overhead costs, and yet at the same time complain that they aren't run professionally.

At our foundation when we evaluate and score applications, we award a low score for overhead that is too low. We're interested in working with organizations that have built in capacity for growth and excellence.
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05-Mar-2011 02:41 PM
Joshua Sieweke posts :
I am speechless. I work for a nonprofit and am responsible for mobilization. There is a tremendous need for the message of this post. The effectiveness of my office is constantly compromised by a lack of investment in administration.
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06-Mar-2011 06:06 PM
Scott Forbes posts :
I have worked in an environment that starved the overhead costs. In fact I was the leader and proud of our lean machine. In actual fact we were more like a machine that ran out of oil and clickety clanked forward in fits and starts. Because I could not afford to hire more staff, I took on multiple tasks and worked 75 hours a week all the while telling myself that I loved my job. My breakdown was sudden, severe, and horrifying. I am no longer in that organization and 5 years later they have not found a new Exec. Director. I am now in ministry with a new organization, confined to work only within my strengths. Instead of two employees, this org has 10 and the overhead is twice what my lean machine had at its disposal. The team I work with has my back - I feel safe.
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08-Mar-2011 05:00 PM
Scott: I am so thrilled you found your niche with an effective organization that respects and values your incredible strengths.
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24-Mar-2011 08:22 AM
Wow. Thanks for this post. Very refreshing and encouraging to hear!
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