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How the ‘Overhead Myth’ is Limiting the Impact of Nonprofits

If you’ve ever given money to a homeless person, you’ve no doubt wondered how they money was actually used. Maybe it was a fleeting thought and maybe it gnawed at you for longer, but you questioned the value of your donation. And perhaps that doubt – will it be used on drugs and alcohol or food? – has kept you from giving more often, and not just to someone on a street corner.

It’s hard not to insist on a reasonable return on investment, even when we are making a donation. And while I’m convinced there are many times when we should give with no expectations at all, I also believe good stewardship involves giving wisely and factoring in the impact as part of the equation.

When it comes to organizational giving, however, I’ve noticed that donors often unwittingly lose sight of long-term impact, even as they try to ensure a responsible return on investment.

If you are considering a donation to an organization, you probably don’t worry that the money will go toward drugs and alcohol. But you might wonder if the nonprofit will spend too much on salaries, operations, or other overhead expenses that don’t directly provide the services of its mission.

In fact, in my experiences as a board member for nonprofits, many donors still target 10-15 percent as the goal for how much an organization should spend on non-service-related expenses. Ironically, no one runs a for-profit company based on those numbers. They would never be able to grow their companies with that much money falling to the bottom line. And neither can most nonprofits grow their impact with that type of limitation.

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The “overhead myth,” as it’s known in the nonprofit world, is such a big deal that three of the top nonprofit watchdog groups joined forces a few years ago to address it. GuideStar, BBB Wise Giving Alliance, and Charity Navigator wrote an open letter to donors in 2013 as part of their campaign to end the “false conception that financial ratios are the sole indicator of nonprofit performance.” In reality, as they noted in their letter, nonprofit work is complex, and simple generalizations often miss the mark.

Brian Saber, president of Asking Matters, used a blog a few years ago to highlight these five reasons why a 15 percent guide might be meaningless:

  1. Organizations account for costs differently.
  2. Start-up programs and new organizations need to invest in infrastructure.
  3. Some programs simply cost more to run.
  4. Costs vary across the country.
  5. Overhead is not an indication of impact.

As chairman of the board of Colorado UpLift, I’ve encountered this donor dilemma in a personal way. Colorado UpLift provides teacher/mentors for students in inner city schools, building relationships with these kids to help them develop the character and leadership skills they need to become more productive members of society.

Donors who buy into the overhead myth actually end up limiting the growth and impact of the organizations they believe in.

Like most nonprofits, it needs to run lean to attract dollars from donors. But running lean doesn’t always allow UpLift to maximize its impact. Great organizations need great people. To attract great people, you need to have more than a wonderful mission – you need to give them the resources to achieve that mission. That’s just as true in the nonprofit world as it is in business.

I have zero concerns at Colorado UpLift as it relates to the mission or how efficiently it is bringing services to bear. But I would love to see the organization expand its impact. I’d like to see it double the number of schools it works with from 25 to 50. Instead of mentoring 3,000 kids, I’d love for it to work with 10,000. And if we hit those numbers, I’d love to grow even bigger – not because I want a bigger organization, but because I want the organization to have a bigger impact. And those goals require upfront capital for investment that alter the ratios, especially in the early years.

Donors who buy into the overhead myth actually end up limiting the growth and impact of the organizations they believe in. The best way to defeat this myth is with knowledge. Donors need to look more deeply into the operations of organizations and assess the impact based on all the factors involved, not on an outdated, off-the-mark formula. Organizations, meanwhile, need to work harder to transparently share their information and accurately tell the story of the work they are doing and how they are doing it. They still need to run lean, but they never need to sacrifice greater impact.

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