Think about how you donate to charities; do you focus on the percentage of your dollar that will actually go towards the cause? If for every one dollar donated 50% of the amount goes towards the cause, would you still donate? How about 40%? 30%? 10%? Here is some food for thought.
Overhead expenses and the cause or goal of the nonprofit can be two good measurable indicators of success within a nonprofit organization. The Bill and Melinda Gates Foundation point out that they use many measurable indicators to prove their cause is a success without limiting themselves to JUST the overhead metric. Their causes or goals are measurable, attainable, and set within a time limit to encourage continued movement towards the goal/cause. SMART goals, as you might have heard them referred to in the for-profit sector.
Different from the for-profit sector that can increase overhead to increase success, nonprofits find themselves the center of negative questioning in the media when they increase overhead to reach their goal. Increasing their overhead then results in the reduction of dollars towards their cause, regardless if the cause is being measured and attained within a specific time limits. Causes that are measured and being attained SHOULD prove the success of the nonprofit and not JUST the use of funds towards overhead expenses.
The Overhead Myth letter (found here) does a good job of describing just how wrong it can be to solely use overhead spending as a key indicator to success. The continued review of overhead spending by potential donors can be detrimental to nonprofits in the long term as they deter away from making the investments in infrastructure, workforce and other forms of capacity, preventing them from having a greater impact in serving their constituencies. As Mr. Pallotta points out in his TED presentation (found here), organizations must be give the freedom to attain the kind of scale in their operations that will enable them to make more of a difference.
However, as the Overhead Myth letter also points out, overhead indicators do say something important about nonprofit management’s effective stewardship and can be a red flag for poor financial management. The question then becomes how to link financial indicators, like overhead ratio, with other nonfinancial indicators of performance and outcome effectiveness. How do we determine if the additional investment in capacity and building scale is really paying off, not just in terms of how many dollars the organization is raising, but in terms how those dollars are being put to use in having an impact on the organization’s mission, cause and goal.
Performance measurement and management – the task of choosing metrics and outcome measures that truly capture the “success” of the organization in the largest sense – may be part of the answer. As Bill Gates stressed in his recent annual letter issued for the Gates Foundation, performance measurement is a critical tool for effectively delivering social impact in classrooms, clinics and cities, “setting clear goals and finding measures that will mark progress toward them can improve the human condition.”
So let me ask you again… If a nonprofit is creating concrete goals, attaining those goals/causes, and doing so within a relative time constraint, but spending 60% on overhead, would you donate? This means that 40% of your dollar goes towards the cause. What about 70% given the same results? 80%? What do you feel is the ideal investment a nonprofit should place into overhead to allow that nonprofit to attain its goals?