The key element of the TED talk is the concept of ‘The Overhead Myth’ – the ingrained and persistent belief that a non-profit organization’s key aim should always be to limit and reduce its overhead above all other objectives.

There’s a belief that spending money on fundraising efforts, advertising campaigns and talented, experienced personnel is somehow contrary to the aims of a charity – and that causes a problem for the non-profit sector.

If you’re ever going to grow your charity, increase your fundraising income and have a bigger impact on society as a whole, how can you do that without investing donations back into the organization?

It’s an issue that all non-profits face, but it is an issue that can be minimized and reduced by taking a proactive approach to your financial management and planning.

And that starts by getting the correct level of control over that overhead.

What is the overhead myth?

As an entrepreneur, a fundraiser and a human activist, Dan Pallotta knows a lot about the business of raising funds for a non-profit organization. And it’s this knowledge and experience of the problems that the non-profit sector faces that allowed him to crystallize the problem into his theory of ‘The Overhead Myth’.

Pallotta’s theory states that there are two rule books: one for the non-profit world and one for the rest of the world.

And he goes on to add that the existence of these two separate rule books discriminates heavily against the non-profit world, in five very distinct ways:

1. Compensation – In the for-profit sector, the more value you deliver for your organization, the more money you’ll receive as remuneration. But, on the flipside, we don’t like non-profits to use money to incentivize people to produce more social care. We don’t like people being paid well to deliver social value.
2. Advertising and marketing – We accept that for-profit businesses must spend a big chunk of their revenues on large advertising campaigns to bring in more customers and more profits. But we don’t like to see our money spent on advertising by charitable organizations – even though doing so would dramatically increase donations.
3. Taking risk on new revenue ideas – We expect for-profit businesses to take calculated risks to improve profits. But the same isn’t true of non-profits. Charities become reluctant to take a risk and that kills innovation. If you can’t innovate, you can’t bring in bigger revenues, grow the organization or increase your social impact.
4. Time – For-profit businesses have the luxury of time. A long-term plan, where profit gets put back into the organization, is seen as ok, if the goal at the end is big enough. But if a non-profit tried to plow its funds back into growth and attain the tools to cure a social problem, we wouldn’t stand for it.
5. Profit to attract risk capital – For-profits can pay people profits to attract them to invest their capital in their ideas. But you can’t look to make profits in the non-profit sector, by definition.

Why a focus on overhead is such a huge issue

This immovable focus on reducing overhead at all costs creates five very defined problems for the non-profit sector:

1.  You can’t use money to lure people away from the for-profit sector to the non-profit sector.
2.  You can’t advertise on the same scale as the for-profit sector.
3.  You can’t take the same kind of risks in pursuit of new customers that a for-profit can.
4.  You have less time to find these customers than the for-profit business.
5.  You don’t have a ‘non-profit stock market’ to fund any of this, even if you could

And the net result of these problems is one even bigger problem:

The non-profit sector can’t GROW and SCALE.

Charity giving is only 2% of US GDP, and has been since it started to be measured in the 1940s. Whatever the not-profit sector does, it can’t lure away money from the grip of the for-profit sector.

So, as a non-profit organization, how can you improve your fundraising, increase your growth and help change that seemingly static 2% figure?

How do you overcome the overhead problem?

Your overhead is how the public judge your charity and its effectiveness. So how do you overcome the conflict between effectiveness and being measured on your overhead expenses?

The key starting point is to get real control over your overhead.

As the CEO or management team in charge of your organization, you make the decisions that result in your overhead.

You decide:

•  How much you pay your employees.
•  How many people are hired for your team.
•  How much money is spent on advertising.
•  How big the scale of your fundraising efforts will be.

So the initial impetus behind your overhead is largely in the control of you and your organization’s management team.

And when your financial management is organized, up to date and proactive, you can also work with your professional advisers to get detailed budgets, reporting and performance tracking of the spending that goes to form this critical overhead number.

But the really important thing to understand is the link between this reported overhead and your social impact on the communities around you.

Learning to aim for scale and impact

It’s not about just cutting your overhead, of course.

It’s about learning that investment in your fundraising is key to growth, and that growth and increased revenue brings about a more effective impact on the social problems you’re attempting to tackle.

What you need is a plan – a plan that sets key goals for your fundraising, your advertising and marketing and the overall growth of your resources.

We can help you write that strategic plan, set up the budgets that are needed and create the metrics and key performance indicators (KPIs) needed to track your non-profits performance and keep you on track for achieving greatness.

With the right ambition, the right control and the right planning, your non-profit really can overcome the overhead problem.

Contact us to discuss how Checkbox can help your non-profit increase its fundraising efforts and start making a difference for your core community.

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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?

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