Think of your favourite effective charity. Now imagine that they reported overhead costs (admin, salaries, etc.) of 40% or more. Would you still hold them in such high regard?
If not, you may have fallen victim to the overhead myth. For a long time, overheads, or the portion of funds used on operating costs, have taken centre stage in the evaluation of nonprofit efficiency and effectiveness. Recently this notion has been dragged out and put under scrutiny, and it's not faring well.
One of the main problems with placing a high emphasis on overheads is that it rewards charities for how little they spend, rather than how much they do. Organisations must invest in systems development and infrastructure to scale quickly if they wish to succeed, and nonprofits are no exception. But very few are able to get away with this kind of strategic investment, as it would greatly increase their overheads. The donating public and grant makers would respond negatively, funding would dry up, and the organisation would fold.
Shortly after Dan Pallotta's talk, three of the leading sources of nonprofit information in America, the BBB Wise Giving Alliance, Guidestar, and Charity Navigator, launched an initiative called The Overhead Myth, striking out against overheads as a measure of nonprofit performance with an open letter to the donors of America. In the letter they echo the need for nonprofit organisations to spend more, not less, on overheads, empowering them to use business practices to scale and achieve greater impact.
The result is that commonplace practices in business, like leadership development, infrastructure investment, and effective management have become heresy in the nonprofit sector. This needs to change. Of course, charities must still be held to account. Nonprofits do not operate in a competitive market, instead living or dying by the willingness of the donating public and various institutions to fund them. It is therefore up to us to demand that our money is being used in the most effective way possible, to do the most good. So let's insist on high impact solutions, on absolute transparency and efficient governance. But leave overheads out of it.
What do you think? Is there too much importance placed on low overheads, or are nonprofits too different an animal for business logic to apply? Let us know in the comments below.
The Life You Can Save is a movement of people fighting extreme poverty. We hold that an ethical life involves using some of our wealth and resources to save and improve the lives of those less fortunate than us.
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