Putting overhead under scrutiny

By Lynn Sygiel, editor, Charitable Advisors |

So you donate money to your favorite charity, and you find out later that the money went to buy a new roof. Or new computers. Or to replace the muffler on the company van that shuttles needy clients around the city. Was this a good use of your money?

For many people, any conversation about money is difficult.

But when the conversation is about overhead or unrestricted dollars, and it’s between a nonprofit and a donor, it can be even more difficult.

Six years ago, in the Stanford Social Innovation Review, Ann Goggins Gregory and Don Howard wrote about what they called the nonprofit starvation cycle and challenged foundations to start an open conversation about overhead and analyze the true cost of running a nonprofit. They cited statistics from a five-year study by IU’s Lilly Family School of Philanthropy and the Urban Institute’s National Center for Charitable Statistics, which reviewed more than 220,000 IRS Form 990s and surveyed more than 1,500 organizations with revenues over $100,000.

At the time, the nonprofit sector equated low overhead with high performance and best allocation of dollars. Donors depend on online rating sites such as Charity Navigator or GuideStar to help them give wisely. If there’s a perception that a nonprofit spends too much on overhead, it can have a negative effect on donations.

Indiana grantmakers have started a conversation to address the issue.

Last year, the Indiana Philanthropy Alliance included the topic at its annual statewide conference for grantmakers. There were two sessions that took on the topic, said Marie Beason, director of professional development and special initiatives for IPA.

“It included both sides — not only the direct costs of overhead but true costs of programming. It was a very rich conversation,” said Beason.

Besides a keynote address by Bob Lupton, author of Toxic Charity, five Indiana foundations shared experiences about what it truly costs a foundation to run all the programs it funds and operates.

Based on the responses to these sessions, IPA felt there was an opportunity for additional conversations on the topic. So in early June, they are hosting five IPA/GIFT regional forums facilitated by Lupton. Besides outlining the elements of toxic charity, the sessions will provide foundations and nonprofit partners an opportunity for frank communication about achieving results, using these practices.

While Beason has seen some change, she said conversations have been more casual. She also cautions that no two nonprofits are created equal when it comes to overhead.

“It comes up, I’m sure in every internal grant application review committee. We have not found a format or template that has been strong enough to lead us to a formal initiative, but what we have learned is that folks want to learn more.”

At McCoy, President John Brandon said it is a regular internal staff conversation, and annually with his finance and budget committees.

In the last five years, he has broached the topic with donors, too.

“We have had conversation fairly regularly with donors and givers because I think we have to help them understand the true cost of doing business,” he said.

Sometimes, though, the toughest conversations he has about overhead are in his own head.

“I’m justifying allocating money in my budget to buy that or pay for that and even though it’s not direct programming expense and it improves the quality and effectiveness of our organization. We’re trained to say, ‘Let’s do more with less.’ If we spend hours and hours trying to figure out how to do more with less, we’re wasting time and effort, that we could really be putting into more effective things,” he said.

Without accurate data, and open communication with funders, both argue it is difficult for donors to know what actual costs are.

“So instead of making excuses for overhead,” said Beason, “I do see a movement afoot to really articulate the importance of the work, the importance of the investment and the outcomes, rather than, “Oh, we’re sorry but we could really do this for much cheaper.’

“It all leads back to communicating the value of the work. Oftentimes the nonprofits come begging, which is not the appropriate mindset to raise funds. Now I’m seeing a shift both in donors as well as foundations to recognize it more as an investment,” she said.

The Nonprofit Finance Fund (http://nonprofitfinancefund.org/), according to Beason, has done a great job articulating overhead costs associated with a cup of Starbucks coffee and how that might equate to the nonprofit sector.

Beason suggested that nonprofits start by asking:

  • What is the true cost of programming?
  • What are the real outcomes and not just outputs of what the organization does?
  • What are the things that work and how does the organization build support for that?
  • What are the donor’s expectations?
  • Why is this an appropriate funding source?
  • What will the nonprofit gain from this funding source that will that allow it to effectively reach the outcome that it is hoping to achieve?

Both Brandon and Beason agree this has to be a two-way conversation, and it is critical to have open conversations about how each partner – donor and nonprofit — can benefit from the work.

“It’s not just the foundations understanding that personnel and insurance, and utilities and fully funding a program is important, it’s also getting the nonprofits to understand how best to plan for, manage and raise funds for those line items effectively,” she said.

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