In late January Dan Pallotta was the closing keynote speaker for Florida Philanthropic Network’s 2013 Statewide Summit on Philanthropy, and people in Florida philanthropy who heard him are still talking about his remarks to this day.
One of Pallotta’s key points Pallotta had to do with our country’s historic focus on a nonprofit’s “overhead” when making funding decisions. The word “overhead” has come to mean something bad or wrong, he pointed out, and “good” nonprofits are the ones who keep their overhead as low as possible. This way of thinking does not recognize that those overhead expenses also help to support a charity’s cause, Pallotta continued. It’s hard for a nonprofit to operate effective programs to fight hunger or homelessness, for example, if it can’t keep the lights on in its office or give its employees decent computers.
And the much-used nonprofit “overhead ratio”? Pallotta noted that it doesn’t tell you anything at all about a nonprofit’s impact. He encouraged donors to stop using the word “overhead” altogether, to stop asking nonprofits for their overhead ratios, and to build a “magnificent assessment apparatus” to determine if a charity is making a difference on its particular issue or cause. A month later, Pallotta communicated a similar message about overhead at the TED2013 Conference, and the video of his presentation has caught on like wildfire, with nearly 2 million views.
And last week we had a landmark announcement by the leaders of three of our country’s leading nonprofit information providers – GuideStar, Charity Navigator and BBB Wise Giving Alliance – that they have launched a campaign denouncing the overhead ratio as the sole measure of nonprofit performance. In an open letter, the three CEOs – Art Taylor of BBB Wise Giving Alliance, Jacob Harold of GuideStar and Ken Berger of Charity Naviator – called for an end to the “overhead myth.” They stated that “overhead costs include important investments charities make to improve their work: investments in training, planning, evaluation, and internal systems – as well as their efforts to raise money so they can operate their programs. When we focus solely or predominantly on overhead … we starve charities of the freedom they need to best help the people and communities they are trying to serve.” The leaders recommend that donors focus their attention on more relevant factors behind nonprofit performance: transparency, governance, leadership and results. Their letter was published on a new Web site, www.overheadmyth.com.
Continuing the conversation, my colleague in Illinois, Valerie Lies, President and CEO of Donors Forum, wrote a piece last week for the Huffington Post in which she stated that “for too long the laser-like focus on nonprofits doing more with less when it comes to overhead and administrative expenses has unnecessarily limited their abilities to fulfill or expand their missions.” She declared this an “important moment” for the nonprofit sector, stating that “it’s time we start looking at an organization’s outcomes – in addition to what they spend to achieve them – when determining where our charitable dollars go.”
I agree. FPN’s members have spent a great deal of time and energy in recent years trying to determine the best methods and frameworks for gauging a nonprofit’s effectiveness and for assessing an organization’s true impact in the community. Our members have learned that this is not an easy task, and that identifying the “best” nonprofits can’t be accomplished by using a single, simple ratio.
This is not to say that grantmakers and donors should not pay attention to a nonprofit’s expenses and closely examine a charity’s financial statements when making funding decisions – they certainly should. It’s always important to ensure that a nonprofit will be an effective steward of your donations. But as the three nonprofit leaders said in their “overhead myth” letter, “when you are making your charitable giving decisions, please consider the whole picture.”
– David Biemesderfer, President & CEO, Florida Philanthropic Network
Note: Donors Forum has partnered with The Bridgespan Group to provide some excellent resources – Real Talk About Real Costs – to help guide nonprofits and their funders about administrative costs and organizational performance, including this brief video: