A few weeks ago, three of the nation’s leading sources on charity information released a statement denouncing “overhead ratio” as the sole measure of an organization’s performance. A letter signed by the CEOs of GuideStar, Charity Alliance and BBB Wise Giving Alliance marked the beginning of what is called the “Overhead Myth” campaign, a crusade to correct the long-espoused theory that the percentage of a nonprofit’s overhead is the ultimate metric in evaluating their overall efficiency. This erroneous emphasis, which has been in practice for over three decades, caused donors to discount nonprofits whose percentage was considered “too high” and worse, restrained nonprofits from investing in essential infrastructure. This has created what The Stanford Social Innovation Review coined in 2009, as, “The Nonprofit Starvation Cycle” which they describe “starts with funders’ unrealistic expectations about how much running a nonprofit costs and results in nonprofits’ misrepresenting their costs while skimping on vital systems.”
The Curtis Group has been talking about this cyclical dilemma for the past four years since SSIR published its article. We were especially pleased to see the launch of the “Overhead Myth” campaign that states openly the need to reverse this sequence. One of the most important statements from the CEOs’ announcement letter submits: “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.”
We recently attended Merrill Lynch’s discussion of the 2012 Bank of America Study of High Net Worth Philanthropy. The presenter, Barbara Washington, vice president for Bank of America, noted the recent focus many high net worth individuals are placing on a nonprofit’s efficiency and effectiveness when evaluating recipients of their charitable dollars. Wealthy individuals are viewing their donations as investments and want to be sure the nonprofits they are supporting financially are accomplishing their mission in the most successful, competent way possible. And as our firm has always believed, in order to be efficient and effective, nonprofits must spend money on operations and infrastructure. Nonprofits need to hire, train and retain top talent; they should spend on technology and education for their staff and board and they should not be fearful of dollars going to operating a successful fundraising program. Organizations that invest in operations are more likely to achieve their mission and therefore receive support from philanthropists. Like any successful for-profit business, a nonprofit must capitalize it, especially in the beginning, in order to ensure sustainability and accomplishment in the long term. The “Overhead Myth” letter recommends that donors focus on more relevant factors behind nonprofit performance such as transparency, governance, leadership, and results.
To learn more about the “Overhead Myth” campaign visit www.overheadmyth.com. We encourage nonprofit management to share the CEOs’ letter with their boards and staff to help spread the word about this new, important public campaign.