How Much is Your Obsession with Overhead Costing You?

Posted by on Apr 4, 2017 in Donor Cultivation, Featured, Plans and Budgets, Uncategorized | 6 comments

How Much is Your Obsession with Overhead Costing You?

Let’s say you get fundraising letters from two different land trusts with similar missions and similar geographies. The first raises $150,000 per year and brags that 95% of every dollar goes to programs. The second raises $500,000 per year, and you learn from Guidestar that they have a 25% overhead. Which one are you more impressed with? Which one should you be more impressed with? Which one would you give to?

Would you support the land trust that is actively using $142,500 to protect land every year or to the organization that is using $375,000?

Now turn the scenario around. Compared with similar organizations accomplishing two and a half times as much conservation with their programs, how do you talk to your donors? Do you say, “95% of every dollar you give goes to protecting more land.”?

Or do you say, “Look at all the land we protect every year!”?

Here’s what I wish would happen: Let’s all STOP talking about our overhead or fundraising costs – period.

  • First, because doing so perpetuates a MYTH that low overhead and low fundraising costs equate to better conservation;
  • Second, because it sets up a “fool’s gold” mentality where land trusts are compared with each other based on how little they spend period instead of how much they accomplish; and
  • Third because doing so demonizes overhead and fundraising.

I am not the first to write about this. Consider this blog post from Claire Axelrad.

Resist the temptation to starve your organization. Don’t shortchange those who rely on you by focusing too much on your overhead percentage. After all, it costs money to build programs. It even costs money to fundraise. If, in the end, you create more value by having slightly higher overhead, then why not?

One of the comments posted in response, from “Karen,” was also interesting:

When I am asked, ‘How much money actually goes toward the actual cause?,’ my answer is ‘all of it goes toward the cause.’ [For example] No nonprofit can operate without electricity. I’m in Florida, and whenever there is a hurricane, we try working without electricity for a few days. It doesn’t work. So yes, the electric bill is to benefit the cause.

Another blogger, Vu Lee, has written several pieces on the problems with overhead, including this one from this week. In another post I saved from last December, Vu lists the following problems with dwelling on overhead ratios:

  • It reinforces society’s ridiculous expectations of low “overhead.”
  • It trains people to look down at core mission support.
  • It distracts from our outcomes and impact.
  • It is insulting to so many people in our field.
  • It screws over other nonprofits and the entire sector.
  • It reinforces our internalized martyrdom complex.

And consider this letter, co-signed by the country’s three leading sources of information about nonprofit organizations, Guidestar, Charity Navigator, and BBB Wise Giving Alliance:

The percent of charity expenses that go to administrative and fundraising costs—commonly referred to as ‘overhead’—is a poor measure of a charity’s performance.

In fact, many charities should spend more on overhead. 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. These expenses allow a charity to sustain itself (the way a family has to pay the electric bill) or to improve itself (the way a family might invest in college tuition).

Frankly, I don’t think about overhead much – discussions quickly get into the weeds with salaries and benefits, and I really don’t want to go there.

But I do think about fundraising expenses a lot.

Here’s the point – or at least the point related to fundraising: Donors are NOT motivated to give because of how little you spend on fundraising. They are motivated to give because of how MUCH you accomplish. Focus on THAT in your communications and stop bragging about how little you spend on overhead. You’ll likely raise more money.

I’ll go even further…..

Consider this thought experiment: Calculate the total amount of money your organization has expended in the last five years. Now take 25% of that. If your land trust had spent that 25%, over those same five years, on fundraising systems – recruiting new members, keeping the ones you have, improving communications, developing meaningful connection activities for donors, actively cultivating and soliciting major gifts – how much more money would you have raised?

It’s rhetorical. You don’t have to answer.

For the record, I am NOT advocating that everyone spend 25% of their annual budget on fundraising. What I AM saying is that I find organizations not spending enough on fundraising far more often that I find organizations spending too much.

But even THAT isn’t the problem.

The real problem is that they’re proud of it.

 

Cheers,

-da

 

Photo by Susan Yin courtesy of Stocksnap.io.

 

6 Comments

  1. I love your concluding lines about the problem being that nonprofits are proud of how little they spend on fundraising and overhead. It’s like saying “I spend as little as possible on my kids food, shelter, education and health care, and just hope for the best. How little I spend is more important than whatever value/outcome results.” We’d be tempted to take the kids to Child Protective Services!

  2. ” One of the comments posted in response, from “Karen,” was also interesting:

    “When I am asked, ‘How much money actually goes toward the actual cause?,’ my answer is ‘all of it goes toward the cause.’ [For example] No nonprofit can operate without electricity. I’m in Florida, and whenever there is a hurricane, we try working without electricity for a few days. It doesn’t work. So yes, the electric bill is to benefit the cause.” ”

    Love this. Great point.

    Thanks for the post!

  3. Dave, thank you for the piece. Having spent my career working for Fortune 500 corporations, before becoming an unpaid volunteer in retirement, the “bottom line” is how effective the organization is in “selling its product”, in this case the objective standard of “how much land is being preserved”. Obviously for-profit and non-profits need to invest to accomplish their mission but it is also true that different organizations are more or less efficient in their operations and I have worked for businesses that were simply poorly run and terribly wasteful. Non profits are no different and I have seen poorly run non-profits as well. If overhead percentages are poor bases for determining effectiveness, then we still need objective criteria for determining that in our role as donors. What are those?

    As an aside, my personal pet peeve is nonprofits that send out endless “bling” to encourage donations, e.g. carrying bags, t shirts, etc. much of which is I think wasted money ultimately. Or even worse, they send me actual coins in the window in the envelope….perhaps that is another article on the effectiveness of such fund raising techniques.

    Thank you for the piece.

    • Rick,

      You’re asking great questions here. And I have several responses:

      First, no one should ever be defending organizations that spend 70-80% or more on overhead and fundraising. It is indefensible and possibly fraudulent.

      Second, any measure of overhead that is taken from a single year of data needs to be considered in context. Land trusts who purchase and/or accept donations of land and easements may have wild swings in their total expenses and revenue year by year. Their overhead ratios need to be considered and evaluated in a longer-term context – at least over five years and possibly even longer.

      Third, I am not asking donors not to consider overhead and fundraising ratios when comparing organizations. I am asking organizations not to lead with it in fundraising materials, because they are complicit in setting the bar unreasonably low. 990s are public documents and anyone wishing to know the information can find it – indeed many donors do. But no guidance is given about where the bar should be – 5%? 10%? 25%? 35%? What is reasonable? I think the hypothetical question in my opening is still valid – as a donor, would you rather support the organization that appears to be more efficient or the organization that is getting more done?

      And last, what counts and doesn’t count in determining overhead is not an exact science. For example, consider communications. Many organizations consider communications expenses as part of their program, because they are providing information germane to advancing the nonprofit mission, encouraging landowners to consider protecting their land, recruiting field volunteers, and so on. For other organizations, these same expenses are considered “overhead.”

      Perhaps instead of seeing overhead and fundraising ratios against some arbitrary bar or myopically in comparison with other nonprofits, we should define a range of “reasonable.” For fundraising alone, I would consider that range to be 15-25% (average over at least five years). Anything less than 15%, and I might begin to worry that the organization is not spending enough. I’m going to look for signs that they might be risk averse to the point that it affects their ability to accomplish their mission. More than 25%, and I might begin to worry that they are inefficient and wasteful. Neither may be true, but the metric still serves as a useful indicator.

      Thanks for the comment!

      Cheers,

      -da

  4. Yes! Yes! Yes! The “overhead myth” is doing more harm then good in our sector. You need to invest money to make money, and the perception that every dollar donated to a nonprofit goes “to the cause” is ill conceived. Nonprofit organizations, just like their for profit peers, need tools, software and other resources that allow them to do their jobs more efficiently. This is what ultimately helps them further their mission.

    Thanks for this reminder, David. Great post.

    • Zach, what really kills me is when I read that “100 percent of donor contributions go directly to programs,” implying that zero percent goes to “overhead.” My gut response is always “Liar, liar, pants on fire.”

      Thanks for the comment. -da

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