Is Your View of Overhead Uncharitable?
By Rachelle Jervis Chopra, President & CEO, Executive Service Corps
Measuring impact is hard. Who is helped? How much? How often? Tracking data is time-consuming. The results of one organization’s impact can’t be easily ranked in relationship to another. For example, you can’t compare the community value differential between meals served to the hungry to children tutored in an after-school program. Enter “Overhead,” the easy to calculate but an inaccurate way to calculate the value of nonprofits. “Overhead” is the percentage of an organization’s budget spent on things like staff and toilet paper. A common belief among donors is that the lower your overhead the better. This tells nonprofit workers that the less they make and the fewer tools they have the better job they are doing running the organizations.
This uncharitable view means that those that choose a career in the field are either in the privileged position of not having to care about money or are forced to live meagerly while working long hours. There are clear issues of empathy when those leading organizations can’t relate to those they serve because they have never been without privilege or because they are exhausted from having to work a night and weekend job.
It is time we reversed the question and asked, does the organization have enough resources to recruit and retain representative team members at all levels of the organization. If not, is it sustainable?
In the grassroots phase of an organization, they might have only funds for one staff member, creating the perception that they are either light or heavy on overhead depending on how much of their time allocation is focused on growing the organization. Organizations without revenue-generating programs are reliant on fundraising (categorized as overhead) to sustain their existence; without donors, there aren’t programs.
I asked the Executive Service Corps’ Nonprofit Advisory Council what they thought about overhead as the go-to measure of a nonprofit. They dislike its inaccuracy. Here are three of their responses.
"The vast majority of nonprofits are not equipped to provide meaningful data which would validate their successes. In this absence, donors and evaluators have mindlessly, and harmfully, defaulted to their flawed for-profit go-to of overhead ratios, irrationally assigning program expenses the necessity of operating somewhere between a range of 60 to 80 percent. Unfortunately, these ratios don't serve any value as an indicator of organizational success and the unfortunate emphasis that has been inordinately placed on them has created flawed ideals amongst donors that the lower the overhead ratio is the healthier the organization is. This is clearly unreasonable and forces the people who work in and operate nonprofits to suffer unnecessarily to create a KPI that is to their own detriment, lest they be improperly judged and passed over by donors. I call it the Overhead CON (Conundrum of Overhead Nonsense)." - Dan Hostetler, Executive Director, Above and Beyond Family Recovery Center, Executive Service Corps Nonprofit Advisory Council Member
“Using overhead as a metric de-prioritizes the very things that businesses invest in to be stronger more sustainable organizations worthy of investment. Under an ESG framework, things like proper wages, benefits, and opportunities for learning directly impact employee engagement in a corporation which has a direct correlation to its profitability. Further, nonprofits are incredibly varied. They go about providing services in different and unique ways. This variety helps surface best practices in the field that more organizations can adopt. Finally, the work of most nonprofits is people to people and that is inherently more expensive work and harder to automate. In fact, we automate this kind of work at our peril. If we learned anything over the course of the last 18 months it is how integral the nonprofit sector is to the health and wellness of communities large and small, rural, and urban. It needs support and investment.” - Sejal Shah-Myers, Founder, SSM Philanthropic Consulting, Executive Service Corps Nonprofit Advisory Council Member
“This is really a conundrum. “How do you grow capacity to serve if you do not grow overhead capacity?” I think there needs to be more work on how an organization can or should grow…What are the phases first? Where do you invest first? What skillset is needed? A % overhead question in a grant request does not tell a story... does not tell any story.” - Nancy Sawle Knobloch, Executive Director, Family Service of Lake County, Executive Service Corps Nonprofit Advisory Council Member
As an industry, we need to push back against the overhead as a metric for quality. Boards should ask, “Are we paying health and mental health costs, matching 403b contributions, issuing annual cost of living adjustments, giving merit raises, providing the soft and hardware needed, the tools needed?” If not, this is a key strategic weakness. Organizations' missions, be they the environment or the arts, will be negatively impacted with each staff transition and staff work around due to lack of resources. The same is true for teams, donors, and vendor relationships.