A BETTER MEASURE OF CHARITIES’ SUCCESS
What’s the matter with judging a non-profit organization’s worthiness by how much it spends on “overhead” — those costs associated with things like fundraising, computers and office space?
Actually, quite a bit — if that is the only measure you use to determine whether you want to invest in a non-profit with your hard-earned dollars.
For years, charity watchdogs Charity Navigator and Better Business Bureau Wise Giving Alliance insisted that the “overhead ratio” — the percentage of overall expenses a non-profit devotes to administrative and fundraising costs — should be low, and donors have listened. Non-profits have felt compelled to play along, minimizing over-
ELLEN SOLOWEY head and touting, for example, that 90 cents of every dollar go directly to programs.
Certainly, the overhead ratio is appealing in its simplicity when a non-profit’s performance is evaluated. But hospitals, homeless shelters, theaters and afterschool programs do not operate without computers, facilities and fundraising staff who raise dollars to support these programs. A focus on overhead cannot tell you if a soup kitchen is serving healthy meals in a safe environment or if a volunteer mentor for children is properly trained and supervised.
But then, one quiet day, in a surprising and momentous move, the charity watchdogs came together and changed their minds. They renounced the non- profit overhead ratio — a measurement of non-profit effectiveness that the watchdogs themselves established.
This is a startling sea change, though a very welcome one for non-profits. The shift is remarkable, since the charity watchdogs are now campaigning to dispel the very “overhead myth” they created. It’s like a tobacco company admitting smoking can cause cancer. The initiation of their campaign was unexpected, like the sudden collapse of the Berlin Wall. And like the crumbling of the Berlin Wall, the new stance on overhead costs is long overdue.
The overhead ratio is a quick, but flawed, measure of a non-
profit’s performance. Non-profits tackle sprawling, messy social issues that make it difficult to easily determine if they are making a difference. Their business model — fulfilling a social purpose while relying mostly on donations and government contracts supported by taxpayers — means that people rightly want to know if funds are used wisely.
So, what can foundations or individual donors look for when determining whether to invest in a nonprofit? Just as there are no simple answers to curing cancer or reducing poverty, there is no single measure for judging non-profit effectiveness.
Donors can look to factors beyond overhead that are relevant to non-profit performance.
For example, does a non-profit publish how it raises and spends funds? Who is the executive director, and who serves on the board of directors? What kind of results does a non-profit achieve? Guidestar, an information service specializing in reporting on U.S. non-profits, offers access to non-profits’ financial documents. And a non-profit’s annual report supplies a wealth of information about who serves on its board and leads the organization. Websites such as Philanthropedia (myphilanthropedia.org) and GreatNonprofits (greatnonprofits.org) offer ratings akin to those on Yelp or TripAdvisor. And check your local foundations’ websites to see which non-profits they have supported.
The Virginia G. Piper Charitable Trust welcomes this new conversation that we hope will help nonprofits escape an artificially constraining view of how they should allocate their funds. Arizona’s more than 20,000 non-profits provide health care, education, social services, and arts and culture to our state. Dollars wisely devoted to non-profit overhead are an investment in the quality, efficiency and growth of the irreplaceable services they provide.
As author and non-profit provocateur Dan Pallotta tells us, you do not want your organization’s epitaph to read, “We kept our organization’s overhead low.” Instead, let it say, “We had overhead, we served many, and we served them well.”