Why Overhead Is a Bad Word – Part One

By Sara Beggs, Exponent Philanthropy

When we focus solely or predominantly on overhead, we can create what the Stanford Social Innovation Review has called “The Nonprofit Starvation Cycle.” We starve charities of the freedom they need to best serve the people and communities they are trying to serve. —OverheadMyth.com

Recently, I had a discussion about nonprofit effectiveness with my dad, a former Fortune 500 business executive and venture capital enthusiast. I was surprised to find someone so deliberate in his assessment of effectiveness in other realms to be so quick to judge a nonprofit’s effectiveness on a single factor: its amount of overhead. And yet he was. For him, the lower the overhead, the more effective the nonprofit.

Unfortunately, he’s not alone in his thinking. The nonprofit sector is plagued by this standard, but why? Why might we all be tempted to buy into the faulty logic that low overhead = effective nonprofit?

  • We’re inundated with negative news that highlights nonprofit corruption. Hear enough stories like these, and our brains make an easy, though faulty, assumption that nonprofits are not trustworthy. As a result, we expect nonprofits to prove themselves by spending every dollar on programs.
  • Constant news of budget cuts, a growing deficit, and global competition changes the way we think. With scarcity on our minds, waste is one of our greatest fears. As such, we elevate “reducing waste” above other important factors.
  • The word “over” is often a negative. Overreaction. Overcrowding. Overrun. Over the limit. None of these words positive. Although accountants simply assign the term “overhead” to those costs that cannot be attributed to particular work or a specific product, the costs sound excessive or unnecessary.
  • We expect passion to power nonprofits. Somehow we think that effective management and good administrative systems will fall into place simply because, well, because they should. We expect something from nonprofits that we would never expect from business.
  • It’s difficult to measure social impact, so we settle for a financial standard instead. Although overhead alone isn’t particularly meaningful, it’s quick to calculate, and it gives us some satisfaction that we’re not spending our money on high-priced, mercenary fundraisers.
  • It feels better to feed starving children than starving organizations. We’re wired to eliminate pain and suffering, and organizations are one step removed from those they serve.

Why do you believe low overhead has become the holy grail for nonprofit effectiveness?

My next post will make the case for overriding our deepest emotions and thinking differently if real impact is our goal.

Related resources

Sara BeggsSenior Program Manager Sara Beggs currently focuses her time and energy on Exponent Philanthropy’s Getting to Impact Initiative, an effort to equip Exponent Philanthropy members with the information and inspiration to achieve greater impact over time. Her greatest philanthropic joy is participation in Blooming Kids for Kindness, a group of ten families that encourage their children to care about their communities and recognize that each can make a difference through local and international volunteer and fundraising activities.

6 thoughts on “Why Overhead Is a Bad Word – Part One

  1. To use overhead as a benchmark is difficult. We must remember that qualified (educated and experienced) staff are entitled to and should be paid a competitive wage. Many of us talk about financial justice or a living wage but we fail to apply that concept to the non-profit’s staff.

  2. Sarah, thanks for your succinct summary of this topic. Having worked nearly a decade in philanthropy and social change, Ive happily observed a shift from rigid program and service earmarking to flexible support of overhead, fundraising, and recently–my personal passion–storytelling.

    We at Skees Family Foundation believe that our grantee partners know best how to end poverty and equalize opportunity; so we ask them each year: What do you need? Even when they request specific program funding, e.g. Freedom from Hunger’s jobs-and-education-healthcare initiative and V-Day’s global V-Peace scholarships, we provide flexible wording in our grant agreement: “This grant may be used for _____ program and/or general operational expenses,” in case their overall needs shift through time or they receive unexpected program funding from another source.

    If we don’t trust our grantee partners to balance their budgets in a way that most benefits their/our clients, then we should invest elsewhere. Unfortunately, nonprofits can’t be so choosy about which funders to work with, or whether they will end up in a “starvation cycle.”

  3. In the business world, there is a tight focus on reducing overhead, because it’s a metric that is often quite meaningful and a good indication of efficiency, especially as a percentage of income. It’s also a nice metric to look at across companies within an industry.
    There are a couple very obvious problems using this in the nonprofit world. One, nonprofits often have radically different operational structures and deliver radically different programs. To use this metric across these very different organizations is simply not useful. Secondly it is usually most useful as a percentage of the measure of organizational success. In a for-profit company this is easy: sales! But in the non-profit world there are different, and often harder-to-measure, metrices. Reach, Impact, Babies Saved – there’s a huge debate surrounding how to measure success for non-profits and it varies radically from organization to organization.
    Overhead could be a useful kpi but only when comparing similar organizations with similar (and similarly calculated) success metrics.
    Lastly it might be a useful internal number to track, but external reporting pressure means that it is often kept artificially low resulting in numbers that don’t really reflect the reality on the ground and therefore not reliable enough for action.

  4. I’m delighted to have all of you join the discussion! You all raise excellent points that deserve more attention: financial justice, trust, and the lack of understanding of how nonprofits operate. This topic has a lot of baggage that needs to be unpacked! I look forward to hearing more from all of you and continuing the conversation in my next post coming soon.

  5. Pingback: Why Overhead Is a Bad Word – Part Two | PhilanthroFiles

  6. Pingback: Building Trust Through Transparency | PhilanthroFiles

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