The Most Important Statement in the Nonprofit World in the Last Decade

Perhaps you are thinking the title of today’s post is a bit bold. However, after reading below, I am hoping you agree that it is literally not strong enough!

My thoughts are centered about the groundbreaking joint announcement by three of the premier watch dog groups in the charity sector. Together the BBB Wise Giving Alliance, Guidestar and Charity Navigator have been the “thought leaders” regarding the rating of all nonprofit organizations.

The first few paragraphs and the final paragraph of their joint statement were absolute music to the ears of most nonprofit leaders. They are pasted in below in their entirety for you to absorb:

“To the Donors of America:

We write to correct a misconception about what matters when deciding which charity to support.

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.

We ask you to pay attention to other factors of nonprofit performance: transparency, governance,
leadership, and results. For years, each of our organizations has been working to increase the depth and breadth of the information we provide to donors in these areas so as to provide a much fuller picture of a charity’s performance.

. . .

So when you are making your charitable giving decisions, please consider the whole picture. The people and communities served by charities don’t need low overhead, they need high performance.

Overhead Myth

Thank you,

Art Taylor
President & CEO,
BBB Wise Giving Alliance
overheadmyth.give.org

Jacob Harold
President & CEO,
GuideStar
overheadmyth.guidestar.org

Ken Berger
President & CEO,
Charity Navigator
www.charitynavigator.org

Overhead Myth Logos

My first comment is going to mirror one made by my friend of The Agitator fame Mr. Roger Craver in his post “When Sharks Become Vegans.” I also believe the TED Talk by Dan Pallotta, which went viral in our sector, outlining what is holding back most nonprofits from growing as rapid as commercial businesses had to have inspired some aspect of this joint statement. If you have not seen the video you owe to yourself to grab a beverage and enjoy.

No matter what the reason or the inspiration, I am delighted beyond all belief to see this joint statement being made. Yes, overhead is important, but it is not the only factor in declaring success. Perhaps this joint statement will finally allow nonprofit organizations of all sizes to invest from time to time in innovative tools, techniques and yes, even staff to insure more rapid growth and success in the future!

Without this declaration of factors besides overhead being important, most of the charities would continue to operate like the majority of publicly held commercial corporations who are held slave to another master, “Quarterly Results.” The quarterly result mindset keeps so many of the corporations from even occasionally “investing” in innovative tools, techniques and staff to accelerate future growth and profits.

Nonprofit leaders and more importantly, board members, please use this as your guiding sign and permission to truly evaluate game changing factors to your future success. Please allow a few budget variances to invest for the future! Keep in mind you can and should closely track the return on investment for those budget variances. A top notch scorecard to review at each subsequent board meeting might be a superb idea.

What do you think? Can this be the vastly needed permission needed for more game changing ideas and actions to take place?

Jay Love

Jay Love

Co-Founder & Chief Relationship Officer at Bloomerang
A 30+ veteran of the nonprofit software industry, Jay Love co-founded Bloomerang in 2012. He currently serves on the board of the Center on Philanthropy at Indiana University and is the past AFP Ethics Committee Chairman.
Jay Love
By | 2017-06-10T20:04:59+00:00 June 24th, 2013|Nonprofit Sector|

7 Comments

  1. Gayle L. Gifford, ACFRE June 24, 2013 at 4:56 pm - Reply

    I’m getting flashbacks from the Overhead Wars!
    In my first paid nonprofit job I became Director of Development and Communications at what was Foster Parents Plan, now Plan International USA. – this was in the 80s. At PLAN, overhead was a never ending issue. Like Dan Pallotta now suggests, we had increased the amount we invested in fundraising to raise more money for programs, a strategy that was working. But without significant government grants and totally dependent on our donors for support, this investment lowered our program spending to 72-75%. Matched up with similar looking child sponsorship organizations with program percentages in the 80s or better (many of whom had significant government spending, which came at a lower fundraising ration than our exclusively private funding), it was often hard to explain why this was a good investment for both the donor and the families they sponsored. Overhead ratios were highly competitive in the undifferentiated world of US child sponsorship.

    But we were not only explaining our decision to our donors, we were also constantly sparring over overhead with the colleagues in our international federation. They saw our higher overhead rate as morally indefensible, and more than that, a problem to their position in their own marketplace as a number of them were subject to national laws that capped their overhead at 20%. Our attempt to justify our investment went nowhere.

    I left plan to join a local environmental organization. I helped found and was active in promoting local workplace giving federations that were alternatives to the United Way. Here again, overhead raised its ugly head.

    The Combined Federal Campaign and State Employee Campaign brochures listed overhead rates of each agency in the campaign. Again, for those lesser known organizations, donors were “smart” to choose the organizations with the lowest overhead rate knowing next to nothing about their impact.

    Each federation also had to list its overhead rate in those campaigns. Our local UW had created an endowment that funded its overhead as result of a large bequest. So it was able to brag that 100% of donor gifts went directly to programs. Of course, if you stacked up the real administrative and fundraising expenses of the UW against the tiny alternatives, the UW looked shockingly expensive. But… for years the power of this argument for low overhead was so strong that the UW not only made the true claim but it also listed its real overhead as 0% in those brochures … totally inaccurate if they had calculated their actual overhead rate using the 990 calculation required by those campaigns. After our federation made quite a fuss, they finally accurately reported their real overhead calculation.
    And then… somehow, over the last 16 years as a capacity building consultant to nonprofits, I have found myself out of those overhead wars. Surprisingly, given how thought consuming overhead had been previously, I have since barely heard a whisper from a donor or board member or even staff member about overhead. For those organizations that fly under the radar of the CharityNavigators of the world, it’s pretty much been a non-issue.
    Now, unfortunately, that doesn’t mean that organizations I encounter are rushing to invest more in their fund development programs. They keep starving those programs of resources and wondering why they don’t get better results. So while overhead as a percentage may not be on their conscious minds, the belief that spending more money to raise a lot more money is still rarely understood as an option until someone like us suggest they consider it.

    • Jay Love June 25, 2013 at 2:33 pm - Reply

      Gayle, your comments and real world experience ring so true that it is downright scary! Thanks for sharing and illustrating how investing in success can work and how not investing can starve the very hands that are feeding the mission of most nonprofit organizations . . .

  2. Kevin Cahill June 25, 2013 at 10:16 am - Reply

    The world we live in is complicated. People are confused and confusion breeds apathy. Having a lot of charities means duplication of services, governance structures, volunteer requirements and charities are increasingly being forced to deal with that complexity. It is not just about handing out cans of food although check out how many competing organizations do hand out food. To be effective charities need resources, capital, structure, governance, volunteers, donors, and employees. With the plethora of charities that exist, many are dealing with the same issues and it begs the question, is competition in the charitable sector effective. Can competition be in fact unhealthy for the future of the charitable sector? Having intense competition leads to more funds being spent on marketing to differentiate yourself from the other charities. More and more effort gets spent justifying that you are doing a fantastic job rather than actually doing a fantastic job. I endorse setting up organizations for greatness, but maybe it is also a time that people stop giving to United Way and Community Foundations as aren’t they just middle men organizations anyway? What is the direct impact of a United Way? Wouldn’t the funds be better served going directly to the people who benefit?

  3. Claire Axelrad June 27, 2013 at 5:28 pm - Reply

    Jay, I absolutely agree about how important this is. It’s huge, and long overdue. I recently wrote my own post on the subject on my Clairification.com blog, informed by my 30 years in the trenches with nonprofits. If I had a nickel for every time I tried to tell folks “If you don’t grow you die” or “You’ve got to spend $ to make $” I’d have a tidy little next egg.

    “Incremental Change is Not an Option.”
    What if this was your charity’s mantra? This is so different than “We keep overhead super low.” The first means dreaming on a large scale, and reaching for true solutions to social problems. The latter, not so much.

    For years donors have been taught to look for low overhead as a sign of effectiveness. When you stop to think about it, it makes little common sense. Who cares if you spend only 5 cents on the dollar if you only net $71 from your bake sale? Will this solve your problem? Whatever resources are needed to solve the problem, those are the resources that must be spent. Nothing more. Nothing less.

    For too long we’ve confused morality with frugality. And, by so doing, we’ve missed the point. Does it matter so much what percentage you spend if you’re getting a 1,000% return on your investment? Honestly, when I worked in the trenches I consistently calculated and reported this sort of return. In the for-profit world folks would do cartwheels if they got this result! Not so in not-for-profit. Instead, staff would be asked to shave off a percentage point next year and raise more with less. Wrong perspective. Charity needs to be judged from a different perspective. We need to look at two things: (1) what is needed to do the job and (2) what is accomplished. Period.

  4. Diane June 27, 2013 at 8:40 pm - Reply

    It seems to me that the underlying issue is not legitimate and ethical fundraising. It is the overuse of for-profit fundraising companies and the abuse of the joint accounting loophole by dishonest charities trying to fake efficiency. Charity Navigator does no analysis of any of this, and doesn’t even bother to read past one of charity tax returns. Charities that do their own fundraising (or use reputable vendors, sparingly) end up penalized for honest reporting of their fundraising and overhead costs. It does not take a long time to see which charities cook the books and how much money is funneled to telefundraisers and direct mailers. It’s on page 8 of IRS 990’s. Ignoring this important issue rewards bad charities and the dregs of the fundraising industry. BBB ceased operating as a watchdog when they were unable to attract members and donors. They are now a trade association. Charity Watch is the only reputable and independent national watchdog. Charity Watch differentiates between legitimate in-house fundraising and industry profiteers. And Charity Watch does not rubber-stamp fudged IRS financial statistics.

    This agreement/letter is a result of the Direct Marketing Association’s efforts to fight reform and counter the recent series of investigations by award-winning reporters into the dark underbelly of for-profit fundraising. It was not the DMA’s finest hour when CNN asked why Quadriga Art mail mill was allowed membership in the DMA. Quadriga has also been a major sponsor of DMA conferences. So have many of the worst solicitation firms. Charity Navigator has also been recently exposed in the media for awarding high grades to Charity Watch D and F rated groups that ended up exposed on 60 Minutes, CNN, USA Today and other media outlets. Ken Berger’s TV appearances exposed him as in over his head, but still eager to aggressively market Charity Navigator as something it is not. Dan Pallotta has never gotten over his rage about his AIDS Ride fundraising scandals.

    I guess this is a good career move for these red-faced dunderheads. They have to realize that effectiveness and impact can easily be fudged by the same groups that cook the books on fundraising and overhead expenses. These include Help Hospitalized Veterans, Feed the Children, and the Humane Society of the United States, which is threatening to sue Charity Navigator if it downgrades them from their undeserved 4 star rating. HHV, HSUS and FTC all appeared on Worth Magazine’s 10 Worst Charities the last year Worth analyzed nonprofits. All three have been investigated numerous times, and ordered to repay money fleeced from the public. HSUS and FTC got nabbed for Katrina (HSUS) and Haiti (FTC) disaster fundraising scams. HSUS is part of the Lois Lerner/IRS disgrace.

    I favor specialized watchdog groups for specific charitable categories. A cancer watchdog is desperately needed. The Disaster Accountability Project is a promising newcomer, and the oldest one, Animal People Watchdog on Animal Protection Charities, is brilliant. The signers of this letter? Not so much.

  5. Elaine Fogel June 28, 2013 at 12:51 pm - Reply

    One word… Hallelujah!!!!!

  6. The Overhead Myth Revisited April 4, 2014 at 5:11 am - Reply

    […] we all work much harder, it may be decades before the overhead myth is completely debunked. Even bold new fundraisers like charity: water are still claiming 100% of […]

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