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There’s No Free Lunch in Fundraising: Why You Need Overhead

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overhead myth

“Nothing comes from nothing.” – King Lear speaking to his daughter Cordelia.

You really, truly must spend money to raise money.

If you think otherwise, you’re naïve or foolish.

And you have to spend enough money.

How much? Enough to get the job done without leaving money on the table.

Simply spending to hire a development staffer will not do the trick if you have no administrative support for that person, no marketing staff, and no budget for training and infrastructure.

A good fundraising portfolio, just like a smart investment portfolio, is diversified.  You don’t want to put all your eggs in one basket.

If only one staff person is assigned to the development function, how likely is it they’ll be skilled at every type of fundraising and marketing strategy?

With everything you do you need to commit to it. Otherwise, there’s no point. A job description that includes database entry, mail merges, writing appeals, project management, foundation grants, special events, business sponsorships and individual fundraising has very little chance of adequately covering all those bases. If you think you’re getting some of this stuff for “free” by hiring one person instead of two, you’re kidding yourself.

Something is going to fall off the plate.

What it is will likely depend on who you have on staff, and where their areas of greatest strength and affinity lie.

We’ll Just Raise Awareness before Committing Budget to Fundraising

If you’re new to fundraising, or your donor base is small, it may be tempting to fall for the trap of “first we must raise awareness.”  That’s just an excuse to avoid spending money on fundraising.

Oh, and by the way, marketing costs money too.

There’s no free lunch.  

Volunteers and interns take management.

Even social media is no longer a free medium for distributing your marketing messages. You need to budget for content creation, social media advertising, influencer marketing and appropriate marketing tools. Not to mention staff and training.

You Get What You Don’t Pay For

Nothing comes from nothing.

Nonprofits have a love/hate relationship with what is called “overhead.” Be it for marketing, fundraising, accounting or other “administrative” functions.

Organizations pride themselves on being “lean and mean,” while simultaneously moaning about being “overworked and underpaid.”

For too long we’ve confused morality with frugality. And, by so doing, we’ve missed the point. The bake sale with only 5% overhead that nets a paltry sum for charity because it invested so little is not better than the AIDS ride with 30% overhead that nets millions of dollars. And this is the whole point of the much ballyhooed TED talk by Dan Pallotta where he said:   

Our generation does not want its epitaph to read: “We kept charity overhead low.”

Surely keeping expenses low makes little sense if it keeps income depressed, staff disgruntled (leading to high turnover), and programs operating at less-than-optimal levels.

Which is why several years ago Guidestar and BBB Wise Giving Alliance joined in, with Charity Navigator, in writing “Letter to the Donors of America,” stating that “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.” They also noted:

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.

At the same time, Charity Navigator changed the way it awards stars to focus more on results than costs. It was a good beginning.

Yet too many charities are still colluding in the persistence of the overhead myth and starvation cycle.

Inferior Investments Yield Inferior Results

If you spend 20 percent on overhead and knock your mission out of the ballpark are you less worthy of support than the charity that spends 10 percent on overhead but helps relatively few people?

Of course not!

Then why do so many donors persist in saying they want their contribution to go directly to help people, and not to “overhead” costs? And why do nonprofits go along with this, continuing to proudly tout their low “administrative” expenses?

If you don’t adequately administer your program, how the heck does it run? Not too effectively!

People don’t get therapy without therapists, healing without social work and medical professionals, research breakthroughs without scientists, and on and on.

Work—whether nonprofit or for-profit—doesn’t get done without workers; without buildings for them to work in; without computers for them to work with; without supplies for them to build with; and without cars, boats, planes and camel caravans for them to get to their places of work.

The Overhead Myth is at the Heart of the Problem

As long as people persist in the belief salaries shouldn’t be too high… folks who work for charities should wear hair shirts… and no one should complain about being overworked because, after all, nonprofit work isn’t really “work” (it’s a joy and privilege)… the problem will persist.

Does anyone tell sports celebrities or rock stars they shouldn’t get paid because they’re having too much fun?

Bragging about low overhead is a thoughtless practice. It shouldn’t be about what is low or what is high, but what is adequate.

There’s seriously no one right amount of overhead you can uniformly apply to all charities. Think about it this way:

  • Nonprofits just starting out necessarily will have higher overhead than those that have been established for a long time.
  • Smaller nonprofits will have higher overhead than larger ones, who can benefit from economies of scale.
  • There’s no uniform practice of measuring overhead, so often we’re comparing apples to avocados.

Stop Colluding in Persistence of the Overhead Myth

This year why not consider changing the way you plan and budget?

Don’t just do what you’ve always done. Make a list of everything you want to accomplish, just like you always do. But this year also consider what it will really cost to get there.

Pretend you have no staff or facilities, and are building from the ground up. In other words, do a bit of strategic zero based budgeting. This doesn’t mean cutting to the bone, scrapping everything and starting from scratch. It means figuring out what things would cost were you to start fresh (without the Founder who takes no salary; the COO who does the work of two people and has no life; the underpaid staff who are likely to jump ship at any moment because they can make more elsewhere; or the unpaid board members who find no need to hire essential staff, suggesting they can run the financial/fundraising/marketing operations as volunteers, even though they already have full-time, day jobs).

Persisting in the myth of low overhead is one of the reasons staff turnover in the sector is so high. And this is an expense most nonprofits aren’t counting, because it’s hidden. But it’s a huge expense! Penelope Burk’s Donor-Centered Leadership reveals it takes an average of 14 months to get a new employee up to speed. So if they leave before that period elapses, or shortly thereafter, you never get any real productive work out of them. Work becomes more expensive, not less, as years of experience are lost.  

My guess is you’ll find the real cost of doing business is more than you’re spending.

Perpetuating the overhead myth doesn’t help change the world. It’s harmful to the sector as a whole.

Spending less on fundraising doesn’t translate into spending more on programs.

If it were a zero sum game that would be true. But it’s not. In an interesting article for the Harvard Business Review, Dan Pallotta made this point:

Imagine a $10 million pie, with $8 million going to programs and with the 20 percent fundraising slice taking $2 million away from programs. The last thing we want to do is make that a $3 million slice, leaving only $7 million for programs. But that’s not how it works. If done correctly, the extra million enlarges the pie—substantially. A $10 million pie becomes a $15 million pie, and the $7 million available for programs grows to $12 million.

Budget for What You Need

Cutting corners just to “look good” to your donors is not going to get the job done.

It’s like cutting your medications in half because you can’t afford them. One aspirin won’t take away your head-ache if you need two.

Instead of going as low as you can, why not consider a race to the top?

Stop adhering to the common wisdom (really nonsense) that “a dollar less” is good. That the less you spend, the more effective you are. Nonsense. Lean and mean is just that. Mean.

It’s not fair. It short-changes those you’re allegedly helping. It short-changes the staff who are helping them.

It leads to an untenable nonprofit starvation cycle that makes no one happy.

Focus not on how little or much you spend, but how little or much you achieve.

What would happen if you were to say “our overhead reflects the high quality of our staff and infrastructure, assuring we deliver results in the most effective way possible – lasting solutions that don’t skimp on positive outcomes?”

Do you think donors would say, “Forget that…? I’d rather support the charity that offers the ‘el cheapo’ solution?”

This year, as you build your business and development plans and budgets, consider carefully your organization’s mantra for efficiency and effectiveness. There’s a world of difference between:

  • Incremental change is not an option,” vs.
  • 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.

If you are serious about boosting fundraising success in the year ahead, talk to your leadership about spending money to make money. Consider presenting the Dan Palotta TED talk directly to your board (and senior management); then facilitating a discussion about what it might mean for your organization to rethink the amount you spend on marketing and fundraising.

While exorbitant, unnecessary spending is wasteful, the same cannot be said for extra spending that helps more people at a somewhat more expensive ratio. Would you not spend 15 cents on the dollar to cure cancer if 10 cents on the dollar couldn’t yield that result? Of course you would!

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  • Jen

    I profoundly agree with this, Claire. Now, what will it take for nonprofits to have this conversation with donors -- to actually say: "no, we won't accept your grant if it stipulates that we cannot spend a portion of it on (so-called) overhead"? Until we are willing to put our foot down this is bound to persist. We do a disservice to our industry and our organizations and staff--not to mention to the people we serve--by letting this go on. The ball is in our court, I just wish we'd pick up and run with it.
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