Nonprofit Insights: The Overhead Myth - What It Is, Why It Matters...and What Now?
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You may not know it by name, but most nonprofit organizations have fallen victim to the Overhead Myth, a misconception that spending money on administrative and fundraising costs is a bad thing. It's been confusing donors for too long about what matters when judging a nonprofit, and it is actively harming our ability to solve the world's problems. In October 2013 VolunteerMatch hosted a special edition of the Nonprofit Insights webinar series and welcomed Jacob Harold of Guidestar and Ann Goggins Gregory of the Bridgespan Group, in conversation with Greg Baldwin of VolunteerMatch. They discussed the cultural values and past behavior of nonprofits, businesses and funders that have led to the current problem, and answer the critical question of "What now?" Whether you work at a nonprofit or a company, changing the conversation about the overhead ratio is absolutely necessary for ensuring the health of the nonprofit sector, our communities and our world. Watch this webinar to learn what your role can and should be in ending the Overhead Myth.
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Nonprofit Insights: The Overhead Myth - What It Is, Why It Matters...and What Now?
- 1. The Overhead Myth: What It Is, Why It Matters…and What Now? October 16, 2013 #vmlearn
- 2. Who are we? Jacob Harold President & CEO Guidestar @jacobcharold @GuidestarUSA Guidestar.org Ann Goggins Gregory Senior Director, Knowledge The Bridgespan Group @BridgespanGroup Bridgespan.org Greg Baldwin President VolunteerMatch @VolunteerMatch VolunteerMatch.org #vmlearn 2
- 3. The Overhead Myth: What it is, why it matters….and what now VolunteerMatch Webinar October 16, 2013 Collaborating to accelerate social impact #vmlearn
- 4. Does any of this sound familiar? “No administrative fees means that all money goes to local charities.” Ad for donation drive “Our organization has remained lean, allocating nearly 90% of revenue to direct service programs...” Large multi-service organization in CA “100% of your donation will go towards programs that help children; 0% will go to overhead.” Large health services organization #vmlearn TBG 131007-VolunteerMatch Webinar- ... 4
- 5. What about this? “The 10% figure is totally unrealistic…” Executive Director “We’re having to raise pools of general support to pay for our real overhead costs.” Board Chair “13% overhead doesn’t nearly capture the reality of our administrative costs.” Nonprofit COO #vmlearn TBG 131007-VolunteerMatch Webinar- ... 5
- 7. We don’t judge companies on their overhead Sales, General & Administrative Expense as % of Total Sales 50% 40% Average for service industry = 34% 30% 20% 10% Consumer Services Telecomm. Services Source: Compustat; Standard & Poor’s Global Industry Classification Standard Structure Healthcare & Equipment Services Software & Services TBG 131007-VolunteerMatch Webinar- ... 7
- 8. How does this play out for nonprofits? “No more than 10% of these funds can be used for nonprogram expenses.” Funder Nonprofit Pressure to conform = Under-report + Under-invest #vmlearn TBG 131007-VolunteerMatch Webinar- ... 8
- 9. The Nonprofit Starvation Cycle “The Starvation Cycle” Pressure on nonprofits to conform #vmlearn TBG 131007-VolunteerMatch Webinar- ... 9
- 10. Many individual donors consider the overhead rate to be more important than program effectiveness #vmlearn Source: BBB Wise Giving Alliance Donor Expectations Survey TBG 131007-VolunteerMatch Webinar- ... 10
- 11. 80% of foundations said they do not include enough overhead to cover the cost of reporting #vmlearn Source: Grantmakers for Effective Organizations, “Is Grantmaking Getter Smarter?” 2008 TBG 131007-VolunteerMatch Webinar- ... 11
- 12. Government contracts and grants are often diluted Health and Human Services initiates “Safe and Healthy Families” grant program State of Maryland Department of Human Resources St. Mary’s County Gov’t Department of Social Services “[Government funder X’s] rate is woefully inadequate. We report our finances to comply with the grant, then look elsewhere to bridge the huge funding gap that this grant creates.” St. Mary’s County acts on behalf of the state. State and county keep 10% for their own admin costs No indirect cost funding retained by Board of Ed No indirect costs allowable Source: GAO “Treatment and Reimbursement of Indirect Costs Vary among Grants, and Dependent Significantly on Federal, State, and Local Government Practices.” May 2010 TBG Local Board of Education Nonprofit Grant Recipient 131007-VolunteerMatch Webinar- ... 12
- 13. Nonprofits feel pressure to limit overhead “Do you feel pressures from ____ to limit overhead, fundraising or admin expenses? “20% overhead is the industry norm. It doesn’t capture the way we think about and manage overhead…” “We found that a peer organization allocates 70% of their finance director’s time to programs. That’s preposterous.” #vmlearn Source: Nonprofit Overhead Cost Study, 2004 TBG 131007-VolunteerMatch Webinar- ... 13
- 14. Many nonprofits underreport true overhead “Analysis of over 220,000 Forms 990 found widespread reporting that defies plausibility.” 37% Percent of nonprofits reporting ZERO fundraising expenses on their IRS form 990 #vmlearn Source: Nonprofit Overhead Cost Study, 2004 TBG 131007-VolunteerMatch Webinar- ... 14
- 15. Actual overhead often differs from reported, and these differences aren’t surprising given: TBG 131007-VolunteerMatch Webinar- ... 15
- 16. Some glimmers of hope… #vmlearn TBG 131007-VolunteerMatch Webinar- ... 16
- 17. From vicious to virtuous: Ask better questions, get better answers “What do good outcomes really cost?” What are the meaningful measures of our impact and how will we communicate them? #vmlearn TBG 131007-VolunteerMatch Webinar- ... 17
- 18. The two elephants in the philanthropic room… Art by Banksy E1: Some nonprofits are better than others (they create more social or environmental impact per dollar) E2: Some donors are better than others (their donations create more social or environmental impact per dollar) #vmlearn
- 19. #vmlearn
- 20. #vmlearn
- 21. #vmlearn
- 22. Question at hand: Can we build a stronger information scaffolding for social change? #vmlearn
- 23. Information about… Issues (e.g., 50% of children from at-risk backgrounds are below the basic level for reading and math skills) Interventions (e.g., regular nurse visitation for new mothers their babies leads to a .2 point increase in math & reading GPA in grades 1-6) Resources (e.g., The Robert Wood Johnson Foundation made a 5-year, $10 million grant to NurseFamily Partnership in 2007) Organizations (e.g., NurseFamily Partnership is currently serving 22,795 babies and their mothers in 40 states across the U.S.) #vmlearn
- 24. Many types of information can help social change actors make good choices Qualitative (stories and descriptions) Contribution (you helped) Subjective (peoples’ perceptions) Independent (just about you) Prospective (goals for the future) and Quantitative and Attribution and Objective and Comparative and Retrospective (numbers) (you were responsible) (facts) (you in the context of others) (what happened in the past) #vmlearn
- 25. But how do we organize that information? #vmlearn
- 29. 29 #vmlearn
- 30. #vmlearn
- 31. Gather reviews from users Survey experts Collect basic info & set standard of quality Company Analysis Wise Giving Alliance Deep analysis of performance Highly simplified star rating Standardized descriptions #vmlearn
- 32. What is your organization aiming to accomplish? What are your strategies for making this happen? What are your organization’s capabilities for doing this? How will your organization know if you are making progress? What have and haven’t you accomplished so far? #vmlearn
- 33. The supply chain of nonprofit information – 2000 Sources Aggregators Hubs Nonprofits IRS GuideStar Channels Users Donors Feedback? #vmlearn
- 35. The supply chain of nonprofit information – 2012 Sources Nonprofits Aggregators Hubs Beneficiaries Donors Foundations Vanguard Wealthy donors Schwab BBB Wise Giving Alliance Foundation Center DonorEdge … Retail users Network for Great Nonprofits GuideStar Government Good Volunteer Match Media Facebook Causes Philanthropedia Nonprofits GiveWell Experts Users Fidelity IRS Community foundations Volunteers Channels TBD Root Cause … Foundation staff Feedback? Solid lines are existing relationships Dotted lines are potential relationships
- 36. Questions? Jacob Harold President & CEO Guidestar @jacobcharold @GuidestarUSA Guidestar.org Ann Goggins Gregory Senior Director, Knowledge The Bridgespan Group @BridgespanGroup Bridgespan.org Greg Baldwin President VolunteerMatch @VolunteerMatch VolunteerMatch.org #vmlearn 36
- 37. Next Month: Integrating Volunteers into Donor Management Software November 20, 2013 http://learn.volunteermatch.org #vmlearn
Editor's Notes
- Source: Grantmakers for Effective Organizations, “Is Grantmaking Getting Smarter? A National Study of Philanthropic Practice.” 2008
- Some of the websites I mentioned are providing better information than the tax form. I’ll talk about them now.There has been a lot of experimentation in the corporate sector around gathering information about performance—even in complex topics like choosing a restaurant or choosing a mutual fund. Yelp and Zagat gather user reviews. GreatNonprofits is a nonprofit analogue, which I’ll discuss in a moment. US News and World Report surveys college presidents as a key part of its rankings. Philanthropedia is a nonprofit analogue. The Good Housekeeping seal of approval is a recognized baseline of quality. In the financial markets, there are countless sources of deep information like equity analysis reports as well as high-level summaries from the rating agencies. It’s worth pausing here to say that the financial crisis reminds us both how important these rating can be—as well as how dangerous it can be to rely solely on one source of information. Given that, and the diversity and complexity of the nonprofit sector, we believe it is critical to have several different types of analysis of nonprofits. The Philanthropy Program’s grantees use several different approaches to analyzing nonprofit performance—together they form a landscape of organizations helping donors make better decisions.
- And better.There are many types of information, not just financial data.Also, the information does not just sit on one website.It gets pushed through many different websites.I once had lunch with a friend who works at Google. I told him that Guidestar had 10 million users a year. He laughed and said, “Google has that many every minute.” The nonprofit sector needs to partner with companies to reach more people.