Debunking the Overhead Myth
By Dale Needles, Strategic Finance Consultant
While progressive funders and social justice organizations are considered partners in their goal to advance social and environmental justice, there is one area where these two communities experience ongoing tension - Overhead and the role it plays in advancing the mission of an organization.
As we know, most funders try to limit the amount of overhead that they will support, generally in the 10% to 15% range. This is based on the premise that the lower the overhead, the more effective and efficient the organization is. Additionally, civil society organizations (CSOs) with low overheads are viewed as being more responsible and better stewards of their funds.
For years, this overhead myth has been supported by both funders as well as nonprofit rating agencies, such as Guidestar, Charity Navigator and BBB Giving Alliance. As the Ford Foundation’s president, Darren Walker states, “all of us in the nonprofit ecosystem are party to a charade with terrible consequences—what we might call the overhead fiction.”
The good news is that the times they are a changing and the Overhead Myth is being debunked!
A Dialogue with Funders
How can the CSO sector convince funders to move away from this false narrative and provide the necessary overhead and infrastructure support that these organizations need to become financially resilient? One key strategy is for CSOs to enter into a dialogue with their funders and have an open conversation about overhead and infrastructure support.
As part of this dialogue, CSOs need to make the case that there is no correlation between low overheads and programmatic effectiveness. In fact, a 2013 study shows the opposite, i.e., organizations with higher overheads were judged to be more effective.
Additionally, a fixed overhead rate, which many funders use, should not be applied across the board to all grantees, since one size does not fit all as a recent article in The Chronicle of Philanthropy points out.
CSOs need to make the case that investing in overhead and infrastructure is critical to financial resilience, long term stability and programmatic effectiveness and helps organizations move away from the “Starvation Cycle.”
CSOs can also point to how nonprofit rating agencies are now advocating for funders to discontinue using overhead as a measurement of efficiency and effectiveness.
Finally, CSOs need to be strategic in how they allocate and classify costs. Based on my experience, many organizations under budget what programs actually cost, due in large part to how they allocate and classify expenses. CSOs need a clearly defined methodology for allocating costs that is well documented and supported by a written policy. This can then be shared with funders.
While we know that some funders will be open to these discussions, others will not. Nevertheless, if we are to move the sector forward and begin to move away from the starvation cycle that so many organizations find themselves in, then we need to be advocates for change and Debunk the Overhead Myth!
What is Your Experience with the Overhead Myth?
What has been your experience in seeking overhead and infrastructure support? Did you use any of the methods outlined above? Do you have funders that are open to discussing this issue? Do you see any signs of change?
**Graphic is from Ann Goggins and Don Howard. “The Nonprofit Starvation Cycle,” Stanford Social Innovation Review (Fall, 2009): 49-53