How Did We Get Here in the First Place?
Lately there has been a lot of discussion around the letter issued by Guidestar, Charity Navigator and BBB Wise Giving Alliance to “correct the overhead myth” and redirect attention to indicators that are more accurate measures of nonprofit effectiveness. Dan Pallota’s challenge to let nonprofits pay more competitively for talent and advertise aggressively to build market share has struck a chord, validating the notion that nonprofits can move beyond a culture of self-deprivation in order to do better work.
This change in tune is a welcome relief. But a bit of historical context reminds us that those writing the “correction letter” are the same organizations who championed the overhead rule 10 to 15 years ago!
Old News
The rationale put forth in the letter – that “underinvesting in overhead creates a range of negative outcomes, which undermine quality and sustainability” – is old news. Over the past decade I can recall many conversations and heated debates about the damage that can result from underinvesting in the people and structures that undergird healthy organizations. But many of these conversations stayed in the back rooms, and it took over a decade for this truth to garner enough attention to stop the widespread application of the 20 percent rule across nonprofit organizations of all shapes and sizes.
There is now ample documentation, research, and awareness highlighting why the overhead ratio is a poor criterion for measuring organizational effectiveness.
How Did We Get There?
The real question to be answered is, “How did we get here in the first place?!” When so many of us knew that different organizations operate with different levels of overhead, that investments in people and processes can be worthwhile costs, and that overhead rate is not a measure of impact, how did this rule survive for more than a decade?
Cause and Consequence
I want to start a conversation about the dynamics in the late 1990s that allowed this to happen, in the hope that we can avoid similar errors in the future. Here are some thoughts on contributing forces and factors:
Dot-com Turned Do-Gooder – The dot-com boom created quick wealth, and many successful entrepreneurs wanted to use their momentum to make a positive difference in the world. Some of these entrepreneurs were painted as heroes on the covers of Forbes, Time, and Inc. magazines for their desire to “take on the charity establishment.” In the dot-com wake, venture philanthropy emerged with fervor, seeking to apply VC concepts to philanthropic goals and asking nonprofit leaders to measure results, track new metrics, complete onerous reports, and devote more time and talent to funder relationships than before. This intersection of values and cultures brought new attention to important issues and catalyzed some very healthy changes. But the trend also valued new resources and for-profit success over the commitment and knowledge of the people that had been working for social change for decades.
Bad Apples – Scandals in the nonprofit and business sectors turned a spotlight on issues of accountability (Think United Way, Foundation for New Era Philanthropy and WorldCom.) The schemes and abuses of power understandably shook the confidence of funders, and pushing on overhead spending seemed a logical place to exert control.
Form 990 & Watchdogs Online – By the late 1990s the public could hop online to access the IRS Form 990 for any NGO that filed its taxes. Simultaneously, a number of organizations emerged to consolidate information and inform charitable giving, such as Charity Watch (1992), GuideStar (1994), and Charity Navigator (2001). In our quest for accountability and efficiency, the snapshots these organizations provide into NGO finances and operations are helpful, but not complete. Access to information is a fantastic thing. But when a blunt criterion became a widespread indicator for philanthropic worthiness, regardless of context or mission, the collateral damage is now clear.
Ultimately, these external factors led to some bad consequences, squeezing investments in people and infrastructure that are important for healthy organizations in the long-term. Moving forward, we should:
Test new ideas. Never take as gospel advice from people who do not have hands-on experience in the field in which they are giving advice or money. New voices have important insight to offer, but new ideas should be tested in context before achieving widespread acceptance.
Avoid believing that one sector knows more than the other. We see good and bad in business (lest we forget Enron, Lehman Brothers, and Bear Sterns), good and bad in nonprofits, and good and bad in government. The movement of people, ideas and resources between sectors can spur critical innovations, but we shouldn’t blindly adopt private sector best practices just because they work in that context.
Remember that snazzy business tools are no magic bullet. The 20 percent overhead target has appeal as an objective measurement to control what nonprofits spend on themselves. But this mathematical ratio is not magic, and applied arbitrarily it fails to take into account the vast array of nonprofit missions. For example, disaster relief organizations need a deep supply chain and carry significant inventory, requiring a different overhead structure than a food bank or local service organization.
Never let those pulling the purse strings matter more than the people we serve. This is the hardest of them all. The advocates of the 20 percent overhead rule were primarily the ones with power – with money or access to money. The pressure to maintain and/or report low overhead costs because organizations think that’s what donors want to hear is dangerous. As nonprofit leaders are pushed to underinvest in people and systems, they rarely feel they can be candid about this strain with funders. Such pressure can lead to masking of the truth, preventing honest conversations about real organizational needs. This reveals the power imbalance, and creates distorted incentives that aren’t focused on impact or best outcomes for the customers and clients we serve.
Of course we should seek accountability and efficiency in our pursuit of results. But we need to be wary of willy-nilly application of business tools to nonprofit organizations. You don’t take a deep sea fishing rod to fly fish in Montana. We need to innovate and try new things to find the right models and right solutions that pull the best from nonprofits, business and government. And when something doesn’t feel right, or we see a pattern emerging with pernicious potential, we need to stop these dangerous trends before they start.