Overhead versus Outcomes Part II

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In January, I blogged about nonprofit overhead costs and why using overhead cost ratios can be a misleading approach for donors to evaluate nonprofit organizations. The bottom line is that nonprofits need access to high quality infrastructure including technology, financial systems, fundraising, advertising and performance management systems in order to effectively carry out their missions. Nonprofits also need the ability to provide training and professional development and offer competitive salaries in order to hire and retain quality staff. Without these investments in overhead, nonprofits will have a difficult time becoming truly high performing organizations.Unfortunately, nonprofit leaders continue to feel pressure to keep their overhead as low as possible. The reason behind this pressure probably has a lot to do with what the Bridgespan Group and the Urban Institute have identified as the Nonprofit Starvation Cycle.

1. The Starvation Cycle starts off with funders’unrealistic expectations about how much it costs to run a nonprofit.

2. In the second step, nonprofits feelpressure to conform to these unrealistic expectations.

3. In the third step, nonprofits respond to the pressure they feel byspending too little on vital overhead resources and at the same time under-reporting their true overhead costs.

4. This in turn leads to the perpetuation offunders’ unrealistic expectations about nonprofit costs.

This is a vicious cycle which ultimately leads to organizations unable to deliver quality services to clients and the community.Before coming to Greenlights, I spent seven years working in the Austin public schools supporting students with social, emotional, and behavioral challenges. In this role I was often reminded of just how difficult it can be to create real change in the lives of children and their families. It takes significant time and resources and comes at a cost. But what can we do to educate funders, boards, and the community to have a realistic understanding of what it takes to deliver on outcomes?The Bridgespan Group offers several suggestions to consider in an attempt to break free from the Starvation Cycle.For Funders:

• Begin to shift your focus from overhead to outcomes. Ask the questions, “What is the program trying to achieve?” and “What would define success.” Demonstrate that impact, not overhead costs, is what is most important.
• Have open, honest conversations with grantees about what it will take to deliver on outcomes consistently.
• When possible, provide general operating grants and fund the administrative costs needed to run effective programs.

For Organizations & Boards:

• Commit to truly understanding overhead costs and infrastructure needs. Then create a strategic planning process which outlines the long-term plan for building your organization’s capacity.
• Educate board members about the Nonprofit Starvation Cycle.
• Encourage board members and key stakeholders to talk about your organization’s outcomes and the importance of investing in infrastructure and building capacity.
• As a board member, be willing to ask the question, “Where are we under-investing?” and “What will it take to achieve impact?”

What are other steps we as a sector can take to reduce the Starvation Cycle?  Will breaking the cycle lead to greater impact?  For more information on this topic, check out Dan Pallota’s recent TED Talk, The Way We Think About Charity Is Dead Wrong.

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