There’s a proverb goes in China: “Grinding a chopper will not hold up the work of cutting firewood”. I found it very true in this weeks reading, Nonprofit Overhead Costs. The two examples of benefiting from increasing overhead costs are very impressive. Because I searched on China’s website about overhead costs, an overwhelmingly majority of the articles are talking about how to cut it, an opposite topic to our readings this week.
When we talked about the difficulties in collaborating with for-profit organizations last week, Tamaria and I had discussion about problems that can be caused due to different focus of nonprofits and for-profits in this relationship. The article pointed out a similar topic. Donors, even though donate for nonprofits, are very business-oriented. They want to see every dollar they donate to make maximum outcome while overhead costs are not considered as money that make sense. A very interesting topic to me here is most non-profit organizations are trying to report their overhead fees below 20%. Who set up this number? Why “half of adult Americans felt that nonprofit organizations should have overhead rates of 20% or less” (p.11)? I read the article Nonprofit Overhead Cost Project: The pros and Cons of Financial Efficiency Standards. In the article, it says that “ For illustrative purpose we investigate a standard of 65/35, meaning that a nonprofit is judged by whether it spends at least 65 percent of its total expenses on program activities and no more than 35 percent on administrative and fundraising expenses” (p.2). So it turns out that donors are actually less bearable for overhead costs than experts thought it would be.
If the donors are not quite right on this judgment, why nonprofits should conform to it? Why don’t we try to let the donors know that 20% is not an appropriate number and more overhead costs can lead to more outcomes? So to me, it is more important to let the donors be aware of the “right number” on overhead costs, rather than give them misleading reports. This cannot, of course, achieved by a single nonprofit organization. However, “watchdogs” such as Charity Navigator can address this problem to the public, and other nonprofits should help to do the same thing as well.
I also found the “Nonprofit Overhead Costs” article intriguing. I thought that the author's description of the 'vicious cycle' many nonprofits engage in is accurate. The vicious cycle occurs largely due to poor preparation. Assumptions that numbers do not matter can also be a factor that contributes to the vicious cycle. Such assumptions can weaken the perception the general public has of the nonprofit. Based on that reasoning, I agree with the authors that nonprofits should consider how for-profit businesses handle overhead costs. However, the most important lesson to consider from the reading is the true impact that overhead costs can have on beneficiaries. Amelia Johnson, the Executive Director of Learning Goes On Network's (LGON) epiphany acknowledges this point; “What I realized was that my penny pinching had the potential to hurt the kids as much or more than it helped them". If more nonprofit organizations recognized the importance of accurate reporting on overhead costs, than more nonprofit organizations would be able to better serve beneficiaries.
ReplyDeleteI actually agree with you guys, in deed my post on the blog was in line with your thoughts. I think that the way to overcome this 'wicked' cycle is to definitely shift nonprofit activities to a focus on outcomes and to educate donors on the critical importance of the overhead in order to see the great impact of their donations.
ReplyDeleteI agree - the problem is a cyclical one that catches both nonprofits and their donors in an act of trying to keep the other happy. One thing that I think would increase donors willingness to fund overhead costs would be increased transparency about what those costs are and what they support. For example, if a nonprofit wants to spend a significant amount on a new building, new staff position, or another cost, it should explain how that building or staff position will increase the organization's impact in the community. How will the staff person spend his/her time? What skills does the staff person bring to the table that merit the decided salary? I think that donors will be more likely to support overhead when they have clear, compelling information about what it is they are really funding and how it will sustain the organization's work in the long-run.
ReplyDeleteThe question of overhead was and is actual. We are discussing that even 20 % of overhead costs are little for organizations but in developing countries like Armenia it is even less. In Armenian Caritas we have only 7% for the overhead cost and it is still very challenging to negotiate with donors to have that line in the budgets. Actually Armenian Caritas always negotiates with all its donors to have overhead costs in the budget of the projects and if the donor do not agree we do not apply for the call or we do not proceed with that possibility as we are sure that each project needs to have 7% of overhead costs for the organization’s management to insure effective monitoring and implementation of the project.
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