Back in July, Ben Paynter of Fast Company brought in branding experts to see if they could come up with a better name for “overhead.” They couldn’t, but it’s still an interesting read.
And last week, Guidestar brought in Mr. Paynter as well as Michael Etzel from The Bridgespan Group for a webinar¹ titled “How Much Does It Cost to Do Good?” They spent 60 minutes discussing the challenges of making a case for overhead spending. Their interesting discussion is archived here.
Maybe it’s just misunderstood?
In my opinion, we’re still dancing around the issue. “Overhead” is an accounting term, reinforced by the categories in the functional expense statement, and publicly repeated by the Form 990. Donors and rating agencies want to use a comprehensible, repeatable metric to determine whether or not a particular charitable investment is a good one. Overhead ratio, since it comes from the accounting world, seems to work just fine for that purpose.
But just like in financial investments, blindly using easily obtained ratios to pick winners can give you terrible results. Here’s part of a disclaimer from the Motley Fool website:
But one single ratio on its own should not be interpreted as a complete picture of a company. Rather, each gives a different perspective of a company’s financial health and investment viability. Keep in mind, too, that to truly understand a company, you often have to look beyond its ratios.
So if it’s not a good predictor, why do donors rely on the overhead ratio? One reason might be that donors are searching for reasons to say “no,” and any reason will do. Surprisingly, this isn’t as pessimistic and depressing as it sounds. Research on charitable giving by small businesses² found that “there was a strong sense … that most of the causes they were asked to support were highly deserving.. ‘you feel bad that you can’t support them [all].'” In other words, donors don’t have the resources to support all good causes, so they need reasons, however thin and exasperating, to narrow down their list.
One of my least favorite things in the world is when people present problems without suggesting at least one possible solution. Even a dumb one is better than nothing. So here’s a (potentially dumb) solution.
You can’t get rid of the easily calculated overhead ratio without convincing FASB and the IRS to eliminate the functional expense statement. In other words, it’s never going to go away. And because it’s already an accounting term, calling overhead something different (like Margaret Wolfson’s suggestion of “vessel funds”) isn’t going to work, either.
Instead, I’d do two things. Make the overhead ratio more complicated, and provide a simpler effectiveness metric, like unit of service per dollar donated.
Complicating the overhead ratio
It’s going to be tough to complicate the overhead ratio because there’s really nothing you can do to prevent people from doing math. Just grab three numbers from a single page of the Form 990 and the calculator on your phone and you’re done.
One rhetorical device I’ve used in the past when talking to people about overhead is to bring up the electric bill. Depending on how your nonprofit works, some or all of the electric bill will count as overhead. Is it okay for some of your donation to be used for the electric bill? How about the gas bill? How about the broken lock on the front door? The annual fire inspection? Toilet paper for the bathrooms?
You probably see where I’m going with that. If the donor hasn’t already hung up on you, they might bring up executive director salaries, but by then you’ve certainly complicated the issue for them.
But many nonprofits do just the opposite, and slap a pie chart somewhere with program, fundraising and management slices clearly delineated. Instead, why not load up that chart with detail, like this:
It’s the same information, but it’s much more interesting than just saying, “we spend 12% of expenses on overhead.”
A better effectiveness metric
Lots of nonprofits already use a really good effectiveness metric. Most food banks in the Feeding America network advertise some variation on “one dollar equals three meals.” Donors respond well to these positive impact statements, too. Food bank employees frequently hear community members repeat the phrase back to them verbatim. Contrast that to the number of times you’ve heard a donor say, “I love that 88% of your expenses are program related.”
But for many organizations, coming up with such an easy to understand effectiveness metric is tough, e.g., “for every dollar donated, we can save 0.00012 Amazonian insect species from extinction.” It certainly isn’t impossible, but quantifying your impact and then connecting that back to donor inputs is an interesting and useful process in itself.
Overhead isn’t a branding problem
Maybe we’re making too big a deal out of the overhead problem. Even if overhead wasn’t a thing, donors that are looking for a reason not to make a gift will find one. And if donors can be swayed by the existence of overhead, it might be because your mission just isn’t that compelling to them. But if donors are really trying to make rational economic decisions about where best to make charitable investments, substituting an effectiveness metric (units of impact/$) for an efficiency metric (overhead) should work.
¹Someone please ask the branding experts for a new name for “webinar.”
²Stay tuned. I’m in the process of finishing up a multi-part series on just this topic.