The Overhead Myth

By Virgil Carter

Through a historic collaboration, The Better Business Bureau, GuideStar and Charity Navigator have distributed a "letter to donors," aimed at clarifying the "overhead myth" often used to assess performance of nonprofits when making donations.  Here’s the verbatim letter:

To the Donors of America:

We write to correct a misconception about what matters when deciding which charity to support.   The percent of charity expenses that go to administrative and fundraising costs—commonly referred to  as “overhead”—is a poor measure of a charity’s performance.

We ask you to pay attention to other factors of nonprofit performance: transparency, governance, leadership, and results. For years, each of our organizations has been working to increase the depth and breadth of the information we provide to donors in these areas so as to provide a much fuller picture of  a charity’s performance.

That is not to say that overhead has no role in ensuring charity accountability. At the extremes the overhead ratio can offer insight: it can be a valid data point for rooting out fraud and poor financial management.   In most cases, however, focusing on overhead without considering other critical dimensions of a charity’s financial and organizational performance does more damage than good. 

In fact, many charities should spend more on overhead. Overhead costs include important investments charities make to improve their work: investments in training, planning, evaluation, and internal systems—as well as their efforts to raise money so they can operate their programs. These expenses allow a charity to sustain itself (the way a family has to pay the electric bill) or to improve itself (the way a family might invest in college tuition).

When we focus solely or predominantly on overhead, we can create what the Stanford Social Innovation Review has called “The Nonprofit Starvation Cycle.” We starve charities of the freedom they need to best serve the people and communities they are trying to serve.  

If you don’t believe us—America’s three leading sources of information about charities, each used by millions of donors every year—see the back of this letter for research from other experts including Indiana University, the Urban Institute, the Bridgespan Group, and others that proves the point.

So when you are making your charitable giving decisions, please consider the whole picture. The people and communities served by charities don’t need low overhead, they need high performance.

Signed by the Presidents/CEOs of the BBB, GuideStar and  Charity Navigator, these thoughts should help all of us to better recognize the proper role of overhead and what is truly important in our volunteer contributions and organizations.

To see the original letter, go to bbb.org bbb.org