Rebounding from the Overhead Myth
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!
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:
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:
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.