Nonprofit Insights: The Overhead Myth - What It Is, Why It Matters...and What Now?

The Overhead Myth: What It Is, Why It Matters…and What Now?October 16, 2013

#vmlearn

Who are we?

2

#vmlearn

Jacob HaroldPresident & CEOGuidestar@[email protected]

Greg [email protected]

Ann Goggins GregorySenior Director, KnowledgeThe Bridgespan [email protected]

Collaborating to accelerate social impact

VolunteerMatch WebinarOctober 16, 2013

The Overhead Myth: What it is, why it matters….and what now

#vmlearn

4131007-VolunteerMatch Webinar- ...TBG

Does any of this sound familiar?

“No administrative fees means that all money goes to local charities.”

Ad for donation drive

“Our organization has remained lean, allocating nearly 90% of revenue to direct service programs...”

Large multi-service organization in CA

“100% of your donation will go towards programs that help children; 0% will go to overhead.”

Large health services organization#vmlearn


What about this?

“The 10% figure is totally unrealistic…”

Executive Director

“We’re having to raise pools of general support to pay for our real overhead costs.”

Board Chair

“13% overhead doesn’t nearly capture the reality of our administrative costs.”

Nonprofit COO#vmlearn


But wait!

#vmlearn


We don’t judge companies on their overhead

Source: Compustat; Standard & Poor’s Global Industry Classification Standard Structure

10%

20%

30%

40%

50%

Sales, General & Administrative Expense as % of Total Sales

Average for service industry = 34%

Software & ServicesHealthcare & Equipment Services

Consumer Services

Telecomm. Services


How does this play out for nonprofits?

“No more than 10% of these funds can be used for non-

program expenses.”

Pressure to conform = Under-report + Under-invest

Funder

Nonprofit

#vmlearn


The Nonprofit Starvation Cycle

Unrealistic funder

expectations

Pressure on nonprofits to

conform

Mis

lead

ing

repo

rting

& U

nder

inve

stm

ent

“The Starvation

Cycle”

#vmlearn


Many individual donors consider the overhead rate to be more important than program effectiveness

0

20.0

40.0

60.0

80.0

100.0%

Overhead

ratio

79%

Success of

programs

70%

How important are each of the following in

deciding whether a nonprofit deserves your support?

(Very Important)

Source: BBB Wise Giving Alliance Donor Expectations Survey

#vmlearn


80% of foundations said they do not include enough overhead to cover the cost of reporting

Source: Grantmakers for Effective Organizations, “Is Grantmaking Getter Smarter?” 2008

#vmlearn


Government contracts and grants are often diluted

Health and Human Services initiates “Safe and Healthy Families” grant

program

State of Maryland Departmentof Human Resources

St. Mary’s County Gov’t

Department of Social Services

Local Board of Education

Nonprofit Grant Recipient

St. Mary’s County acts on behalf of the state. State and county keep 10% for their own admin costs

No indirect cost funding retained by Board of Ed

No indirect costs allowable

“[Government funder X’s] rate is woefully inadequate. We report our finances to comply with the grant, then look elsewhere to bridge the huge funding gap that this grant creates.”

Source: GAO “Treatment and Reimbursement of Indirect Costs Vary among Grants, and Dependent Significantly on Federal, State, and Local Government Practices.” May 2010


Nonprofits feel pressure to limit overhead

0

10

20

30

40%

Charity

Watchdogs

8%

Federated

Campaigns

21%

Foundations

24%

Individual

Donors

30%

Government

Agencies

36%

“Do you feel pressures from ____ to limit overhead, fundraising or admin expenses?

“20% overhead is the industry norm. It doesn’t capture the way we think about and manage overhead…”

“We found that a peer organization allocates 70% of their finance director’s time to programs. That’s preposterous.”

Source: Nonprofit Overhead Cost Study, 2004

#vmlearn


Many nonprofits underreport true overhead

37%

Percent of nonprofits reporting ZERO fundraising expenses on their IRS form 990

“Analysis of over 220,000 Forms 990 found widespread reporting that defies plausibility.”

Source: Nonprofit Overhead Cost Study, 2004

#vmlearn


Actual overhead often differs from reported, and these differences aren’t surprising given:


Some glimmers of hope…

#vmlearn


From vicious to virtuous: Ask better questions, get better answers

“What do good outcomes really cost?”

What are the meaningful measures of our impact and how will we communicate them?

#vmlearn

Art by Banksy

The two elephants in the philanthropic room…

E1: Some nonprofits are better than others (they create more social or environmental impact per dollar)

E2: Some donors are better than others(their donations create more social or environmental impact per dollar) #vmlearn

#vmlearn

#vmlearn

#vmlearn

Question at hand:

Can we build a stronger information scaffolding for social change?

#vmlearn

Information about…

Organizations (e.g., Nurse-Family Partnership is currently serving 22,795 babies and their mothers in 40 states across the U.S.)

Resources (e.g., The Robert Wood Johnson Foundation made a 5-year, $10 million grant to Nurse-Family Partnership in 2007)

Interventions (e.g., regular nurse visitation for new mothers their babies leads to a .2 point increase in math & reading GPA in grades 1-6)

Issues (e.g., 50% of children from at-risk backgrounds are below the basic level for reading and math skills)

#vmlearn

Many types of information can help social change actors make good choices

Contribution (you helped)

Attribution (you were responsible)

Qualitative(stories and descriptions)

Quantitative(numbers)

Subjective (peoples’ perceptions)

Objective(facts)

Independent(just about you)

Comparative(you in the context of others)

and

and

and

and

Retrospective(what happened in the past)

Prospective(goals for the future) and

#vmlearn

But how do we organize that information?

#vmlearn

29

#vmlearn

#vmlearn

Gather reviewsfrom users

Survey experts

Deep analysisof performance

Highly simplified star rating

Collect basic info

& set standardof quality

Wise Giving Alliance

Company Analysis

Standardized descriptions

#vmlearn

What is your organization aiming to accomplish? What are your strategies for making this happen? What are your organization’s capabilities for doing this? How will your organization know if you are making progress? What have and haven’t you accomplished so far?

#vmlearn

The supply chain of nonprofit information – 2000

Sources Aggregators Hubs Channels Users

Nonprofits IRS GuideStar

Feedback?

Donors

#vmlearn

The supply chain of nonprofit information – 2012

Sources Aggregators Hubs Channels Users

NonprofitsIRS

Volunteers

Beneficiaries

Donors

Experts

Community foundations

GuideStarGreat

Nonprofits

Fidelity

Vanguard

Schwab

TBD

Network for Good

Volunteer Match

DonorEdge

Facebook Causes

Wealthy donors

Retail users

Foundation staff

Philanthropedia

GiveWell

Root Cause

Foundation Center

…

…

BBB Wise Giving Alliance

Feedback?

Solid lines are existing relationships Dotted lines are potential relationships

Foundation staff

Nonprofits

Media

Government

Foundations

Questions?

36

#vmlearn

Jacob HaroldPresident & CEOGuidestar@[email protected]

Greg [email protected]

Ann Goggins GregorySenior Director, KnowledgeThe Bridgespan [email protected]

Next Month:

Integrating Volunteers into Donor Management Software

http://learn.volunteermatch.org

#vmlearn

November 20, 2013

Business

Nonprofit Insights: The Overhead Myth - What It Is, Why It Matters...and What Now?