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Spending Money on Overhead is OK, Says 3 Top Nonprofit Oversight Groups

OHMythLogo1-300x84Just this morning the CEOs of Guidestar, Charity Navigator and BBB Wise Giving Alliance released a co-signed letter calling for an end to what they call “The Overhead Myth”.  This marks the first time the three leading nonprofit information providers have come together for a joint message and it is this:

the percentage of a charity’s expenses that go to administrative costs, the “overhead” ratio, is the wrong measure to consider when determining if the nonprofit is effective or efficient.

The point of this message is that for far too long, nonprofits have been caught in what the Stanford Social Innovation Review calls “The Nonprofit Starvation Cycle”, robbing themselves of much needed investments in training, planning, evaluation, internal systems…all the expenditures that are necessary to sustain growth and development.  This has proven to be devastating to the charity sector and I loudly applaud this move.  Sadly, a full 62% of the public believes nonprofits spend too much on overhead, when in fact, most don’t spend nearly enough!  In order for nonprofits to be successful, they must escape the poverty mindset and look to proven business principles.

Along with the applause, let me be blunt:  It’s about time!

This is not a new message, but it is a new position for these 3 groups.  A number of nonprofit innovators have been lonely voices in the wilderness making this point for a long time.  Dan Pallotta, in his ground-breaking book Uncharitable, made this very point years ago.  Wayne Elsey, the founder of the shoe charity Soles4Souls, built that wildly successful charity on sound business principles…to much criticism from old-school purists.

The reality is, for years all three groups, especially Charity Navigator and BBB Wise Giving Alliance, have helped foster the overhead myth.  Charity Navigator’s numerical score was heavily influenced by the overhead ratio.  The giving public has been trained by these very groups to focus on that ratio as a key indicator of donation-worthiness.  As a result, charities have been practically shamed into spending every last dime feeding the homeless, but ignoring their own internal needs.  Worse yet, some have simply fudged the numbers on their Form 990 to make it look like less money was being spent on overhead, as if it were somehow more noble.  The end result for many organizations has been effectiveness sacrificed on the altar of efficiency, meaning less results, not more.

Don’t get me wrong…I’m personally thrilled to see these 3 groups make this move.  It truly is a turning point in the national conversation about nonprofit effectiveness.  The impact remains to be seen (entrenched perceptions change slowly), but it is an honest-to-goodness sea change.

I encourage you to check out the announcement at The Overhead Myth website.

Greg McRay is the founder and CEO of The Foundation Group. He is registered with the IRS as an Enrolled Agent and specializes in 501(c)(3) and other tax exemption issues.

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