Thursday, March 20, 2014

The Overhead Myth

Jeffrey D. ByrneThanks to friend and colleague Jeffrey Byrne, President + CEO of Jeffrey Byrne Associates, for addressing "The Overhead Myth" and allowing me to re-post. Confusing to donors, grantees and charities themselves  only  in recent months have knowledgeable leaders weighed in. Here are excerpts from his piece:

Last June (2013), three highly-respected nonprofit leaders asked donors in America to look beyond overhead and help dispel the "Overhead Myth." 

Jacob Harold, President and CEO of GuideStar, Ken Berger, President and CEO of Charity Navigator, and Art Taylor, President and CEO of BBB Wise Giving Alliance, launched an initiative to help donors make better decisions about their giving: by eradicating what they believe is a common misconception that, on its own, "overhead" is a valid and appropriate way to evaluate a nonprofit.

In an open letter to the donors of America, the most trusted and reputable organizations that provide information about nonprofits in America denounced the overhead ratio and asked for help in ending the "overhead myth." Donors were asked to take into account additional factors of a nonprofit's performance - such as transparency, governance, leadership and results - when evaluating charities and making their charitable giving decisions. 

More than 2,800 have signed the pledge to "end the Overhead Myth and help support nonprofits to invest in their mission, sustainability and success." But after an initial flurry of reaction and commentary, the "movement" seems to have quieted a bit. 

We all understand the overhead ratio (more commonly referred to as "overhead") is the common term used to describe the percentage of a charity's overall expenses allocated to administration and fundraising costs. We also know it is a commonly-accepted and often-used metric to assess a nonprofit's performance and worth. But many times, it is misinterpreted by foundations, major donors and corporations when used as the key tool in evaluating a nonprofit's organizational efficiency. Maintaining low overhead may also inhibit organizations from making investments necessary to achieve success.  To make matters worse, feeling pressure to present low (or in some instances, practically nonexistent) overhead, many nonprofits misrepresent or under-report this number - especially when it comes to fundraising expenses.  

Is this behavior truly in the best interests of either side - let alone the causes they each hope to support?  


Though overhead does have a role in evaluating charities, focusing on overhead as the sole or primary determinant of a nonprofit’s effectiveness can have negative repercussions: if charities don’t direct resources toward sustaining and strengthening themselves, they will ultimately not be able to fulfill their missions or effectively help those they are trying to serve. 

Another concern is the way donors, funders and watchdog agencies utilize audited financial statements and publicly available IRS Forms 990 as part of their assessments: the proportion of total expenditures for administration and fundraising often receive particular scrutiny. But how accurate are the numbers reported?  If there are errors, what are the sources of the inaccuracies?  


Dr. Patrick Rooney, Associate Dean for Academic Affairs and Research at the Indiana University Lilly Family School of Philanthropy and one of the lead researchers in the Nonprofit Overhead Cost Project conducted in 2004* offers the caveat that obvious functional expense reporting errors occur even when the documents are prepared by auditors and CPAs. For example: reporting all salaries as program expenses and reporting no fundraising expenses despite the existence of fundraising staff; or not including the cost of the time top executives and senior program managers devote to securing government grants. Responding to pressure (both real and perceived), nonprofits have changed their behavior to keep real and reported administrative and fundraising costs low.

The authors of the Overhead Myth Letter back up both their claim and their call to action with statistics and research from several experts, including Indiana University, the Urban Institute and the Bridgespan Group. Dr. Gene Tempel, Founding Dean of the Indiana University Lilly Family School of Philanthropy, supported the Overhead Myth movement through his own open letter to the authors. Dr. Tempel expressed gratitude for their efforts and stressed the importance of continuing to educate donors and nonprofit executives about the best ways to evaluate nonprofit efficacy, instead of relying on one, over-simplified measure. Dr. Tempel also pointed out that overhead costs are “essential investments for effective, high-performing organizations.”

As Dr. Tempel says, “Donors and funders today want nonprofit organizations to do thoughtful planning, deliver effective programs through excellent management, and conduct effective fundraising and thorough evaluation . . . we have an ethical responsibility to get organizations to focus on accountability, transparency, and trust building.”

Monday, March 17, 2014


A recent New York Times essay highlights the role billionaire's philanthropy plays in funding basic and clinical research or prevention and treatment across a spectrum of diseases, mostly cancer but other ones as well. Having had Michael Milken's Prostate Cancer Foundation as a client for several years I truly appreciate the game-changing role billionaires have had. But rightly the thrust of the article is that no matter how generous they are "private" science - billionaires' gifts are still a drop in the proverbial bucket when contrasted with the sums the federal government puts into grant making even when it's cut back as it has  in recent years.

PCF, for example, founded in 1993 has raised more than a half billion dollars and they push the money out the door funding scientists and  investigators as quickly as they can consistent with due diligence. What the article doesn't say  much about, though, is the part groups  like PCF have played  in leveraging dollars. Every dollar PCF raises generates many multiples in grant awards from National Science Foundation, National Institutes of Health, Defense Department and other entities. But the government pace is slow; PCF pushes hard and it has a seat at the table..

But if you're  not a billionaire how do you make a difference? Over time  I've been approached  by folks who have lost a loved one to cancer, stroke, other disease, drunk driving, accident, whatever -  and  in their bereavement their notion is to set up a fund of their own and raise money. As gently as possible I encourage them to direct their giving to established, well regarded charities already engaged  in research, prevention or treatment. Though well intended these start-ups can seldom achieve scale; after an early run of  support from family and friends, and some  luck, they fade.

A few things I learned at PCF carry over: first, it's hard to blow off a billionaire; second, regardless of  political persuasion rich men with prostate cancer or any other life threatening disease know their giving alone is  not enough. The federal government still has far more than any single billionaire or even a clutch of them. Third and maybe most  important is many thousands of small and modest annual gifts is what separates a start up from a charity with scale and staying  power over time.