Getting Over Overhead

Want to give money to a worthy nonprofit? Then please do not—repeat, do not— focus on “overhead.”

Such is the plea—and, from our vantage, a long-overdue one—from Art Taylor, head of the BBB Wise Giving Alliance; Jacob Harold, CEO of GuideStar; and Ken Berger, chief of Charity Navigator.

“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,” they write in an open letter to the donors of America. “We ask you to pay attention to other factors of nonprofit performance: transparency, governance, leadership and results.”

In fact, the authors argue, overhead expenditures in many nonprofits should be higher, not lower. “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,” they note. “The people and communities served by charities don’t need low overhead, they need high performance.”

It’s rare that we declare, “Peter Drucker would have said exactly the same thing,” but we suspect in this case Drucker would have said exactly the same thing.

After all, Drucker’s emphasis in nonprofit management was always on measurable results—namely, lives changed for the better—not on the percentage of an organization’s budget devoted to overhead.

As he wrote in Managing the Nonprofit Organization, responsible overseers should ask of a nonprofit’s use of money, “Is this the best balance between our available resources and our effectiveness?” Nonprofit managers, meanwhile, should “think through how to define results for an effort, and then report back to the donors, to show them that they are achieving results.”

Regarding overhead—of any sort—Drucker felt that, once again, the fundamental issue was resources versus effectiveness. Often, as Drucker pointed out in The Practice of Management, “what the accountant lumps together as ‘overhead’—the very term reeks of moral disapproval—contains the most productive resource, the managers, planners, designers, innovators.”

To be sure, there is also bad overhead, the sort that funds “destructive . . . elements in the form of high-priced personnel.” But there is “productive overhead” and “parasitical or frictional overhead,” Drucker asserted, and the two should never be conflated.

What role do you think overhead should play in evaluation of a nonprofit?