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  • 07.01.09

Why Overhead Isn’t Evil in the Non-Profit World

Overhead is seen as the devil of the not-for-profit world. Here’s why that conventional wisdom is wrong.

Why Overhead Isn’t Evil in the Non-Profit World

Every industry has a bogeyman. Farmers fear Mother Nature. Celebrities hate (yet love) the paparazzi. Big pharma worries about hurting babies — a jury loves nothing more than punitive damages for sick kids. In the not-for-profit world, we worry about babies too, but really, we think about overhead.

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The first question many people ask me, truly, is, “How much do you spend on overhead?” That means expenses not directly related to a group’s programs, including office rent and the electric bill. Givers want to know that we’re not spending much money on this stuff, that most of their donations go to “program-related activity.”

The assumption is that when 99% of your expenses go to programs, you are fantastic. Not-for-profits proudly proclaim, “95% of our expenses go to programs fighting poverty!” as if they’re a gazillion times more effective than those that spend a pathetic 85%. Web sites that track not-for-profit financials perpetuate the “overhead is evil” myth by lauding groups that curtail it. Perhaps they think overhead is an espresso machine. Or a new jet. Or art on our walls. (Whoops! Then we’d be a bank.)

But low overhead doesn’t necessarily mean an organization is awesome at fighting poverty, or that its turnover is low and its people productive. And it certainly doesn’t guarantee that the group is spending wisely.

Let’s take an example from the for-profit world, which isn’t so squeamish about overhead. According to Apple’s Q4 2008 report, 78% of its expenses were sales, general, and administrative — the corporate equivalent of overhead. Seventy-eight percent! Yet nobody flinches. Keep spending, Steve Jobs! Your products rock!

Obviously, not all overhead is good. I know one not-for-profit executive who flies only first class, stays in suites at the W, and has a car service schlep him around New York whenever he’s there. This guy has an overhead problem.

Overhead is a beast, a mass of ambiguity and confusion — like the black-smoke monster on Lost. For instance, is it better to have no staff dedicated to grant writing? Without that person, fund-raising pressure could distract the program people. Worse, we might not land any grants at all.

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Here’s a case study from my own organization. Last year, we spent nearly $200,000 overhauling our Web site, from the content-management system to the architecture to the design. No one likes such expenses on the books: They smell like overhead. But our site no longer crashes, traffic has doubled, and we even won a Webby Award.

I decided to look at the list of alleged overhead addicts (imagine John Walsh’s voice as you read). According to Charity Navigator, five charities that spend the biggest portion of their budgets on admin are:

1. Jobs With Justice, 77.5%

2. Boys Choir of Harlem, 66.3%

3. National Council of Negro Women, 64.0%

4. Fresno Metropolitan Museum, 58.4%

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5. Cherokee National Historical Society, 58.2%

No doubt, there’s waste on that list. But let’s examine No. 4. In 2005, the Fresno museum closed its main facility and launched a three-year, $28 million renovation; it reported on its Web site that, because of the project, “operating expenses … reflected an increase in administration.” Renovations inflate overhead and slash the proportion spent on programs. But they’re a legit, even laudable, expense. And the museum continued programming, to a reduced degree, while its building was shuttered.

My point: Stop obsessing about overhead. You can’t assess an organization on one statistic. Instead, focus on effectiveness. That’s a harder story to tell and a trickier thing to measure. But that effort is what everyone ultimately wants — a good investment.

Nancy Lublin is CEO of Do Something.

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