A Quick Overview of the Nonprofit Overhead Myth

A Quick Overview of the Nonprofit Overhead Myth

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The term overhead comes from accounting terminology, and the costs it describes figure into the operation of every business or organization, whether public, private, or nonprofit. In general, overhead costs include ongoing expenses that require payment, no matter how much money is coming in or going out. Charity organizations have traditionally measured overhead as the ration between funds spent on administration and the funds spent on the program or cause.

Whether overhead ratios accurately, or fairly, depict a given charity’s productivity—or efficiency measures, as many view them—remains a source of debate. A 2012 survey found that average Americans view 77 percent as the minimum amount of money that should go to a cause, but that charities barely allocate more than 60 percent of funds to their programs.

Low overhead appeals to many as a strong model for the functioning of nonprofits—the lower the amount of dollars given to administration, the higher the available amount to dedicate to medical research and social action. Donors are rightfully concerned about whether or not their gifts to charity actually go to charity. One innovator in the nonprofit sector, however, has endeavored to point out that supporting overhead is the same as supporting charity.

Dan Pallotta

Dan Pallotta
Dan Pallotta | Image courtesy TED Conference | Flickr

In his own experience, Dan Pallotta led two nonprofit organizations that ultimately dissolved because the public thought 40 percent overhead was much too high. Breast Cancer 3-Day walks and AIDSRides bicycle journeys raised a combined $569 million for breast cancer and HIV/AIDS, respectively, before they closed their doors.

Pallotta first laid out his case for running charities more like a business in his 2012 book Uncharitable. He notes that although well intentioned, the ethics to which many people feel compelled to adhere to when it comes to charity might, in some situations, lead to more harm than good. Charity, he argues, might have a better chance at achieving its objectives with a shift in paradigm, one that allows for putting money where it is most needed.

Uncharitable features, among other appeals, a call for instituting competitive salaries for nonprofit leaders and sponsoring high-level advertising so that efforts to help others become household names. Altogether, it points readers toward a focus on overall impact rather than overhead.

A year after his book release, Pallotta shared more of his story in a TED Talk titled “The way we think about charity is dead wrong.” He asked audience members to consider the possibilities if charities invested in their administrative infrastructure in the same ways that big businesses do, including bringing in talented advertising and marketing minds.

The TED Talk, which has amassed roughly 4 million views, quickly spread and exposed multiple nonprofit groups to Pallotta’s ideas. In fact, within a span of a few months, three prominent organizations collaborated to draft a letter addressed to the donors of America.

The Overhead Myth

The 2013 dispatch cut straight to the point in its opening line: “We write to correct a misconception.” In the following paragraphs, executives from BBB Wise Giving Alliance, GuideStar, and Charity Navigator, asked that donors redirect their attention to such factors as transparency and results when deciding which organizations to support. They further state that more or higher overheads can better sustain the long-term viability and success of charities.

BBB, GuideStar, and Charity Navigator issued a follow-up letter in 2014 directed to nonprofits across the country. The document invites leaders to make their operations more transparent, to focus on results, and to better inform donors how much those results really cost. Overheadmyth.com includes a comprehensive list of resources for people interested in learning more about the movement and how to get involved.

These two open letters aim to end the myth that surrounds overhead. Dan Pallotta has observed a large shift in the leadership demographic of nonprofit, but a lot of work remains to be done before the entire sector sees the value of fully committing to results.

Charity Defense Council

Charity Defense Council logoEncouraged by the letters above and the success of his TED Talk, Dan Pallotta decided to establish the Charity Defense Council (CDC) in 2014. CDC is a Massachusetts-based 501(c)(3) formed with the purpose of protecting the nonprofit sector. Leaders from the Nature Conservancy, BBB Wise Giving Alliance, and United Way soon joined the advisory board, and the organization has steadily grown in subsequent years.

CDC intends to reverse the fact that 70 percent of Americans misuse either a “fair amount” or a “great deal” of their funding. Toward this goal, the group has developed a marketing campaign featuring a series of ads that personalize overhead. In one publication, a photo shows a man looking into the camera with text introducing himself: “I’m overhead.” By showing real people who are affected by and fighting real issues, the organization hopes to put overhead in a different, more accurate, and human light.

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