Challenging the Overhead Myth: An Open Letter to the Donors of America from GuideStar, Charity Navigator, and BBB Wise Giving Alliance

August 12, 2013 § Leave a comment

Foundations and other grantmakers of all sizes and stripes have long viewed the share of a nonprofit’s budget that goes to cover administrative and fundraising costs (a.k.a. “overhead”) as a key factor determining whether they should provide funding to that organization. Popular wisdom dictates that nonprofits that spend the least on overhead are the ones that are most deserving of support. The following letter to the donors of America, penned by the leaders of the country’s three leading sources of information on nonprofits (GuideStarCharity Navigator, and BBB Wise Giving Alliance) challenges this simplistic and harmful view, which often pressures nonprofits competing for limited funds to under-invest in administrative systems. Why is this important? Because such underinvestment is “consistently linked with poor organizational performance and sustainability.” If you work for a grantmaking organization, serve as a grant reviewer, or support the work of charitable organizations as a private donor, I urge you to read this letter, add your name, and spread the word about this campaign to change the way nonprofits are evaluated and funded. –MF

overhead myth header

To the Donors of America:

We write to correct a misconception about what matters when deciding which charity to support.

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.

We ask you to pay attention to other factors of nonprofit performance:  transparency, governance, leadership, and results.  For years, each of our organizations has been working to increase the depth and breadth of the information we provide to donors in these areas so as to provide a much fuller picture of a charity’s performance.

That is not to say that overhead has no role in ensuring charity accountability. At the extremes the overhead ratio can offer insight: it can be a valid data point for rooting out fraud and poor financial management.  In most cases, however, focusing on overhead without considering other critical dimensions of a charity’s financial and organizational performance can do more damage than good.

In fact, many charities should spend more on overhead.  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.  These expenses allow a charity to sustain itself (the way a family has to pay the electric bill) or to improve itself (the way a family might invest in college tuition).

When we focus solely or predominantly on overhead, we can create what the Stanford Social Innovation Review has called “The Nonprofit Starvation Cycle.”  We starve charities of the freedom they need to best serve the people and communities they are trying to serve.

If you don’t believe us—America’s three leading sources of information about charities, each used by millions of donors every year—see the back of this letter for research from other experts including Indiana University, the Urban Institute, and others that proves the point.

So when you are making your charitable giving decisions, please consider the whole picture.  The people and communities served by charities don’t need low overhead, they need high performance.

Thank you,

Art Taylor
President & CEO
BBB Wise Giving Alliance
Jacob Harold
President & CEO
Ken Berger
President & CEO
Charity Navigator

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