Fall 2013 Issue of Horizons

NOT-FOR-PROFIT

Charity Watchdog Agencies and “The Overhead Myth” Two questions that are frequently raised by donors/funders include:

1. How much does your organization spend on overhead?

2. Is that too much?

An organization’s overhead percentage is generally calculated by dividing the total of general & administrative and fundraising expenses by total expenses.

The traditional thinking from a donor or charity watchdog perspective has been that the lower this percentage is, the more efficient the organization is. Further, watchdog agencies have often historically based their evaluations of charities, at least in part, on this percentage. RubinBrown previously covered this issue in our Spring 2011 Horizons article, in which we noted “while there is little evidence that this calculation will completely disappear from the evaluation process, it does appear that reliance on it may be waning.” Evidence of the latter came earlier this summer in a letter released by three of the country’s leading sources of information on not-for-profits – BBB Wise Giving Alliance, Charity Navigator and Guide Star. In their “Letter to the Donors of America,” they caution against overemphasis on this ratio when making funding decisions. The letter cites research which shows that when organizations focus too much on minimizing overhead, they starve themselves of the freedom they need to invest in themselves to best serve the people and communities they were created to serve. The writers don’t believe the overhead percentage should be totally ignored but do encourage donors to keep it in perspective while considering other factors of performance such as transparency, governance, leadership and results. Some watchdog agencies have already taken steps to minimize the emphasis on this ratio in rating charities and increase the emphasis on charities’ results. It remains to be seen whether, and how quickly, donors and funders will react and/or make changes to their funding criteria and evaluation methods. The letter has generated significant publicity and social media activity. As this paradigm shift could have a significant impact on the management of not-for- profits over time, we encourage you to follow and participate in the discussions. In fact, the letter states that “many charities should spend more on overhead” such as “investments in training, planning, evaluation and internal systems”.

page 14 | horizons Fall 2013