Many nonprofits highlight how 90 percent or more of every dollar received goes directly to fund their programs.
These organizations proudly tout their low overhead to potential donors because they believe it shows value, prudence and a high level of effectiveness.
After all, if a nonprofit can keep overhead as low as possible, isn’t this indicative of a highly efficient and capable organization that cares deeply about serving those is need?
Well, actually, this is the furthest from the truth.
It is unfortunate that the cost-overhead ratio carries such strong meaning for donors. It is perhaps the most misguided method for determining effectiveness.
Without appropriate overhead, nonprofits cannot invest in the resources, processes, and systems that an organization needs to effectively manage its performance.
Data from the IRS is the only key metric for quenching donor thirst for past performance information, and unfortunately, it has become the cornerstone for assessing overall effectiveness of a nonprofit.
While it is important to understand an organization’s past performance, how an organization invests in resources, talent, process and systems – all considered overhead – is more indicative of future success.
One of the strongest indicators of future success is an organization’s ability to manage its performance in real time.
Most nonprofits have no idea whether their efforts are making any difference in improving the lives of their clients. And without this understanding, an organization cannot continuously improve.
If an organization does not actively manage its performance, then it is highly unlikely that their efforts will intentionally generate future social value.
Establishing a performance-management system, processes and culture requires adequate overhead. So, if anything, low overhead is an indication of an organization’s inability to generate future social value.
We need to take a deeper, holistic view of assessing the future capabilities of a nonprofit.
To be a truly high-performing nonprofit, an organization that clearly fulfills its mission, there are a number of key criteria to meet:
Does the organization have clear goals in line with existing resources? In any industry sector, a clear vision that encompasses all goals and objectives, that falls in line with existing resources, is critical for success. Organizations should invest in senior leaders who can develop the goals and objectives and inspire the staff to move in the right direction.
Does the organization have a strategy for reaching its goals and objectives? Goals and objectives can only be reached by organizations that have taken the time, and invested in the resources, to develop a strategy for success. This could mean investing in outside consultants, or technologies, to help develop the overall strategy.
What is the organization’s method for monitoring progress? Nonprofits need to invest in the tools, staff and training to monitor all efforts. This necessary undertaking will allow an organization to assess impact during a program’s life span – determining which programs are successful, how they can be refined and if they just are not working at all.
Does the organization have the ability to make mid-course corrections? In the corporate world, every marketing campaign is measured and analyzed throughout the life of a campaign, so changes can be made to make it more effective and reach its goal. The same standard should be held in the nonprofit sector. For a campaign to reach its goal, it is vital mid-course to determine the effectiveness and refine the campaign.
Can the organization easily share results and outcomes? An effective nonprofit should be able to easily share all results and outcomes to social investors. If an investment is placed in the right tools, then the ability to produce comprehensive reports should be a non-issue.
Moreover, organizations with inadequate overhead could actually be causing more damage than good. If there are no tools to assess performance, programs that may actually cause harm continue to operate ignorant of the damage they are inflicting on those in need.
This is a risk not worth taking. Without the proper resources, tools, talent and technology – all of which cost money – an organization will not be able to succeed in the long run.
Fortunately, there already are seismic shifts taking place in how nonprofits are rated. Charity Navigator is moving to a new rating system that encompasses high performance – meaning that nonprofits will no longer receive a four-star rating for just keeping their overhead low.
By keeping overhead inappropriately low, and failing to consider overhead expense as a critical, strategic element of an organization’s work, nonprofits cannot achieve their goals.
Jeff Mason is chair of the Alliance for Effective Social Investing, a network of more than 35 nonprofit leaders helping donors adopt sound social-investing practices. He also serves as vice president of Social Solutions, which helps human-service providers and funders relate efforts to outcomes.