Research shows that many donors make their giving decisions based on how much an organization spends on overhead, and the pressure to cut costs can starve nonprofits of critical operating resources. But analysts have proposed ways to overcome the “overhead myth.”
With Giving Tuesday this week and year-end donations on many people’s minds, donors are making a lot of decisions about their charitable giving right now. And many are likely focusing on the wrong metric in evaluating which organizations should get their money.
“Overhead aversion” often has an outsize influence on donors’ giving decisions, as they prioritize low administrative expenses over other, arguably more important mission-related factors, according to a 2018 study [registration] published in the Journal of Behavioral and Experimental Economics. And charity rating firms such as Charity Navigator have reinforced that habit by evaluating nonprofits on the overhead metric, critics say.
In a recent op-ed for The Conversation, for example, economics professor Joseph Stinn of Miami University argued that the pressure to keep costs low creates a “starvation cycle” in which organizations skimp on salaries and budgets for administrative functions that are vital to carrying out the mission.
“Despite years of research pointing out the drawbacks of relying on overhead ratios as a way to see which charities are the best ones to support, the temptation to keep using them remains strong,” Stinn wrote.
So how do nonprofits overcome this challenge? They can start by changing how they talk about their expenses and by putting more emphasis on results in their fundraising messaging, according to Nonprofit Quarterly‘s Ruth McCambridge and Sarah Miller.
“Take the time to encourage the local media to write about the monitoring of ‘overhead’ as old fashioned and counterproductive,” McCambridge and Miller wrote last week. “Ask the United Way to be a conduit for that message and, very important, embed all of this in an integrity message.”
In addition, nonprofit leaders need to advocate for covering the “full costs” of their work, including overhead, NPQ contributor Claire Knowlton wrote recently. “The myths and misinterpretations of the true full costs of delivering vital programs have contributed to a chronically fragile social infrastructure for our communities,” she wrote.
A 2016 study by the Bridgespan Group showed the damage to an organization’s mission that can be done when necessary administrative and infrastructure costs aren’t adequately funded.
“All of us in the nonprofit ecosystem are party to a charade with terrible consequences—what we might call the ‘overhead fiction,’” Ford Foundation President Darren Walker said when the study was released.
Ultimately, ” nonprofit leaders must take the lead in changing the discourse surrounding overhead and spending,” McCambridge and Miller argued in NPQ.