I recently published a piece called, “Stop Judging Nonprofits by their Overhead Numbers.” This piece (below) received some reaction, as expected. Some agreed with my point. I was a little surprised, to be honest.

Stop Judging Nonprofits By Their Overhead

Even more surprising was a website Dennis Pitocco, Editor-in-Chief of BIZCATALYST 360o pointed me to with the same concept, The Overhead Myth. Although this website is not clearly attributed, it is a follow-up to a publication in 2013 by GuideStar, BBB Wise Giving Alliance, and Charity Navigator entitled, The Overhead Myth, that has a similar concept to what I am proposing.

Others commented that they wouldn’t want to give to a nonprofit which didn’t spend most of its funds on its mission. Others asked what they could look at instead of overhead. I want to briefly comment on these.

Overhead should be kept low because most of the money should go to those being helped.

This certainly has a feel-good flavor to it; however, it does not consider the entire story.

If you feed the hungry, you can hand pack meals for them and you’re are limited by the number of hands. Or you buy some automation and can massively increase your output of meals. Automation probably has higher overhead but will allow you to expand your mission.

You can use no Donor Relation Management software (DRM) or free/cheap software. Alternatively, you can use with high-quality DRM that has all the fields you need to track donors, has AI to improve performance, has the ability to track and respond to what people do on your website, segregates your donors by various factors and sends them appropriate messages, and even sees the “abandoned carts” on your donor page and makes sure to follow up with them. Done right, using the right DRM can have a massive ROI.

Salaries

I am putting this separately because people debate if CEO/ED salaries should be overhead. I’m not going to get into that debate, but the fact is that there is significant tension when CEO/ED makes “a lot” of money, whatever that means. So, I believe it belongs in this discussion.

I was speaking with a businesswoman who agreed with me on many things regarding nonprofits. However, when I asked her, “Would you rather donate to a nonprofit whose CEO makes $100k or one whose CEO makes $900k. Assume the budget of each is $1M.” Her immediate answer was, “Obviously the one whose CEO makes $100k.”

This shows that shortsightedness also occurs in people who believe in for-profit businesses.

By now, you’re probably thinking I’m crazy to suggest there is a real question here.

A reasonable response would have been, “Tell me about the results of their organization.” To which I would have answered, “Well, the first NPO fed 50,000 people last year and the 2nd fed 500,000.”

It was obvious on her face that she still had trouble with the question…This is part of the problem. So many people think that NPO CEO/ED’s should sacrifice money to help the world. And, unfortunately, they miss out on some top talent that goes elsewhere.

Well then, what else can I look at?

Many people, including myself, want a simple way to evaluate nonprofits. Unfortunately, this is not always easy; however, that doesn’t mean that falling back on a statistic that doesn’t say what you think it does is valid…

What you want to do, and what NPOs should provide, and funder require, is some sort of cost/unit provided. In the for-profit world, that would be COGs. I would contend that a modified COGs number in the NPO realm would make more sense. In for-profits, there are sunk costs, investments, etc. When evaluating an NPO, I want to know, “How many mouths did you feed with what total budget.”

In my example below: NPO 1 would be at $20/meal and NPO2 would be at $2/meal. I don’t care if the executive gets paid 90% of the money if the NPO has all the bells-and-whistles…all I care about is that they are good at doing their job, in this case feeding people.

Certainly, the comment in return is, “But if the CEO on NPO2 only got paid $100k, they could do SOOOO much more good!” Well, that might not be an option. You might not get CEO2 for $100k. S/he might go to a for-profit and make $10M, instead. And, while you’re making sure s/he doesn’t make more money than you think is fair, you are now starving 450,000 people a year…Yes, that is what this entire discussion comes to.

Bottomline

OK, as any person in a for-profit business will tell you, keeping overhead low is important. At the same time, a business that focuses too much on cutting overhead will eventually cut into their productivity and harm their operations. Finding the sweet spot in that area is key. How can I maximize the number of units (people fed, trees saved, people rescued, etc) for each dollar the organization receives?

For some verticals, this will be harder than others. With the current focus on overhead, however, there is no incentive for all those innovative people in the world to develop strong metrics that answer the bottom-line questions.

Looking at overhead numbers is of limited utility. It can give an extremely skewed view of the quality of an NPO. Developing, offering, and/or demanding better metrics from NPOs is essential to helping donors decide which NPO they should fund.


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