The Issue with Nonprofit Overhead and How to Change the Conversation | npENGAGE

The Issue with Nonprofit Overhead and How to Change the Conversation

By on Jul 14, 2017 | NONPROFIT-MANAGEMENT

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Cameras on a piggy bank illustrate the issues with nonprofit overhead

The common question I’ve heard over the years is this:

“How do I get donors to realize the importance of paying for what are considered overhead costs?”

I even had one nonprofit professional tell me about a time a donor said to her, “You and your job are overhead, and I don’t want to donate just to pay for your salary.”

Ouch.

It’s important that we determine what is and isn’t an overhead cost for nonprofit organizations that are trying to be good stewards of donated or granted money.

  • Is an accountant overhead?
  • Is a fund accounting software subscription overhead, even if it’s needed to accurately track and report back to funders of the organization?

To answer these questions, I think it’s important to first understand the landscape and pressures around nonprofit overhead

We are all familiar with the ‘Shiny New Toy Syndrome.’ People love donating to the new program, the new building, or the new project because it’s fun to be a part of new initiatives. It’s part of our nature to want to leave a mark and be involved in something that’s going to have impact.

But this creates issues for nonprofits.

The reliance, and accompanying reporting requirements, on restricted program funds often leaves nonprofit organizations in a bind. Since nonprofits must legally live by the donor’s intent of a gift or grant, there’s no wiggle room to use those dollars to pay for things like the light bill, staff needed to manage the new initiative, or building maintenance. And, as you know, the costs associated with delivering the new programs pile up long after the ribbon-cutting ceremony is over

Nonprofit Overhead vs. Mission Costs

I remember an article from a while back in the Chronicle of Philanthropy titled ‘Overhead Costs Pose Dilemma for Charities’. It highlighted the issue of nonprofit overhead costs vs programmatic or mission costs. My thought, after reading the article, was that nonprofit organizations are missing a key metric to accurately define what is and what is not an overhead cost.

The typical percent distribution of program costs to overhead costs paints a false picture for donors to view a charity’s work—and can force some organizations to manage to the metric (much like teaching to the test). It’s not a good way to live or to work.

I challenge the industry to adopt a new metric. I call it Return on Mission® (ROM), a more accurate means to state a standard Return on Investment (ROI) for nonprofit organizations.

Why Return on Mission is a More Accurate Measurement

How do you calculate necessary items—such as staff, technology, office space, etc.—in terms of impact to the mission? How does staff turnover affect program or mission delivery? Could implementation of a better technology solution improve grant funding performance and reporting? Will providing an inviting workplace inspire employees to work even harder and in more collaborative ways for the mission?

For-profit companies are encouraged to make investments that foster happiness and productivity in the workplace, because productive employees help the company’s bottom line. And a healthy bottom line is needed to reinvest and develop the best solutions for clients. Why do we expect nonprofits to operate differently? Why is it considered taboo to ask for money to help those that deliver on the mission?  

The concept of Return on Mission is that the real measure of a charity’s success is not in how well the return is on an ‘investment’ (e.g. a grant, major gift, etc.) but rather how much that investment impacts the mission itself. That, then, is the bridge that connects overhead and mission costs.

It creates the test by which to determine whether a cost is pure overhead or if it is connected to the delivery of the mission. If a large purchase, a salary, an ongoing project, or a proposed project is not tied to the performance of the mission, then the donor or grantor should certainly reconsider that gift or grant. However, if the investment supports the delivery of the mission, whether it’s a shiny new toy or not, it deserves support.

Do you agree? Disagree? I’d love to hear your thoughts on overhead versus mission costs and the concept of ROM.

ABOUT THE AUTHOR

Andrew Urban has had the privilege of working with technology in the nonprofit sector for 17+ years. His first book, The Nonprofit Buyer (2010), was written as a guide for nonprofit organizations in how to apply technology buying to mission success. He is passionate about mission-oriented technology decision processes but even more so about how those processes can amplify the impact to the causes they support. Andrew has been active in multiple youth charities around Austin, TX, his hometown, and he and his wife enjoy spending their free time around the music and outdoor activities Austin has to offer. 

Comments (6)

  • Maggi Junor says:

    I totally agree that we should be judged by Return on Mission instead of overhead. I have worked in the non-profit sector for over thirty years and this focus on keeping down the overhead had hurt us in efficiency and productivity. We are constantly doing without a piece of software which would make us more productive and streamline our processes because it would add to much to the overhead. In thirty years I have only had a new computer once. Usually we get second hand (or even third) old computers. I ran a ROI comparison once and proved that new WAS a better investment but the fact that new would up our overhead costs in one year was considered the main issue and we purchased used again, which then broke down in a year and we purchased another used, again and again. Because the sticker price on a used was $200 and the new was $400. I sincerely wish that we would look at the long haul rather than just getting by.

    • Andrew Urban says:

      Maggi- Thanks for sharing your experience. I think it mirrors that of many organizations who struggle with the incorrect expectations for staff productivity. I hope that ROM is one more piece of the puzzle to help the conversation move forward for you guys. Thanks again!

  • Jess Green says:

    I really like the concept of ROM – I talk to my donors about ROI quite a bit since many of them are business minded but I think ROM speaks better to our work. If you haven’t heard about it yet, grantmakers in California have started the Full Cost Project to help funders start having this conversation: https://sdgrantmakers.org/full-cost-project

    • Andrew Urban says:

      Jess – Your comment is spot on. I was on a board awhile back which consisted of many business owners who understood ROI perfectly. The staff had difficulty relaying mission needs in a way that the business-minded board members could understand. My organizations staff called me “the translator” because I could bring ROI and ROM together so help both sides could talk to the same goals. That’s really what it’s about. Sounds like you do a lot of the same! Also, thanks for the link to the Full Cost Project. I’ll check it out!

  • Michelle Crim, CFRE says:

    Great article and good thoughts on this ongoing issue. I would make the case that all “overhead” can be applied to the mission. If a homeless shelter needs security equipment to scan residents and their belongings to ensure a safe environment, then that is a critical component to their mission of helping clients on their journey home. Unfortunately, I’ve seen too many donors feel that it is someone else’s responsibility to fund salaries and benefits for professional staff. Sigh.

  • Tonja Eagan says:

    Love the article and ROM concept! Donor education in this area is much needed!

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