FYI Blog

What’s Next for the Overhead Myth?

right and wrong decisionDMAW’s annual meeting included a timely and important discussion of charity evaluators, impact strategy and that controversial measure of nonprofit effectiveness—the overhead ratio.  The panel, “Charity Watchdogs, Donor Perceptions and the Overhead Myth” featured an impressive lineup, including:

  • Steven Nardizzi, executive director, Wounded Warrior Project
  • Dan Pallotta, founder and president, Charity Defense Council
  • Bunkie Righter, director of business development, Guidestar
  • Art Taylor, president and CEO, BBB Wise Giving Alliance
  • Andrew Watt, president and CEO, Association of Fundraising Professionals


Three conclusions stood out to and, frankly, inspired me that evening: an alignment of interests among the parties represented, a call for strategic responsibility, and a related call for better and braver messaging. 


Alignment of Interests


Contrary to popular belief, charity evaluators, nonprofits and impact prophets don’t need to duke it out.  While nuanced arguments remain, the big players in this debate share some important commitments.  Most importantly, they are committed to the work that nonprofits do—maximizing benefits to their constituents and local communities. 


Each perspective is exactly that—a perspective on how nonprofits can best go about their work.  The so-called “watchdogs” are evaluating nonprofits in order to safeguard the public trust and donors’ commitment to philanthropy writ large.  Nonprofits are doing the work they do best—addressing the needs of their constituents and executing their missions.   And those who prioritize impact are urging nonprofits to think bigger and do more. 


They offer different angles on a shared concern—strengthening and scaling the missions of nonprofits around the world.  A hostile or oppositional posture does nothing to further that purpose.  To that end, Dan Pallotta rightly suggests that we stop using the word “watchdog,” favoring instead a collaborative framework.


Strategic Responsibility


Smart nonprofit leaders understand the root causes of an organization’s overhead, as well as the high-altitude decisions that have led there.  They also understand the decisions that can either change that result or maintain it.  And they own the responsibility to make those decisions purposefully on behalf of their nonprofits’ missions and stakeholders. 


Steven Nardizzi offers Wounded Warrior Project as a compelling case for choosing one’s overhead ratio.  For example, Wounded Warrior does not accept government funds, a commitment that increases the nonprofit’s overhead ratio, yet gives it a stronger position when advocating for injured service members on the Hill.  They have likewise refused sponsorship from companies selling alcohol, again choosing to accept a higher overhead rate on behalf of Wounded Warrior’s constituents, who suffer from higher than average rates of substance abuse.  This example teaches us that overhead ratios aren’t a circumstance happening to nonprofits—certainly not the strategic ones.  Like Nardizzi, nonprofit leaders should put their strategy first and stop managing to rigid overhead thresholds. 


The thresholds are counterproductive when they cause nonprofits to underreport costs or spend inadequately.  They generate bad decisions that result in withering donor files and stunted potential.   We agree with Dan Pallotta that, in order to grow, nonprofits must increase their investment dramatically—and we agree that most are not investing sufficiently.  Nonprofit leaders are too often afraid to authorize the very growth strategies that will enable them to do more for their constituents.  Stanford Social Innovation Review has called this the “Nonprofit Starvation Cycle.”


Institutional Messaging


The tough reality here is that nonprofit leaders must get comfortable discussing these matters.  They have a responsibility to morph stakeholders’ concern for overhead ratios into more substantive conversations about an organization’s strategic mission.  Peter Kramer recently made a complementary case for candidness in The Chronicle, addressing the need for complete and specific financial discussions between nonprofit leaders and funders.


Last week, Andrew Watt urged the DMAW audience to “change the tide” on this discourse, reprimanding us all for failing to communicate what we do and why.   This is a tough, but vital, call to action.  Nonprofits need institutional communications strategies and marketing strategies, not just fundraising strategies—and they should be prepared to invest there too. 


Fundraising professionals who get this—both within nonprofits and in counsel to them—should lead the charge to clarify message across departments and throughout hierarchies.  We must advocate for our nonprofits to invest as required.  And we must coach our colleagues through this process.  Why us?  Because we are experts at messaging—it is the cornerstone of our impact as fundraisers. 



Broadly speaking, there is agreement on the ideas presented above.  Last week’s panelists shared a critical tone toward overhead thresholds—even the charity evaluators ceded that the overhead ratio is not only a “poor ratio” (Taylor), but “inefficient and wrong” (Righter).  More formally, last summer’s joint statement from the BBB Wise Giving Alliance, Charity Navigator and Guidestar, as well as revised ethics rules from the DMANF, are evidence that we can put “first wave” questions to rest. 


While these are positive developments, they represent low-hanging fruit.  A second wave of more nuanced questions can now move to the foreground.  Those I most want to see incorporated into our public and industry discussions are:


Fraud.  Dan Pallotta commented in last week’s panel that we should leave the criminals to law enforcement.  However, isn’t the purpose of the evaluators, at least in part, to expose and discredit fraudulent nonprofits?  Don’t we, as members of a profession and industry, have a responsibility to condemn and eliminate unethical practices? As it stands today, charity evaluators are not doing much to expose the truly bad nonprofits—this work has largely been left to journalists, who, let’s face it, only rarely get to the heart of matters.  Doesn’t it reflect poorly on all of us when persons outside our profession are doing the lion share of this work?  


Donor Expectations.  There seem to be two lines of thinking—one that emphasizes the philanthropic spirit and
one that emphasizes results. Art Taylor paints a beautiful picture of donors and nonprofits sharing “noble values” and the hope of a better world.  Is he right that donors need above all to trust charities and their leaders?  Or, should we embrace Dan Pallotta’s position that hard results and scale are more influential?  Do donors see their contributions as enabling incremental improvement or as fueling radical change?  And who should be framing those expectations—evaluators, nonprofits or donors themselves?


Nonprofit Performance.  As Suzanne Perry points out in The Chronicle, nonprofit effectiveness can be both difficult and expensive to measure.  What bundle of metrics and evaluations best constitutes a thorough and responsible measure of nonprofit performance?  What resources should a nonprofit allocate towards performance measurement—and won’t that increase overhead?  Can nonprofit performance be ranked for the donor who wants to give to a cause, but lacks organizational loyalty?  Or, is performance always relative to mission and therefore incommensurable across organizations?


Impact and Risk.  Lastly, we need to examine the risk of impact-driven strategies.  In for-profit enterprise, the primary burden of risk belongs to the same stakeholders who stand to gain the most: business owners and shareholders.  This makes the ethics of risk/reward strategies fairly straightforward.  However, in nonprofit enterprise, the risk of failure is largely borne by that organization’s already vulnerable constituents.  The for-profit calculation of risk and reward does not translate seamlessly.  While this complexity does not undermine the promise of impact, it does complicate its execution (and appropriately so).


Above all, and in addition to this important discourse, it remains for nonprofits and their counsel (including Avalon, of course) to respond with strategic recommendations, brave decision-making and purposeful messaging—to build on the agreements we have reached thus far.  



Jennifer Phillips is Avalon’s Chief Strategy Officer and holds a Ph.D. in Theology, Ethics and Culture from the University of Virginia.