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Focusing on Outcomes, Not Overhead

The Bridgespan Group Jul 14, 2017
This is a Giving Compass SelectionThis article is deemed a must-read by one or more of our expert collaborators.
Click here for more.
The myth of overhead in philanthropy
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The announcement from the leaders of charity watchdogs—GuideStar, Better Business Bureau’s Wise Giving Alliance, and Charity Navigator—made waves when it denounced the use of overhead ratio as a valid indicator of nonprofit performance. The CEOs write:

The percent of charity expenses that go to administrative and fundraising costs—commonly referred to as ‘overhead’—is a poor measure of a charity’s performance. We ask you to pay attention to other factors of nonprofit performance: transparency, governance, leadership, and results.”

Want to read more on nonprofits? Visit this selection on Giving Compass.

What do good outcomes cost? The for-profit world does not measure success by focusing on overhead, but if it did (by looking at sales, general and administrative costs as a percent of total sales), the average rate would be 25 percent. Intuitively, we’d expect that a high-performing nonprofit would hire the best people, train them to be effective, and monitor results to improve as it went along. That involves HR, training, and performance measurement. Overhead, overhead, overhead.

No matter what your funding philosophy, there are a handful of steps any funder can take to move toward a better understanding of what good outcomes really cost.

Move away from arbitrary funding limits on nonprofit overhead.
It is shocking how many funders anchor on 10 percent for overhead as a supposed “best practice” rather than on what grantees need to deliver great results. By all means discuss what you are willing to pay for, but encourage grantees to ask for what they really need and justify their request; you may be surprised by what you hear.

Reduce demands that drive up grantee costs.
Due diligence and grant reporting add extra costs for grantees. Consider a due diligence process appropriate to the level of investment. Multiple site visits and data requests may be overkill for a $10,000 grant. This due diligence tool can help. Once a grant is made, commit to funding grantees’ reporting costs. There is work to do here: A 2011 survey by Grantmakers for Effective Organizations found that only 24 percent of foundations “often or always” included appropriate overhead to cover time grantees spent reporting on the grant.

Develop a deeper understanding of “full costs.”
What are programmatic costs? What goes into overhead? Both funders and nonprofits realize that the answers may not be obvious. In a recent survey conducted with Donors Forum of about 250 nonprofit leaders and 100 funders, both groups listed “tools to help analyze and understand full costs” as the most important resource for improving their overhead practices and policies.

Read the source article at The Bridgespan Group

Like this article? Check out this piece on the leadership development deficit in nonprofits.

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Learning and benchmarking are key steps towards becoming an impact giver. If you are interested in giving with impact on Impact Philanthropy take a look at these selections from Giving Compass.

  • This article is deemed a must-read by one or more of our expert collaborators.
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    Four Pathways to Greater Giving

    Many ultra-wealthy individuals and families—who each hold $500 million or more in assets—say they want to achieve more with their philanthropy. In the United States alone, more than 140 billionaires have signed the Buffett-Gates Giving Pledge, committing to give half of their wealth to philanthropy during their lifetimes or upon their death. Despite such aspirations, ultra-wealthy American families donated just 1.2 percent of their assets to charity in 2017, which falls considerably short of average, long-term investment returns on assets. Compare 1.2 percent to the S&P 500’s 20-year average annual return of 9 percent. The clear-eyed math shows that if an ultra-high net worth family wanted to spend down half its wealth in a 20-year timeframe, the family would need to donate more than 11 percent of its assets per year—a nearly ten-fold increase over its current level of giving. The gap between the very wealthy’s current giving and their full potential to give has implications for us all. At its best, private philanthropy, in partnership with innovative nonprofits and resident-led movements, has helped secure major social advances, such as eliminating age-old infectious diseases and securing important civil rights for repressed populations. At the same time, the social problems we haven’t solved will continue to grow. We have arrived at a decisive moment. The ultra-wealthy, having amassed resources of unprecedented magnitude, have the capacity to support innovative initiatives that could benefit millions. Against that backdrop, The Bridgespan Group’s research team, with support from the Bill & Melinda Gates Foundation, set out to spotlight barriers that impede giving to social-change efforts. The team then identified pathways that could conceivably double ultra-wealthy giving to benefit society from $45 billion to $90 billion per year. The team interviewed more than 60 ultra-wealthy families, their advisors and staff, and experts in the field, and paired insights gleaned from those interviews with lessons from behavioral science and the experiences of community leaders and fundraisers. Having identified the barriers, we set about conceiving a compelling “future state” for ultra-wealthy giving. We sought to meld an analysis of what exists today and what has (and has not) worked in the past, while surfacing ideas that would help donors with their quest to put more money toward potent social change. Our assessment identified four significant pathways (there are certainly others) to greater giving to social-change causes, by which we mean causes like human/social services, the environment, and international development. These pathways—individually and collectively—could represent meaningful progress to the audacious goal of doubling giving from this population and unlock billions of dollars to drive social change. However, we also realize that philanthropy is personal, and deeply enmeshed with family, legacy, and values. A core challenge—creating solutions at scale for donors who are accustomed to bespoke approaches—should not be underestimated. Scaling strategies that assume all donors behave alike will likely fail. Aggregated funds become a common asset class for ultra-wealthy philanthropists A high-impact way for philanthropists to bet big on improving economic mobility Philanthropists have access to high-quality services that support their giving Philanthropists have consistent access to those qualified grantees that are able to put their big bets to effective use Read the full article about pathways to greater giving at The Bridgespan Group. 


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