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The Overhead Myth Persists Among Donors

Fast Company
This article is deemed a must-read by one or more of our expert collaborators.
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The Overhead Myth Persists Among Donors Giving Compass
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Giving Compass’ Take:

• Surveys show that donors still believe that when nonprofits keep their operational costs lower, they can provide more impact. 

• Higher overhead can mean that more money is spent on employees to increase their ability to make social programs happen. What is a better measurement of impact?

• Read about how to overcome the overhead myth. 


Grey Matter Research, a charity consultancy, and Opinions 4 Good, a philanthropic online market research firm, combined efforts to conduct a survey of 1,000 donors that shows most people still believe in the “overhead myth”; that’s the industry term for the mistaken belief that groups keeping operational or indirect organizational costs low are somehow more effective at accomplishing their missions.

Group costs can and should fluctuate within reason based on what type of remedy is being implemented (bioscience and tech-based interventions, for instance, tend to require lab space or hardware, not to mention advanced employee training, that might initially be pricey). The point is that oftentimes the overhead cost is worth it, especially if the money allows the group to be more successful and expand smartly.

Many nonprofits and charitable watchdogs understand that and have even lobbied for a wider awareness of it, but the public has been slow to catch on.


Impact Philanthropy is a complex topic, and others found these selections from the Impact Giving archive from Giving Compass to be good resources.

  • This article is deemed a must-read by one or more of our expert collaborators.
    Click here for more.
    Supporting Our Unsung Heroes in a Moment of Crisis: Part 3

    As nonprofits struggle to respond to COVID-19 and the accompanying economic shutdown that has gripped the country, everything that many thought they knew about nonprofit revenue models is being challenged. As it turns out, earned revenue is not the panacea many thought it to be. In fact, the nonprofits with earned revenue spigots that have suddenly been turned off are the ones that find themselves in the most danger at this moment. What should funders do? The pledge that hundreds of foundations have taken in the last week, organized by the Council on Foundations, is a very good one — and affirms what nonprofits have been asking for more broadly for years (for example in study after study CEP has conducted). The kind of flexibility the pledge urges — releasing organizations from funding restrictions, for example, or from particular projects or deliverables — will be crucial if leaders like Phelps are to keep their organizations afloat. And many organizations will need something more: an infusion of funds. Announcements of this kind of action are much fewer in number than signatories to the pledge, but my hope is that this is simply because it’s early days. I was pleased to see the Bonfils-Stanton Foundation in Denver, for example, move immediately to provide its grantees — arts and culture organizations in Denver — with unrestricted emergency funding of 10 percent of its most recent grants, with a cap of $6,000. More funding — and now — is crucial. Armed with good information, funders will need to increase grantmaking rather than contracting — even as their endowment values plummet — if the hardest-hit nonprofits are to survive the coming weeks and months.   Some help from the federal government is possible, and we all need to be supporting organizations like the National Council of Nonprofits, Independent Sector, United Philanthropy Forum, and Council on Foundations that are fighting for nonprofits to get the assistance they need. But increased philanthropic support will also be vital. Read the full article about supporting nonprofits by Phil Buchanan at The Center for Effective Philanthropy. 


What do donors think?

When the last survey was done in 2012, respondents indicated that 22 cents per dollar was a reasonable allowance for overhead. In the recent study, they indicated that 19 cents is now more appropriate—a 14% drop in the overall allowance. (At that same time, upset donors estimated that today groups are more likely spending around 28% on these expenses.)

It’s hard to assign a fixed measure on what charities are actually spending, but Bridgespan has found that for successful businesses, the back-end number is more like 34%, and often double that for tech companies. In contrast many foundations cap this line item in grants at just 15%, which may be contributing to the perception problem.

 

Researchers asked respondents to name their favorite charity and what they thought it was spending overhead. Then, they went and looked up data on those groups. Half of all donors named organizations that were spending above the donor-imposed limit of what was supposedly responsible.

At least a quarter of respondents actually favored groups spending at least twice that threshold.

Read the full article on the overhead myth by Ben Paynter at FastCompany

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