Nonprofit Overhead: A Dangerous Success Metric

The other morning, while driving to work and listening to the radio, I found myself yelling at an NPR reporter. Not a very productive way to express my opinion, I admit. The reporter was interviewing a Red Cross spokesman on the topic of overhead expenses for the nonprofit organization, asking about the percentage of each Red Cross donation that goes directly to provide services to disaster victims. NPR’s reporter pushed the representative to admit that they spend more than 10% on overhead, presenting this claim as if it was a moral outrage.

My problem with this unfortunate focus on overhead percentages is that they do not reflect true results. The reason that overhead costs are so often the central focus is that they are both relatively simple to calculate and don’t require the consideration of variables to compute. It’s easy to compare one nonprofit organization’s overhead rate to another’s and use those values to decide where to send your support.  However, this decision won’t be based on actual accomplishments or outcomes, which are much more difficult to compare.

The Red Cross has come under some scrutiny for its alleged inept handling of relief efforts. I have no way to judge whether these accusations are fair or not. However, I do know that certain situations place nonprofit organizations between a rock and a hard place.

For instance, if they spend money on careful planning before a disaster and in careful evaluation after, this adds to overhead. If they put in place systems to improve efficiency and hire highly competent people, this adds to overhead. If they undertake fundraising campaigns to raise more money to reach more people, this adds to the overhead.  While nonprofits struggle to maintain daily operations and best serve their mission, the public demands that 100% of each donation go directly to help people on the ground.

Let me be clear.

I don’t think The Red Cross is helping itself by making public claims that 91% of all money raised is used for relief efforts.  In fact, the entire nonprofit sector needs to do a better job of communicating all that’s involved in their work and how they approach it. Websites like Charity Navigator only seem to make this metric more of a hindrance by emphasizing easy-to-measure financial metrics as an indication of nonprofit success.

For most nonprofits, outcomes are admittedly a challenge to measure. Websites don’t yet have the intuitive ability to discover the data points that define the best places to invest your philanthropic dollar. To discover organizations worthy of your support, you must consider what elements of a nonprofit’s initiatives are most important to you.

I am personally more inclined to support the organizations that do spend a little more on overhead costs. I want to know that they have invested in some strategic planning, that they utilize robust systems to track finances, that they are supported by smart and experienced people who pay attention to what happens on the ground, and make any necessary adjustments.

I cannot fathom the complaint that a portion of donations may support fundraising efforts. If my financial contribution helps to leverage additional resources for the cause of that nonprofit, I’m happy. After all, that’s the result I was aiming for when I made my donation.

Regarding the relief efforts of the Red Cross, the bottom line is how many people receive the kind of help that will get them back on their feet. The NPR reporter didn’t ask what the organization was doing for victims in Houston, what medical care they were providing for thousands of distressed residents or what lessons they were applying from past floods.  She didn’t ask about the Red Cross outreach efforts to attract more donors. She didn’t ask about their financial management systems or their logistics infrastructure. She just kept pushing on the 91% question.

Overhead costs are not a clear indicator of the success, outcomes, or value of a nonprofit organization, which is why I found myself yelling at my car radio during my morning commute. Too bad the reporter couldn’t hear me!

If you are interested in reading more on this topic, I suggest you read Dan Parllotta’s book Uncharitable and/or watch his TED Talk.