The overhead myth: How it deceives donors, constrains charities & hurts everyone.

The overhead myth is the almost universally-accepted notion that the less a charity or nonprofit organisation spends on overheads or administration, the more effective and virtuous it is. The problem, of course, is that the overhead myth is just that. A myth.

Common sense and business logic alone should be enough to convince most people that there is no merit to the myth. But the data, too, supports this conclusion. Analysis by Giving Evidence in 2013 revealed charities that invested less in administration were more likely to be poor performers.

Additionally, a five-year study by Urban Institute's National Center for Charitable Statistics and the Center on Philanthropy at Indiana University highlighted the unintended and potentially disastrous results of nonprofits starving themselves in order to meet the unrealistic expectations created by the overhead myth. 

But back to common sense. 

We accept without question that for-profit organisations are going to spend money on rent, on electricity, and on qualified staff as absolutely essential parts of achieving the organisation’s objectives. We understand they need to invest in accounting staff, the very people who are going to prepare the financial accountability documents that we all want. They need to invest in marketing to tell more people about their products and services and then get them to hand over their money. If they want to innovate in order to tackle big challenges and embrace big opportunities investment in outstanding leaders and talented, high-performing staff is essential and expected. 

But the second we talk about nonprofit organisations we throw all of that real world logic out the window and start applying metrics that are easy to create but absolutely meaningless. The overhead or administrative metric provides zero indication of whether an organisation is making gains towards its overall mission, whether that’s ending homelessness, curing cancer, saving a reef or building a children’s hospice. And yet, it persists.

In the United States, the overhead myth is finally being challenged. At the vanguard is Dan Pallotta, who delivered a compelling and confronting talk about the overhead myth at TED2013. Here in Australia, however, the overhead myth continues to be a pervasive view of the way to assess a charity’s effectiveness and, ultimately, its very legitimacy. The reason is fairly simple.

The overhead myth gains strength from the very circumstances it creates. 

People who fund charities and nonprofit organisations are looking to change the world. They want assurance that their donations will have the greatest possible impact, and the absence of promoted alternatives has conditioned them to believe that overheads are the legitimate measurement to employ. This then encourages nonprofits to underspend and starve their organisations of the strategic investments they need to make to achieve their mission. 

It also encourages them to under report or creatively account for their expenditures to lower their reported overheads. This only compounds the problem. As the benchmark for overheads falls lower and lower, the already unrealistic expectations of funders rise higher and higher. With no valid, articulated alternatives the media accepts the legitimacy of the overhead metric and reinforces it to donors once more through reporting on charity overheads. Donors read the reports; the cycle begins again.

It would seem fairly evident that the best place to intervene and break the cycle is at the source of the money – the funders, including donors, foundations and governments. Everyone involved benefits when this group is informed of the consequences created by the overhead myth and has access to the studies that show organisations making strategic operational investments are more likely to achieve their mission.

And yet, no one is talking.

Individual charities are the natural choice to start the conversation, but you can’t blame them for keeping quiet. There is a dramatic power imbalance between funders and charities, leaving many charities unwilling to critique donors or challenge the status quo. 

“Whether you are giving away $10 or $10-million or $10-billion, there is a power asymmetry.”

— Susan Desmond-Hellman, leader of the Bill & Melinda Gates Foundation

In a market environment where many charities are championing claims that ‘100% of your donations go straight to the field’ it is potentially dangerous to be the lone charity challenging the overhead myth and declaring a commitment to strategically invest in the organisation’s operations.  

So the overhead myth remains unchallenged in Australia. Until now.

In December I delivered a TED Talk at TEDxSouthbank 2014. In Busting the Charity Overhead Myth I sought to drag the overhead myth into the spotlight and expose its flaws and irrationality.  To articulate all the things that nonprofits would like to say if the power imbalance between funders, donors and media did not make them fearful to speak out.

The talk alone cannot bust the overhead myth without the support of the nonprofit sector.  The challenge now is to work together to share the information with the people of Australia. 

If the feedback to the talk is any indication, once they see the overhead myth for what it is donors eagerly support their preferred charities’ efforts to become more strategic. Even if it means raising overhead.  They are, after all, passionate people looking to do good. 

Left unchecked the overhead myth is damaging to everyone. It deceives donors, constrains charities and hurts the people who would benefit most from organisations achieving their missions. If we are to succeed there must be a whole-sector push that leaves no individual charity to stand alone against the overhead myth.

A version of this post appeared as an article in the February issue of ThirdSector Magazine.

Juanita’s TED Talk ‘Busting the charity overhead myth’ can be viewed at goo.gl/z8YL2d

Juanita is presenting a free webinar entitled 'Why nonprofits should challenge the overhead myth, and how to do it' on 7 May 2015. Registrations are essential.