Luke Douglas, Staff Writer
Individuals and governments have to continually make hard decisions on how to best support non-profits who serve a broad range of people depending on this mission. Monetary donations are a tremendous help, but which of the many deserving organizations should receive funding? We need to examine non-profits not by how much they spend on programs versus non-program expenses, as is the current paradigm, but rather on their achieved results.
Here’s why: imagine the last purchase you made – maybe it was a phone, maybe it was gas for your car, or maybe it was a hamburger. In buying that hamburger, you evaluated its price and its alternatives (like a sandwich or burrito). How much money will it cost? Will it taste good? Do I want cheese or no cheese? I’ll bet you the price of that hamburger that you didn’t think about how much of your money went into the hamburger versus the organizational overhead of the hamburger company. Who cares how much the burger shack paid for photocopies last year? McDonald’s, for example, spends just a third of every dollar on hamburger ingredients. The important thing is the end product – the hamburger – and what it cost you! And yet this is exactly what we do when we evaluate non-profits based on non-program overhead.
Why then are donors obsessed with non-profit overhead? Non-profit effectiveness should be evaluated not by what the organization spends on overhead versus their programs but by the positive impact they create.
Let’s look at two simplified, hypothetical vaccination organizations to illustrate my point – call them JabAid and VacciHelp. Let’s say both work with similar youth populations in Syrian refugee camps. JabAid has an annual budget of $500,000, spends $100,000 on overhead, and vaccinates 10,000 children per year. VacciHelp has a budget of $1 million, spends $400,000 on overhead, and vaccinates 25,000 children per year. Which is better?
By the traditional, overhead measure of non-profit effectiveness, JabAid trumps VacciHelp – JabAid’s overhead is only 20% of their budget, while VacciHelp spends 40% of their budget on overhead. Charity Navigator, a top non-profit data analytics organization, would rank JabAid over VacciHelp and would likely condemn VacciHelp for being so wasteful.
But the reality is VacciHelp is much more effective than JabAid on a dollar per vaccination basis! VacciHelp vaccinates at $40 per child while JabAid vaccinates at $50 per child. If you cared about vaccinations and you only had $40, where would you donate? I know my money would be going to VacciHelp.
Charity Navigator, one of the most popular rating websites for non-profits, writes the following about overhead: “We believe that those spending less than a third of their budget on program expenses are simply not living up to their missions.” But Charity Navigator misses an important point; those non-profit’s missions are not to spend as little money as possible on overhead – it is to do their programs well and create a positive impact. Such a statement is harmful to how non-profits are perceived and measured by stakeholders.
Charity Navigator and its supporters would counter this argument by saying that low overhead is correlated with strong non-profit performance and so it is a useful proxy. Perhaps, but correlation does not equal causation. In fact many other variables are involved with the success of a non-profit. It should not matter if a non-profit spends 99% or 1% of their money on overhead, as long as the programs accomplish tangible, beneficial outcomes for the underserved. Non-profit organization should not be penalized just for their funding structure without thoroughly examining their program performance.
A Grey Matter Research Consulting report highlights the focus many Americans have on intentions over results. Their study found that “average American thinks non-profit organizations spend 60% more on overhead than they reasonably should” – yet the study doesn’t mention what Americans think of current non-profit programming outcomes. This is like examining investments based solely on the capital structure of a firm without looking at what the business does.
Yes, focusing on overhead ratios makes it easier to compare non-profits across different, hard-to-equate issue areas, but an overhead measure gives no information on what is actually happening on the ground. To be an informed and effective donor, moving beyond simply assessing overhead is required.
Donors large and small need a new mindset that preaches outcomes over draconian financial targets. Lives aren’t improved by hitting a magic percentage somewhere on a self-reported financial statement. There are too many people in the world that are not getting the services they need to live a full life. Donors need to focus on what is really important: the people that non-profits are supposed to serve.
Luke Douglas is a third year MPA and MBA candidate at the NYU Wagner School of Public Service and NYU Stern School of Business. He is passionate about non-profit focus – finding what an organization does better than anyone else and building from it.