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The Third Sector Report By Jeffrey Wilcox

Enough Is Enough: The Nonprofit Overhead ConundrumJeffrey Wilcox - The Third Sector Report

May 21st, 2013 – A columnist for The Seattle Times recently suggested that drawing conclusions about a nonprofit organization based on a single overhead percentage is about as useful and fair as interpreting one’s own health based on a composite cholesterol score.

While society has wised up to understanding that it’s the numbers behind the composite cholesterol reading that are the real indicators of overall health, the same can’t be said about wising up to the fact that a nonprofit’s true efficiency can’t be sized up by one number.

Overhead generally refers to the costs associated with operating an organization. And, because there are differing opinions about what the reasonable costs of a nonprofit should be, there are growing numbers of good organizations scrambling to fit subjective, if not arbitrary, guidelines.

The intense debate about and scrutiny of overhead has resulted in a “vicious cycle” gripping the nonprofit sector, according to a study released by The Bridgespan Group in Boston, characterized by unrealistic expectations, inaccuracy and extreme pressure to conform. An examination of 220,000 tax forms revealed widespread inaccuracy and inconsistency in reporting overhead, with at least 75 percent incorrectly reporting costs associated with foundation and government grants. Further, a sampling of nonprofits that reported overhead rates at 13 to 22 percent were actually found to be operating at rates of 17 to 35 percent.

These findings shouldn’t come as a surprise. Moreover, the enormity of the research and its conclusions should teach a few lessons to those who find delight in pouncing the Third Sector with their overhead obsessions.

The first lesson is acknowledging that a nonprofit’s overhead rate is not a one-size-fits-all proposition.

“Nonprofit” is a tax designation, not an industry. Holding every nonprofit hospital, museum, homeless shelter, childcare center, nursing home, private school and youth group to the same standard of what constitutes reasonable overhead has the same sensibility as comparing the overhead of a hardware store to a construction company simply because they both share a “C Corp” designation.

Lesson number two is realizing, like cholesterol, there’s “good overhead” and there’s “bad overhead.” Good stewards understand and regularly monitor both numbers.

Solving the problems of society, educating young minds, cleaning up the environment and supporting creative expression is not going to result from a complacency with underpaid jobs, antiquated systems, inadequate facilities and few incentives to attract and retain great minds capable of changing the world.

Lesson number three is understanding that nonprofits, like businesses, cannot fulfill their missions working under a double-standard regarding overhead.

Isn’t it interesting that no entity in the service industry has ever reported overhead to Standard and Poor’s as being less than 20 percent? And, isn’t it interesting that most of the policy-makers who are calling for nonprofit’s to run their businesses with overhead in the teens or less haven’t found a way to successfully run their own companies on that formula?

The most important lesson is understanding what number, at the end of the day, matters most: It’s called “Measured Impact.” When an organization asks for exemption from taxation, it’s with the intent to provide community benefit. Its measured impact on the community is its proof in the pudding. I look forward to the day when nonprofits are encouraged to set incremental impact numbers for their organization first and then encouraged to calculate the reasonable overhead that it will take to reach those targets. I also look forward to the day when funders see their dollars as leverage to create economies of scale for greater impact, rather than a reward for attempting to do something with next to nothing.

Sadly, those days will be far in the future if nonprofit organizations are continually forced to hide their costs like needles in a haystack of other numbers in order to win public support.

Overcoming the overhead conundrum begins in the boardroom of every nonprofit organization if it’s ever going to be resolved in society. It’s time to start aggressively defending what is reasonable rather than apologizing as if spending good money on good people and good systems for the purpose of achieving sustainable good is unreasonable.

Demonstrating low overhead is not going to change the world. Demonstrating efficient high impact will.

(Jeffrey R. Wilcox, CFRE, is president and chief executive officer of The Third Sector Company, Inc. Join in on the conversation about this article on Facebook or drop us a line at jwilcox@thirdsectorcompany.com)