Donations, overhead, and the “feel good” factor

Do we really want to compete for donors on the basis of low overhead?

I had the good fortune at SOCAP 10 to meet Barty Jan Skorupa of Groundwork Opportunities. In the course of our conversation, he shared with me that when he does a fundraiser, 100% of proceeds go directly to programming. A few years ago I would have said “great!” but after hearing Dan Pallotta give a rousing “social benefit folks deserve to get paid, too” talk at the 2010 SEA Summit in San Francisco, I’ve started to actively wonder how nonprofit leaders can pay the rent when calls of “no overhead” carry the day.

What I took away from Dan’s talk is that overhead ratios are a poor measure of impact. And it makes sense, when you think about it: a smart for-profit company that is going to launch a critical new venture understands the value of investing properly and “doing it right,” and thus they raise big money in order to be as successful. Guess what—a lot of that money goes into infrastructure building and paying competitive wages to smart people, in other words to “overhead.”

But for-profit’s get it—they swing the big bats to get the big results. Dan made the point that the non-profit world often has a meek “spend as little as possible” attitude, based on the belief that “less is best” when it comes to overhead.

Now back to Barty. Here’s a smart guy who could be making good money as a consultant to for-profit companies, who runs this social benefit org “just because.” And I couldn’t help but ask him, “so how do you pay your rent?” because it just seemed unfair that he should have to scrape by. Fortunately for Barty he’s started to attract some grants and institutional money, but it’s still early, and even paying the rent is tight.

Then it occurred to me the next day: the question of whether or not 100% of all “event proceeds” go to programming is really a question for accountants. Let me explain.

Consider two $1M a year social benefit organizations that are totally equivalent in over way, except for this:

  • Org A says “20% of all money we take in, from funders and from events, goes to overhead. The other 80% goes to programs.” So that’s $200K a year to overhead, $800K to programs.
  • Org B says “100% of the money we take in from events goes to programs. And 100% of money we take in from funders goes to overhead.” Let’s say the funders are chipping in $200K a year, and the events raise $800K a year.

Now we have two equivalent organizations, right? Well, not really. Why? The psychological factor.

Here’s my take: Barty is playing it smart by saying “we have no overhead” because the typical individual donor thinks that’s a good thing, and likes the idea of all of their money going “directly to the cause,” even if people who run these organizations in fact need to eat, get medical car, and have a place to live. The casual donor doesn’t really care–from a psychological standpoint, they want the emotional gain from the “direct impact” they are having.

Thus by using the rallying cry of “all funds raised at the event go straight to programming” he can unlock funds that otherwise might not be donated if they went, even in part, to “overhead.” As much as I agree with Dan that social benefits folks also deserve to get paid, unfortunately I doubt we’ll see human nature change such that the average donor cares about infrastructure.

Having said that, I realize that whenever a friend brags about how their charity of choice “has less than 1% overhead” I engage them in a conversation about whether that’s true, and if so, what that would actually mean for the quality of the organization. I’m trying to do my part to get the people around me to think a bit deeper about these issues.

Nonetheless, consider—do you care how about how much overhead Starbucks has, or do you want a good coffee at a good price in a nice shop? If, when it comes to donors, social benefit organizations are at least partly in the business of delivering “feel good,” in return for donations, then a “100% goes to programs” strategy can be a good thing.

Note: since writing this article I finally sat down and read through Dan Pallota’s thought provoking book Uncharitable in which he goes into more detail on this phenomenon of overhead ratios and accounting tricks. He also describes the unsettling case where non-profits that don’t engage in these tricks can lose their funding because they appear to be “inefficient” when in fact the whole “minimize the overhead” frame is what’s actually at fault. It’s time to get out of the overhead game and focus on impact.

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