Tackling Overhead Together
Grantmakers and nonprofits must come to a mutual understanding of the true costs of change.
Grantmakers at Donors Forum—the Illinois state association of nonprofits, grantmakers, and advisors—want their dollars to flow to impact, and trustees often ask them for due diligence on the organizations they fund. As a result, these grantmakers historically have looked to low overhead costs as a signal of dollars well spent. Nonprofits in our purview want to ensure that there is sufficient funding of the kind of overhead that allows them to do their job (backbone activities such as training people, tracking results, and administering finances). Both groups have had separate, highly charged conversations for years, and last year, we did something unusual, yet obvious in hindsight: We brought the two groups together.
Prior to this, we at Donors Forum perpetuated the silos. We hosted trainings for nonprofits on understanding their true indirect, or “overhead,” costs, and factoring in all the support they needed to run effective programs—often more than they initially calculated. We hosted similar conversations for grantmakers. But, a little fearful of exploring such a sensitive topic at the core of the funding relationship, we didn’t bring the two groups together.
So last year, we launched a year-long community of practice (CoP) called Real Talk about Real Costs to discuss indirect nonprofit cost issues; it brought together an equal number of grantmakers and nonprofit leaders to tackle the issue together. The CoP (about 30 people total) spent the first part of the year getting to understand each other’s perspectives. They investigated the problem: Do nonprofits know the real costs of their outcomes? They learned the challenges: How do we help the boards of grantmakers understand the importance of this funding in building strong organizations? And they listened to each other.
The stories (and endless cups of coffee) they shared and the relationships they developed led to a joint understanding of the real costs of nonprofits’ impact in the community and donors’ commitment to changing their culture and practice in valuing them. Education on financial reporting, conversations with sector thought leaders, and the use of case examples all helped deepen their understanding and become champions for fully funding overhead costs in nonprofits.
One of the biggest ah-has for both donors and grantees in the CoP was that they lacked effective messaging. There were few tools to communicate what was truly at stake in fully funding a nonprofit’s mission. To begin to rectify this, the group created a short video to start a conversation between grantmakers and nonprofits across Illinois that others were having in other places around the country.
Video: Donors Forum on funding the true costs of results for nonprofits.
Following the production of the video, the CoP convened more than 300 nonprofit, grantmaking, and government leaders to focus on this issue at an afternoon summit. The gathering brought together leaders to share stories, build relationships with those on the “other side,” and shift the conversation away from the notion that nonprofits with low overhead are more effective, and instead focus on how we must accurately gauge costs to achieve outcomes.
We’re committed to keeping this talk going and making change locally in Chicago and Illinois. But it’s not a conversation that ends here; we’re part of a broader national movement of concern about the misuse of overhead ratios as a sole proxy for nonprofit effectiveness. In the coming months we will follow up on our initial work, and look at ways to expand our reach and provide practical solutions for how nonprofits can tackle challenges related to overhead. We’re thrilled by the attention this issue has garnered (through the recent Overhead Myth campaign and other work), but to really move forward, the conversation needs to happen everywhere.
In addition to the in-person work together, we suggest some immediate actions that donors and nonprofits can take to adapt their practice in ways that respect the full costs of creating change.
- Move away from arbitrary funding limits on nonprofit overhead in future grants. It is shocking how many funders anchor on 10 percent for overhead as a supposed “best practice,” rather than on what grantees need to deliver great results. By all means discuss what you are willing to pay for, but encourage grantees to ask for what they really need and to justify their request; you may be surprised by what you hear.
- Take advantage of new tools that draw wisdom from stakeholders, experts, and analysts. It is possible to go beyond ratios to results. If you must focus on overhead figures, do so only as a filter for fraud, not as a proxy for performance.
- Learn from other foundations that have shifted their practices: This blog from Kathleen Enright of Grantmakers for Effective Organizations (GEO) looks at Weingart Foundation’s journey in the context of the recession funding environment. GEO, Donors Forum, and others offer opportunities to come together with peers and wrestle with these questions.
- Get rid of the pie chart showing fundraising and administrative costs as a “we’re lean” sliver of your overall spending. This kind of depiction reinforces unrealistic expectations about costs and trains donors to pay attention to the wrong things. Instead, focus on communicating—visually and in writing—the impact of your organization. Demonstrate that impact with numbers and stories. To this end, consider sharing data through the GuideStar Exchange; in particular, watch for the five Charting Impact questions, the emerging standard for structuring the how and why of nonprofit purpose.
Video: Philanthropist Josh Beckenstein describes why funding management is important for impact.
If you are or want to become part of the movement to fund the true costs of the good we aim to achieve at Donors Forum—breaking cycles of intergenerational poverty, protecting our environment, lowering crime, or mitigating disaster—you can find online resources about our effort on our website.