Standing Beside Alaska's Non-Profits

Supporting Overhead IS Supporting Programs

There are productive conversations occurring in our state and our sector about the economy and its impact on organizations – and there are other conversations that aren’t so productive. I have been pleased with the approach of many of our nonprofit leaders to their budgets and to figuring out ways to find stability and resiliency in the face of uncertainty. I have seen new thinking, creative ideas, and a recommitment to the best practices of our work in building operating reserves, focusing on unrestricted cash, and diversifying revenue. Unfortunately, while many in our sector are setting a great example, there are still too many conversations about how our sector is wasteful and not accountable or transparent enough in the way we spend our resources. I hear and read most of this from those outside our sector. I could be mad or disenchanted but instead I ask: “What could we do differently as a sector to change the story?”

This isn’t a new set of criticisms. It is likely that most of you have heard of the overhead myth. But how much do you reinforce the myth in your own organization? For those of you new to the myth, the official definition captured on overheadmyth.com in 2013 is “the false conception that financial ratios are a proxy for overall nonprofit performance.” This definition is from the donor/funder perspective. Kate Barr, executive director of the Nonprofits Assistance Fund, also writes about how overhead should be reframed as core support saying “the expenses that are generally accounted for as overhead are expenses related to critical functions of any nonprofit, such as governance, strategic planning, accounting, and development (fundraising). The expenses required for evaluation and measurement are usually also accounted for as administrative expenses or overhead.” I agree with Kate. I see the translation of these two definitions within the sector as: “I can have fabulous quality programs without quality staff or infrastructure to manage them.” We often get to this translation because we are afraid – either consciously or unconsciously – that if we spend funds on operations, then our financial ratios and decisions will be judged unfavorably by others.

Even when we know that this myth creates a starvation cycle for nonprofits and is wholly unsustainable, we are encouraged to live it for many reasons. It has seeped into our overall sector culture both in the boardroom and through the words and actions of staff and volunteers. We continue to be influenced by misguided donors who say things like: “I want 100% of my donation to go to programs” when what they are actually saying is: “I am proud I didn’t spend money on staff, supplies, or infrastructure.” I often wonder how these donors run their own businesses or work life if they don’t believe in the support functions that make their work possible. Other ways we continue to live the myth is when we are encouraged in some grant applications to not tell the whole truth about what it costs to run a program or, even when we do, to be told by the funder that they won’t cover the actual costs. This has proven to be true with many of our government contracts across the country, although Alaska does better than most according to a study conducted by the Urban Institute.

These external forces are part of the reason the myth continues to exist, but the other reason is us. We reinforce it. We do this when we separate our quality programs from our quality staff in donor conversations – when we talk about overhead with an apologetic tone rather than with confidence that donors are investing in a system that works effectively and efficiently – when we fail to offer a living wage and see a revolving door of great employees – or when we create workplace conditions that feel degrading or don’t support the hard work that is occurring in those spaces. All of these things happen every day, and for many of us it feels normal and part of what we signed up for when we decided to work in the sector. I find one of these points truly disheartening. It is some variation of: “I sure don’t work in the sector for the pay.” What I hear is: “I don’t expect to be paid what I’m worth.” Our pay is highly scrutinized. We publish our top earners in our 990s and in our grant requests. Excellent! It is critical we are transparent. But why shouldn’t nonprofit workers expect a living wage? If they are running organizations with equal-sized budgets and staff, why is it okay for the CEO of a for-profit company to make significantly more than a nonprofit CEO? Is the work less? Is it easier? Does it require less skill? NO. And yet, here we are. We accept the myth and we perpetuate it.

In our work as capacity builders, we know that our services are generally considered overhead. These include our assistance in developing skills in leadership, management, board governance, accounting, fundraising, marketing, evaluation, human resources, or in carrying out legal due diligence. This is the landscape of our work. We come from the perspective that capacity building is the opportunity to strengthen the backbone of your direct service so that you’re functioning with maximum effectiveness and efficiency. In our work, we see lots of promise and amazing leadership – we also see the results of the overhead myth in action. Examples abound of under-resourced organizations that skimp on staffing and training because it takes unrestricted “overhead” funds to pay for those things. We see staff spend hours trying to get a lunch donated instead of calculating their hourly rate to understand they just spent more getting the donation than the donation itself – all in the name of saving money. We see boards and staff who would be far more efficient and effective with planning tools in their hands, but are unwilling to take the time or invest the financial resources to accomplish this. We also continue to see far too many messages to individual donors and funders that neglect to paint the whole picture of what it means to do mission work. Overhead continues to be bad word.

Recently, Kit Gillem, Senior Program Officer of the Murdock Charitable Trust, and I wrote a blog for the Trust’s website on the importance of capacity building. We started by agreeing on a definition of capacity building and quickly moved to why we both thought it was so important for organizations and funders to engage and invest in it. Proudly and with full transparency, I share with you that the Trust was a significant founding investor of Foraker, along with Rasmuson Foundation, and both funders have continued to invest not only in our capacity but also in the capacity of many others across Alaska and in the Northwest. Kit and I also quickly agreed that to have great services, an organization has to have great infrastructure and great staff. Let me state that another way – to have great programs, we must have overhead. One is not separate from the other – they are symbiotic. An investment in one is an investment in the other. Do all funders pay for these overhead costs? No, they don’t. But paying for it and understanding and acknowledging the importance are two separate conversations. We start to overcome the myth with acknowledgement.

I certainly could write too many stories about abuses of spending. There are bad actors in our sector just as there are in government and in the business world. I could recount stories of mismanagement of funds and abuse of power, again just as in any other sector. So I am not saying just go spend freely and forget responsibility, accountability, or transparency. Instead I am saying, let’s collectively stop apologizing for our good work. Let’s stop telling our donors half the story about the cost of doing business – even if they won’t fund it.

Let’s stop insisting that we can do more for less and with fewer staff. Let’s start telling the story of how we are changing lives, making the communities we live in healthier, safer, and more connected. Let’s make sure we are fully transparent and accountable not just in filing with the IRS and the State of Alaska, but also in truly understanding the costs of doing our work. Let’s tell the truth not just to our staff and board about those costs, but also to donors. Let’s do a better job of explaining to donors that their gifts are transformative not just transactional – that an investment of any dollar amount does pay for overhead because that’s how the great work gets done. Let’s focus on trust and accountability – they go together. Let’s have an answer we feel proud of when someone questions why staff is paid or how, indeed, 100% of their donation is going to program and that includes overhead. Let’s thank the donors and funders who understand the importance of how the work gets done and how that leads to the great results we all want in our communities.

Myths are broken because we are all willing to tell the truth. How will your story change?

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