[Note: First in a series of a community discussion spurred by Dan Pallotta at the 2013 Partnership for Excellence Conference.]
The following topic, Overhead and Infrastructure, is the first of six topics that we’ll explore related to the current state and future of the nonprofit community via a joint project of Partnership for Excellence and the Nonprofit Resource Network (NPRN) titled “The Challenge of the Nonprofit Sector and Change in the 21st Century.” Click here for more information about this community discussion.
Overhead and Infrastructure
Why is it acceptable for the for-profit sector to spend heavily on "overhead" in the delivery of a product or service to the public yet the nonprofit community is rewarded for having the smallest "overhead" possible?
Is the issue of overhead a limiting factor on the ability for a nonprofit to scale to the size of the issue they are addressing? How would you view a nonprofit with 40 percent overhead that served millions versus a nonprofit with 10 percent overhead that served thousands?
What if a nonprofit raised and spent money for several years building a better infrastructure, service or product before ever actually introducing this to the public?
What are some of your/our assumptions about supporting overhead and infrastructure needs?
Guest Commentaries by Tina Frontado of Santa Barbara Philanthropy and Belen Vargas and Emilie Neumann of the Weingart Foundation.
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Tina Frontado on Nonprofit Overhead
My first thoughts when viewing a low overhead percentage: staff is underpaid, overworked, infrastructure weak. The second being: expense allocations are exaggerated, I hope for the latter ...
I’m not sure how the gold standard for nonprofit efficiency became linked to ridiculously low overhead, but it's never made much logical sense to me. Unfortunately, industry players either drank the Kool-Aid or have been forced to make it. We've come to believe that organizations providing life-sustaining, central, impactful services to the greatest in need, must do so with the limited resources, limited pay, extended work weeks. These are conditions we wouldn't find acceptable for those styling our hair or serving us cocktails.
As one who researches nonprofits for a living, those with impressively low overheads raise more red flags than not. I expect those soliciting philanthropic funds to have balanced and well-positioned cornerstones necessary for sound management, deliverables and growth. How can an organization successfully recruit and retain valuable talent, offer fresh technology, ongoing education and viable infrastructure without investing in overhead? It’s like running a marathon on 26 cups of coffee; you may finish the race, but you’re left dangerously dehydrated, in need of medical attention and eventually out of future races.
There are many moving parts to the world of nonprofits; in truth, it takes time and skill to accurately evaluate. Organizations come in all shapes, sizes, missions and structures, so the “at-a-glance” practice can never yield an authentic picture of those we’re seeking to know. Granted, there have been some who misuse donated dollars, but most are ethical and transparent organizations. We as funders must relearn and revise our beliefs around nonprofit efficiency, which unfortunately doesn’t come wrapped up in a neat little percentage.
— Tina Frontado is the founder and principal of SB Philanthropy.
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The Weingart Foundation on Rethinking Overhead
The Weingart Foundation believes that providing unrestricted support to well-led and well-managed organizations is one of the most effective ways to build nonprofit capacity and sustainability. In January 2009 and in response to the economic downturn, we began offering multiyear unrestricted core operating support to help effective organizations maintain and sustain core programs and infrastructure. In 2011, after two years of offering core support, we conducted an external evaluation that looked at 57 of our core support grants. Among other things, we wanted to understand how our grantees used our unrestricted funding, the impact of these funds to date, and the future need for core support funding.
What we learned from this review is that our core support funding allowed our grantees to not only maintain core programs and infrastructure, but our unrestricted grants also helped strengthen their capacity by: 1) using our funding to address organizational infrastructure needs; 2) providing the flexibility in funding to adapt, innovate and take advantage of opportunities; and 3) creating a grant review process that allowed for more open and honest conversations with us, which gave grantees permission to prioritize our funding to their greatest needs.
Many grantees noted that the vast majority of their funding is restricted to programs or services. The lack of unrestricted funding leaves many of our grantees starved and unable to build their ongoing capacity and sustainability. Our grantees shared that they appreciated the flexibility of our unrestricted dollars and most had prioritized a portion of our grant to build and strengthen their organizational capacity in a number of different ways (e.g. board and fund development, staff training, information technology, collaborations, planning processes, building operating reserves, etc.)
As a result of these findings, we began to adapt how we approach the review of core support requests. In addition to our typical comprehensive review of an organization’s governance, leadership, management, effective programs and practices, funding model and financial position, we now have a much more intentional conversation with our applicants focused on understanding their organizational priorities and strategies and how unrestricted funding will allow them to meet these goals.
The Nonprofit Resource Network (NPRN) asked how we would view a nonprofit with 40 percent overhead that served millions versus a nonprofit with 10 percent overhead that served thousands. It would depend on the organization, who it is serving and the effectiveness of its programs. In gaining a deeper understanding of each organization we work with, we move past a simple delineation between overhead and program costs, understanding that “overhead” is actually the very core infrastructure that can make an organization more effective and more sustainable. So we would look to understand what is included in that 40 percent overhead. Why is it important? What does it allow the nonprofit to accomplish? How does the agency sustain it? And how does it fit in the agency’s larger strategic goals and mission?
On the other hand, an agency with 10 percent overhead gets to some of the key questions we ask in thinking through the value of unrestricted core support. With so little allocated to core administrative costs, we would explore the agency’s capacity in the areas we know can make a nonprofit stronger, such as fund development, financial management, strong evaluation. And more important, we would work to understand why the agency has been unable to fund these core infrastructure needs. It is often a mix of many things: the difficult balance nonprofits must find between funding administrative versus program costs to meet community needs; foundation and donor support restricted to programs; government funding providing very little, if anything, for administration; location in a region with few resources and limited funding sources; and all of these factors contributing to a general culture of scarcity.
Thus a central part of our analysis is really understanding how a given organization runs and whether it has sufficient dollars — dollars that are unrestricted and flexible — to innovate and invest in their own organization. Not surprisingly, the vast majority of Weingart’s grantees, which are well-run, effective organizations aligned with the foundation’s focus on low-income and other underserved populations, generally do not have the unrestricted core support dollars they truly need.
Our proposition is that when combined with strong leadership and management, providing unrestricted multiyear core operating support is one of the most effective ways to build nonprofit capacity because these grants provide the “working capital” nonprofits need to sustain and improve their operations and necessary infrastructure. We let organizations know that Weingart core support grants are truly flexible and unrestricted, do not need to be spent by the end of the grant period, and may even be placed into operating reserves if that is what the agency deems to be a priority.
We continue to examine and learn how best to administer and evaluate our core funding. Consequently, we are in the beginning stages of developing an evaluation framework for our grantmaking, which we look forward to sharing once it is completed in early 2014. Offering unrestricted core support is central to Weingart’s larger strategy for supporting the capacity and important work of the nonprofit sector, which we believe to be a critical and key factor in the much larger, complex process of working toward a more equitable world.
— Belen Vargas is vice president of grant operations and Emilie Neumann is program officer at the Weingart Foundation.