Episode 280: Truly Fighting the Term Overhead in our Nonprofit Work
I'd like to welcome you to this edition of the podcast around with Randall. And of course, I'm Randall. I covered today's subject in generalities back in February of 2022 with episode 110, talking about the concept of overhead. But it's come up in massive ways with different clients and I'll tell a few stories along the way here around where overhead is driving strategic decisions.
It's deeply affecting philanthropy. And what's happening is, is that we're choosing to look at a single number, maybe a ratio, maybe a percentage overhead can be looked at and classified or measured in different ways as the dominant choice as to what we're going to do next, how we're going to raise money or grow raising money. And what's happening is, is that decisions are being made that are counter intuitive to what actually is the truth.
Today, we want to take this apart and really get into some really tactical ways at the end of the podcast, as we try to do each and every episode of, what, six things you can do to really fight this overhead discussion. And it's not just amongst a small group of leaders, but amongst donors, board, executive leaders to have a different level of conversation.
So as we always do, we start at the top, work our way down through the problem, why it must be addressed or whites, the issue of the day. And then what are these tactical solutions? There is a belief that profits should be incredibly cheap, that the ability to create or to realize lower administrative costs, that that fundraising costs, when they're too high, signal ineffectiveness that donors are indicating, or so we think internally that the more we save, the better we are that grants in granting organizations, more importantly, granting organizations use this as a overly burdensome determinant of granting opportunities or choices.
These watchdogs, charity watchdogs, which I'm all in favor of online use this as a marker to say, oh, they're highly efficient. I recently heard my mother talk about this at her kitchen table as she was talking about some of her therapy, and she's very generous to ask my opinion every once in a while what I think, and she talked about that, and we'll hear me talk more about this.
I challenged that and said, wait, wait, wait, mom, what about this? Wow. I didn't think about that. Overhead is a way. I'm not saying it's a terrible way. I'm not saying we should eliminate it as a metric, but as a simple way that people have learned or thought. Think to learn to judge a charity. And that when we look at the data, like my mother, 61% of donors say they choose charities or have implications of their choice are directed toward or based upon overhead, and that many expect overheads to be less than 20% 15%.
Which brings us to kind of where the problem is, does overhead really define impact? Does overhead define what the mission's outcomes are?
If we have low overhead, does that mean we're affecting more people? And what those of us on the inside would tell you is, again, I'm not advocating for not tracking overhead at all. But if that's your soul determinant, you're missing out on all the opportunities that come from investment, from growth. What ends up happening is when we use overhead as such a driven factor in our decision making internally, it creates what I might think of as the starvation cycle that underinvestment and staff systems support reduces impact in innovation.
It doesn't allow for growth. And if you were to invest wisely and I'm not again saying be inefficient, I'm not saying be stupid. But if we would invest like the for profit industry where we may not get the return that we're looking for in year one, but by year three, four and five, we see this growth, what we end up with is a better opportunity to serve our mission, to serve the community as a whole.
This issue of overhead is not a financial issue. It's a belief system issue. It's almost to the level of your mission statement level issue. And this belief systems reinforced at times by donors, by outside agencies, by nonprofits, by rating structures, these watchdogs, by executives who don't understand what we're talking about. And what ends up happening is, is that we create immense amount of frustration about what we think might be possible if we have just a little bit of investment.
So what are we really talking about and where do we have to start? And so this is kind of four thoughts around the bigger picture to get to the tactical. The first is is that if we don't address this we are number one risking internal consequences. I'm hearing more and more as the economy has shifted in the last couple of years.
Inflation has been a challenge that donations are down in some places or a lot of places, particularly in the numbers that the first and only thing we hear often is we got to cut expenses. And what that's doing is, is it's risking talent that the inability for us to be able to recruit and really retain high level performers.
I did a study which you can find on the website, at Howlett philanthropy.com that I survey by 1547. Don't quote me on maybe two off major gift officers. And what came out of it was they're underpaid. They feel like they're underpaid, particularly the ones that are delivering ten to 15 to 20 times their salary. They're like, I'm not doing this anymore.
I am an asset. I deserve to be paid a reasonable level. I've had a client recently who did not promote fully the internal candidate. The right choice to the full position of the chief lands officer. They gave them a kind of a subtitle compared to others in the Leadership Executive Group, and thus was able to cut their salary.
Now it's, I think, lucky because I think she's the right person that was chosen. But to be candid, it was kind of insulting. And does that compromise her down the road when something else comes about? And it will, because she will be successful? This also ignores things like investments into operating systems. It limits scale. I have another client who has a tremendous opportunity with grants, but they don't have the resources to hire.
And by the way, I'm recommending they don't hire a full time grants person. It's not the right fit for their environment, but I know the immense amounts of money that are available to them through granting, but their staff can't do it. It's not large enough. They're already being pulled 61 ways from center. And the CEO keeps saying, well, it's just an expense.
And I'm like, how do you expect to raise more money if you don't go ask the people with the money? And so this idea of internal consequences is affecting not only the staff, but it's affecting their decisions in budgeting and in bringing in outside help, which would actually be cheaper, about half the cost that could return a 10 to 1 ROI in probably a year, year and a half.
The second thing it happens if we don't do this correctly is what I would call external consequences is, is that it puts so much pressure on trying to increase the nemesis of unrestricted giving that I've got another client where we're dealing with this, where literally the CFOs like this, they're they've raised all this money for, for, for, for nothing.
The things that don't help us pay the bills. I'm like, wait a minute, were these things you actually want it needed? In the next 3 to 5 years, you were going to spend money on them at some point anyway. And the answer is, well, yes, but not today. And I'm like, well, wait a minute. Your ability to fund things internally to reduce overhead is having consequences with what your, your donors are telling you, creating a misunderstood misalignment or a misunderstanding about what actually is the priority over the over the long term, or maybe the strategic long term, three to 5 or 7 years, and it's creating competitive disadvantage.
It causes immense misalignment between donors in the organization. Number three is, is that we're already seeing initial movements around or away from this idea of overhead being such a dominant factor in decision making. I give a lot of credit to Dan Polenta, who, if you have not seen it's worth it. It's about 18 minutes. It's a Ted talk.
You can Google it. And then a movie came out of that about 2022 about the same issue. But the 18 minute Ted talks for not phenomenal. I've used it with boards for many years where he talks about this idea of overhead and why we're crippling ourselves with it. I mean, he was kind of out on the forefront of realizing this was a massive issue, and we need to deal with it.
What we're finding is evaluators are moving in that direction. It's that worrying about overhead. And we're talking about major granting organizations, even some associations. We're putting out best practices, really talking more about ROI. An impact. How do you tell the story of what you actually do? This is really true in post pandemic funding decisions that have been, I think, more open, particularly if not some nonprofits, were deeply affected by the financial constraints or issues relating to the pandemic around supporting operating dollars that are necessary to work.
The fourth thing is, is that nonprofits, if we just sit and wait for this trend to continue, as I talked about at number three, the sector moving towards less impetus slowly towards dry or towards overhead being the sole determinant. If we wait for donors to change, nonprofits will suffer, which means we have a responsibility to help change that message.
We can't just sit back and wait that if we do, we put in jeopardy our funding mechanisms of philanthropy, fundraising, which means we need to reframe the issue. And this brings us to our six tactical things you can do to really move the needle on getting away from overhead. Being such a dominant conversation. Again, I'm not advocating not measuring it.
What I'm advocating is, is that there are other ways to talk about it and to measure the impact of the organization. So we'll start at the top. Number one is reframing overhead as a capacity investment. Dan Polenta uses in that video that I was mentioning, the 18 minute Ted talk, the example that he experienced where if you invested in the things that drive the most revenue, you don't just increase the efficiency of the organization, you increase the scope, the size of the impact he uses on the graphics circular pie or, you know, pie charts.
The size of the pie gets bigger. So part of this is vernacular language that we have to stop talking about overhead. And we have to start talking about talent and growth and capital investment. When you think of a for profit company looking to grow, they don't talk about overhead, they talk about we're going to grow by investing in ourselves, by bringing in the right people.
And that in some ways we need to tie overhead to mission delivery. Our responsibility as organization is to do more, not less. And to do that, we've got to grow. And so things like technology and HR, growth impact, those are investments in us for efficiency, effectiveness and more. Impact language can drive perception much more quickly than data does, because if we just wait for the data, we have a period where the vernacular takes off, takes over overhead, our overhead has gone up, but we have to wait to see the impact shift it.
You got to get the language to match the timing before you can measure the impact first. Reframe overhead is an investment capacity growth impact investment. The second is that you need to lead with these impacts and outcomes, not ratios. Now, that may seem counterintuitive, particularly when we talk about gift officers that we talk about in the first year training on pipeline and portfolio development.
We're looking for a one and a half to one return. And then year two, it's 2 to 4, 2 to 5, and you buy your three one anywhere between 5 and 10. If you can get there. I'm talking about the organization as a whole.
We need to think about measuring what we do and things like cost per outcome. When we serve a meal in a food kitchen, what was our cost? How much scale was achieved? How much did we grow an impact? People long term impact? This is one that I get really, aggravated by with clients, particularly with boards, when they're just dealing with the moment.
I'm like, no, no, your job is to think about it three to 5 to 10 years in length. And if all you do is think about the operational effect this year. I had a meeting this morning about this where literally I'm looking at someone saying, hey, if you would stop looking at the operational delta, the gap between what we have and what we need to raise and start looking at what the vision is, we might be able to get to where we need to go.
We need to align this with expectations that are driven by results, by impact. Overhead ratios alone are poor measurements of long term performance. There are decent measurement of knowing what we're doing today, but if our goal is to grow, then they actually are counterintuitive, which is why we have to change, not talk about ratios, but get to outcomes.
Number three is to educate donors directly, consistently, all the time in major gift conversations, board engagements and reports. And you can do so with simple language. Low cost does not equate to high impact. Think about that. Just those I think seven words.
Low cost does not equal high impact. If we just use that in our conversation. When somebody says about overhead, just those seven words, think about the next series of discussions that come.
We need to normalize that. Nonprofits are businesses and they have costs now. We don't want them to be crazy or outlandish, and we need as much as possible, when reasonable, to go towards the outcomes that we're pursuing. But that can include investment in growth, in efficiency, in impact. But we need to educate our donors as to why that's important.
Number four is build funding models that can support the full cost. So there's the tactical piece of trying to increase your unrestricted giving. But we've talked about that often. But I think the more important thing is we need to talk about the price of programs reflected true cost. I have another client that's got an auxiliary service. It's part of their organization, mission driven, very important, and produces tremendous outcomes that align with the mission.
But the person running that part of the organization is struggling to understand that she's trying to justify her costs, but she doesn't want to pay as a part of her budget cycle. That infrastructure, H.R costs, accounting costs, finance costs, technology. That's part of that part of the organization. No no no, no. But you're using it. And I'm in discussions with her number in terms of business planning.
So you've got to account for it. But number two it's okay to talk about it. Typical nonprofits will spend ten, 15, 20% on operations. But what we fail to talk about is is it incredibly large? Nonprofits can spend more than that to grow, but it has to be accounted for internally and discussed as we talked about it, number three externally.
But we have to be honest about what these costs actually are.
Number five is all about messaging our boards. Our leadership is ensuring that, first of all, there are no overhead myths and that we're equipping our volunteers almost like elevator speeches with the language and the data to be able to X to be able to explain why this isn't a problem. We're back to the seven words a board member saying if someone were to challenge them, you know, low cost does not equal high impact.
We're in the impact business. We want outcomes. So we're investing to grow. This really isn't about a fundraising philanthropy issue. When we talk about the board and the leadership, it's a governance issue. It's about who we are and what we believe and how we articulate that, which is all about governance. Having the orientation to be able to explain it, having regular updates so that there's messaging points, having notecards to help people if they need to be able to have a reference point, to be able to speak to the issue.
Those are more governance issues than they are philanthropy or development, but we don't see them that way. Number six is demonstrate disciplined investment. And what I really talking about is being able to tell the story of when the organization did invest it grow, it made more impact that it improve results. We're back to the example I talked about probably ten minutes ago around a client with granting opportunities, and I've had to learn how to change my and this particular area as a consultant, hoping to help them get to where they need to go from a funding perspective, to say things like to the CEO, can you not afford to go get that million dollars or half $1 million that is probably out there? Do you have other revenue sources that I'm not aware of?
You know, when we hired that person in within three years, they raised X amount of dollars.
So it's almost like you're doing a before and after comparison. The disinvestment in philanthropy, investment in fundraising led to revenue growth. And that by investing in our staff, we have proved improved outcomes. You might look at this from a salary perspective, like you lost somebody really great as a chief philanthropy officer. You bring in someone because they cost less, but the numbers diminished.
How do we use this as an understanding that investment into people outreach technology is not just overhead. It's about growth. And this is all about transparency, that if we're going to have a disciplined investment showing of the value, we have to be transparent because that builds trust.
Six things that you can do from reframing it to capacity to leading with outcomes, not ratios to educating. Constantly talking about low cost does not equal high impact. That building our models that include all of the costs. So we're honest about this, that aligning our board and our leadership to have the tools, the language, the examples to be able to explain it and justify it as a governance issue, not just a communications and fundraising issue.
And lastly, showing examples of our organization, maybe another that literally shows why investment led to growth.
Our sector nonprofit generically doesn't have a cost problem. We have a narrative problem.
We tend to think about this in ratios in overhead costs. Too much of the time, the narrative should be about outcome, storytelling, impact, growth.
You might ask this question what would change if our organization stopped optimizing for low overhead and started optimizing for growth impact maximized effect on the community?
By just asking the question you're causing people to think about, well, how would we grow? And we're back to Dan Point and the pies investment doesn't create just more efficiency. More importantly, it creates a bigger pie that if we invest in the things that will grow our impact, the size of our impact, the size of the pie will get larger.
And that's what we really need to concentrate on. And if all we focus on is overhead, we can't get there. Press the envelope on this one. Don't be afraid to have meaningful conversations to figure out how to do this in a more meaningful, purposeful way. Because if you allow overhead to drive your decisions, you will end up in situations.
Unfortunately, with clients, just like clients that I have to deal with where they're limiting their opportunity to create growth in philanthropy, that is all about making the mission more impactful. And that would be a shame. No matter what type of nonprofit you are, we're in the impact business, not the overhead business. Don't forget to check out the blogs, two per week, 90 second reads. I'm always amazed because I've had to do some things with the website where I've had to track a little bit more of this.
How many people are reading Tuesday, Thursday blog post 90 seconds you get to an RSS feed right to you. Hallettphilanthropy.com\blogs. And if you have a suggestion or a thought on a particular topic, I'm getting more and more of those people asking, hey, can you address this? What do you think about this Email Me podcast? It outlines me.com.
We need nonprofit work. We need philanthropy. We need the work that you do every day. No matter if you're a board member, volunteer, CEO, gift officer, infrastructure. It doesn't make volunteer, doesn't make any difference. Remember that the world of philanthropy, the world of nonprofits, sits between. The for profit world that doesn't do certain things is not profitable, and government, which isn't that efficient.
And in the middle is where we because those are where the holes are. That's where people fall, where organizations fall, where people wonder, oh my gosh, what's happened? Which brings me to my favorite saying, some people make things happen. Some people watch things happen. Then there are those who wondered what happened. You're someone who makes things happen. You partner with others who want to make things happen internally, externally, for the people and the things of our community that are wondering what happened.
They fall into that gap. I hope you take a moment and think about every day the impact that you're making, because it is profound somewhere on someone for some purpose. But it's not done in vain. Relish it, embrace it, and then move on to the next opportunity to help someone else. The essence of philanthropy, love of mankind. It isn't about money.
It's about service to the greater community, the greater world and making this little planet we have and the people on it lives better. That's a great way to spend a career, and I hope you have a sense of the value you bring to that cause. Each and every day. I will look forward to seeing you the next time, right back here on the next edition of Around With Randall.
And don't forget, make it a great day.