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The Overhead Myth Is Still Hurting Nonprofits


Apr 26, 2018

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It will take creativity and a concerted, continued effort to bring the persistent overhead myth to an end.


 

 
Dan Pallotta debunked the overhead myth in his groundbreaking TED talk in 2013. Unfortunately, years later, it persists.

“The things we’ve been taught to think about giving and about charity and about the nonprofit sector are actually undermining the causes we love, and our profound yearning to change the world,” Pallotta said on the TED stage.

The overhead myth is the misguided, but common notion that you can judge the worth and impact of a nonprofit by how much (or how little) it spends on so-called overhead.

At its origins, overhead is an accounting term. In the nonprofit sector, vital activities and operations, including staff compensation and fundraising costs, fall into the overhead category. In countless annual reports to donors, you can see the myth epitomized in colorful pie graphs that boast about percentage spent on direct services and programs vs. spending on, well, everything else.

This binary approach impedes missions. How can nonprofits recruit and retain top talent to work on complex social problems if investments in staff compensation are considered frivolous? How can they grow and become more effective if investments in marketing and fundraising are shunned?

Pallotta described the overhead myth’s harmful impact on the nonprofit sector in little more than 100 words—still as salient as they were when he first spoke them five years ago:

    “Social problems are massive in scale, our organizations are tiny up against them, and we have a belief system that keeps them tiny. We have two rulebooks. We have one for the nonprofit sector, and one for the rest of the economic world. It’s an apartheid, and it discriminates against the nonprofit sector.”

I recently returned from a sobering visit to Puerto Rico, where I met with nonprofit teams leading crucial disaster relief and recovery projects. Six months after Hurricane Maria hit the island, toppling its already fragile electrical grid and shattering lives, leaders with varied hurricane-related missions—from addressing homelessness to reducing domestic violence to offering youth development programs—all identified the same urgent need: funds for overhead.

“Many nonprofit organizations have not been able to reopen their doors after the hurricane,” said Edwin Edgardo Otero-Cuevas, a GlobalGiving partner in Puerto Rico who manages fundraising for La Fondita de Jesus.

Nonprofits in Puerto Rico simply don’t have the resources they need to keep the lights on, Edwin explained. With additional overhead resources, nonprofit leaders on the island said they’d hire more staff to serve more people displaced by Hurricane Maria. They would have the capacity to advocate for additional government resources and inspire donors to support their important causes. Many organizations would be able finally address long-delayed—yet important—administrative tasks, such as filing for 501(c)(3) status.

After a disaster, the harmful impact of the overhead myth is clearly more acute. But the harm isn’t isolated to times of crisis.

People in the nonprofit sector contend with the consequences of the overhead myth 24/7.

At GlobalGiving, we introduced GG Rewards, an alternative system for measuring and rewarding nonprofit impact, in 2005. We believe that the best nonprofits all have one thing in common, (and it has nothing to do with overhead): They listen to the people they serve, they act on what they hear by testing out new ideas, and they continually learn from their tests, improving their organizations every day. In our community, nonprofits that Listen, Act, Learn. Repeat. are rewarded with access to additional funding opportunities and given badges to display their accomplishments to prospective donors. Anyone can search for organizations by badge under the “recognition filter” on the GlobalGiving website.

For the overhead myth to truly meet its end, the social sector should generate and embrace more creative ways to show impact.

Retiring old language that perpetuates the overhead myth is key, too. Claire Axelrad, a nonprofit fundraiser with more than 30 years of experience, eloquently makes this argument in her article, “Nonprofit Overhead: Are You Colluding In Its Persistence?” Claiming 100% of donations will go directly to your nonprofit’s work and other gimmicks are thoughtless practices, Axelrad says, which mislead donors about the holistic nature of nonprofit mission fulfillment.

Everyone has a role to play in ending the overhead myth. Here are seven additional resources to help:

1. Six Tips for Busting the Overhead Myth
2. How Funders Can Help Overcome the Overhead Myth
3. The Real Cost Project
4. Overhead Myth Letter to Donors of America
5. Overhead Myth Letter to Nonprofits of America
6. Investing for Impact: Indirect Costs Are Essential for Success
7. How To Measure Impact In 170+ Countries

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