2009/10/8 Michael Snow <[email protected]>: > We do pay attention to the efficiency of operations and how funds are > spent, not merely for the sake of appearances but as something valuable > in its own right. With that in mind, it's more useful to look directly > at ways of achieving greater efficiency than to debate how important it > is for us to meet arbitrary standards.
Indeed. Overhead ratios actually say almost nothing about wastefulness or impact. It is possible to be utterly wasteful in spending on program services, and it's possible to have zero impact with very little overhead. It's possible to make a dramatic "overhead" investment that's going to have an equally dramatic impact on your ability to do your work, and it's possible to make no overhead investments and thereby endanger your ability to function. Think about some examples of large and small "overhead", and then think about whether they are wasteful or not, and you will find quickly how limited this entire conceptual model is. Because donors pressure non-profits to reduce "overhead" without a rational basis, and non-profits respond sometimes in ways that damage their mission, and sometimes in ways that are unethical (deliberately mislabeling costs), the use of overhead ratios is highly controversial among those who study, understand, and advise the non-profit sector. See, for example, this article in the Stanford Social Innovation Review: "A vicious cycle is leaving nonprofits so hungry for decent infrastructure that they can barely function as organizations—let alone serve their beneficiaries. The cycle starts with funders’ unrealistic expectations about how much running a nonprofit costs, and results in nonprofits’ misrepresenting their costs while skimping on vital systems—acts that feed funders’ skewed beliefs." http://www.ssireview.org/images/articles/2009FA_feature_Gregory_Howard.pdf See also this article along similar lines: http://www.bridgespan.org/nonprofit-overhead-costs-2008.aspx And for some serious empirical data, the non-profit overhead study is one of the largest attempts to study the use of efficiency ratios in the non-profit sector, and it found many "glaring functional expense reporting errors" in non-profit's 990 statements, which is a response to the pressure to show high "efficiency" ratios. This goes to the extreme point of organizations reporting their entire fundraising costs as program expenses, in contradiction with their own audited financial statements: http://nccsdataweb.urban.org/FAQ/index.php?category=51 http://nccsdataweb.urban.org/kbfiles/520/brief%204.pdf Because misreporting (and sometimes overreporting) of overhead costs is so common as the above document shows, it's very hard to make any accurate comparisons of different non-profits on that basis, even if you assume that the overhead percentage has value to begin with. The Stanford article also shows the dramatic difference in overhead costs in different business sectors -- what's appropriate "overhead" depends in large part on what you're doing. If you're hiring a lot of high-skill workers, then your HR department better be sophisticated enough to surface the best candidates, etc. The idea of spidering 990s to create some automatic assessment number may sound useful in theory, but its practical value is low, especially without understanding the above context. If you're a sophisticated donor and you understand the implications of a) different sectors having different needs and different efficiencies, b) reporting standards and accuracy varying wildly across different organizations, you might be able to derive some value from it. But the only way to find out whether a non-profit is doing good work is to study its impact, and understand how it's using its money. -- Erik Möller Deputy Director, Wikimedia Foundation Support Free Knowledge: http://wikimediafoundation.org/wiki/Donate _______________________________________________ foundation-l mailing list [email protected] Unsubscribe: https://lists.wikimedia.org/mailman/listinfo/foundation-l
