Recognizing the Value of Overhead

“Misconception No. 4: Low administrative costs are a good indicator of the quality of the organization.”

So begins a post by Saundra Schimmelpfennig about misconceptions created by charity websites. Maybe you have noticed this phenomenon. Many organizations tout only 1% administrative and fundraising costs on their donation pages. One of the reasons for this is that charity rating websites like GuideStar and Charity Navigator highly value bare minimum “administrative expenses”. (SIA is not eligible to be reviewed by Charity Navigator because they only review organizations that raise at least $500,000 in public support per year.)

Clearly low administrative costs are attractive to donors. But, a 2009 report from several charity watchdog organizations has these words of warning: “In short, picking a charity based on the lowest overhead ratio is like buying the cheapest car that money can buy. You might spend less in the short run but it’s inevitably going to let you down.”

For one thing, looking only at administrative costs means that donors are not looking at the impact of the organization’s programs.

Think of it this way: If a soup kitchen has low administrative costs but lets its food sit and rot, have they used their money effectively? Paying someone to oversee the volunteer chefs may be a much better use of donor funds than just buying food!

Schimmelpfennig’s blog post calls on nonprofits to do something new: “Instead of focusing on low administrative costs, share information on the importance of those costs.”

SIA Office in Santa Cruz, CALet’s consider the administrative costs at Spirit in Action. Our annual budget is about $45,000 and my salary (as the sole employee, hired part-time) was  just under $22,000 last year. We spent about $1,250 on printing and photocopying costs.

But what does that get you? Quite a lot of “bang for your buck” as they say in Minnesota!

  • About 65% of my day is spent on purely programmatic activities. Those administrative hours go to writing letters to international partners, reviewing grant applications, following up on previous grants, and working with the grassroots organizations to refine their local programs. Without administrative costs, who would be in charge of building these relationships and refining grant proposals for the SIA Board?
  • The semi-annual SIA Newsletter accounts for almost 100% of the printing costs. From the feedback I get from you, this is a very important part of keeping our supporters informed. Without the newsletter how would you hear about our progress and learn about new projects?
  • Spending money on things like a website and updating office software means that we are investing in the long-term effectiveness of Spirit in Action. An old laptop might be cheaper but if I waste hours waiting for websites to load, is that effective?
  • Our international SIA Small Business Fund coordinators are all volunteers in their countries. An important part of my job is to make sure they have the information and support they need to effectively train the new business leaders who receive our small business grants.

In summary, we take our work very seriously. We reduce overhead costs when we can (like not paying for an office space, for example) but SIA has also recognized the value of having a paid administrator. I am so blessed to feel appreciated and supported by the SIA Board as I work on behalf of them and you to strengthen our worldwide network and continue to evaluate how we can best empower people around the world through thoughtful assistance.

Do you buy my evaluation? Does this bring up more questions for you? I’d love to hear what you think about charities and administrative costs – post your comments below!

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4 Responses to “Recognizing the Value of Overhead”

  1. Donna Thomas February 1, 2011 4:05 pm
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    Thank you for pointing out the important aspects of what an administration contributes to a non-profit like SIA. I like the word, “effective”, for how SIA achieve the highest of goals.

  2. Bill Huddleston February 2, 2011 12:53 pm
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    First, a salute to Tanya’s hard work. I had not heard of SIA before, but because of her using some of SIA’s administrative resources, (e.g.) PC and Internet access, I learned something today and I thank you for your efforts in the communities you serve.

    The non-profit sector seems to not always see the forest for the trees. Do you really want to carry out your non-profit’s function with no lights, no chairs, no phones and no e-mail, much less a computer for all types of tasks? I still have my mother’s typewriter in the basement, and I’ll will give it to any non-profit that wants to go back to using carbon paper and white-out for their written communication. (BTW, it’s a manual Underwood).

    Here’s a more detailed examination of the true consequences of the ridiculous emphasis on “How” instead of on “What and Why” that the non-profit world likes to emphasize:

    The non-profit sector has done a spectacularly lousy job of explaining what it does and how it does it, and has spent fifty years convincing the American public that “administrative expenses” are bad and that “program costs” are good and now complains about how hard it is to get unrestricted funds.

    Let me elaborate on this point, because I do think it is “chicken and egg question” – which came first, did the donors request to know the percentage of administrative costs, or did the non-profit in an attempt to compete for funds, say “Our administrative costs are lower than the other guy’s.” What a dumb thing to say. Only in the non-profit world do we push the “how” of a service or good as the means of convincing donors or grant-making organizations to fund us.

    Think about it for a minute, when you go to get your car repaired, you presumably go through these steps:

    1. You take it to a garage or dealer that you either have direct experience with, or was recommended by a friend, or you looked it up on the web.

    2. You describe the problem with the car (your need).

    3. Their mechanic diagnoses it, and calls you back with the recommended solution and estimated cost.

    At this point you make your decision, and there are only 3 possible choices:

    1. You have them fix it.

    2. You decide their price is too high and you might be able to get it fixed somewhere else cheaper.

    3. You decide that the problem is not as critical as you thought and you can live with it for some amount of time, whether the ultimate solution is to get a new car, or to have it fixed later.

    Notice, nowhere in this decision process did you ask these questions:

    1. How much are you paying your mechanics?
    (I only want the cheapest mechanics possible to work on my car.)

    2. What brand of tools and diagnostic equipment are you using?
    (I don’t want to pay for the use of modern tools and computer equipment, my grandfather was a mechanic and he didn’t need any new-fangled gear to fix cars).

    You can substitute almost any service or good you want and you can have a similar sequence: Dentist – I only want the old drills used (you know the slow, loud, painful ones from your childhood). Coffee server: What brand of coffee roaster/maker are you using, I’m only going to pay for one that’s cheap.

    What the non-profit sector does not do well, is to make the case as the difference between “What & Why” versus “How.” “What & Why” should matter a lot to the potential donor, that is why you are talking to them, and why they are considering giving you some of their money. Your mission resonates with them in some way, whether because they or a family member or someone they know has had direct experience with your organization, or they just have heard about you and care about what your organization does.

    The things that truly matter to donors are “What does your organization do?” and “Why do you do it?” If you answer those two questions, and you can certainly say, “Ten dollars a month helps us do ________ for the _________ in our community, or overseas, or in ________ this part of the country.

    In a rush to compete against other non-profits, many non-profits then also answer the “How question” – even if it hasn’t been asked. What’s said is “We keep our overhead costs low so more of your money goes to program.”

    What’s not said is this, even if it is true:
    “Keeping our “overhead low” means that we pay our staff a barely living wage, and have 30% turnover because as soon as someone has any outside needs (home, family, etc.) they can’t afford to stay here.” The fact that 30% turnover keeps the program from ever being as successful as it might be, is never mentioned.

    In the 21st century, the distinction between “overhead” and “program” costs is meaningless. Ask the potential donor or funder if they use the telephone, e-mail and the computer in order to do their job, and if they work in an office do they sit on a chair and work at a desk, because given the emphasis on “low overhead” all those things are bad. Then ask them to keep track for 3 days of how they spend their time: are they using the phone and computer for personal, work, or civic functions, and that they need to submit the detailed timesheet with this to their supervisor.

    The fact that in our modern society we still use accounting methods that were developed 7000 years ago to count crops and cattle is a subject for a different article, but it’s worth mentioning. All marketing experts will tell you that your customers (donors) can be educated as to what’s important and why they should choose you and your product or service. Just because it’s for a non-profit and the direct benefit to the donor is harder to describe, it doesn’t mean that it’s not real.

    The non-profit sector although it likes to although it likes to talk about the importance of collaboration, is often very close minded when it comes to fundraising. It views the world has having a “money pie” of a set size (charitable giving) and competes mainly against other non-profits for a slice of that pie. My experience is that it is possible to “grow the pie” by working in colloboration with other non-profits, and that the real competition for the donor’s dollar is not between two different non-profits, but it’s competing for attention among other discretionary spending, including sports, cable TV, $4 coffees, $200 shirts, toys, etc.

    A lot of the problems that the sector faces, and believe me, I know that this is a particularly tough economic time, would be helped if this attitude and direction were encouraged: “Give While You Live and Give Without Strings.” If you don’t trust our organization to do what we’ve been doing, and have been successful at, that’s fine – choose some other organization, but if our mission does resonate with you, don’t hamstring us, we appreciate your unrestricted gift and you are making a difference by helping us meet our mission.

    Regards,
    Bill Huddleston
    The CFC Coach
    http://www.cfcfundraising.com
    BillHuddleston at verizon dot net

    The Combined Federal Campaign (CFC) is the Federal government’s workplace giving program, and the single largest generator of unrestricted funds in the non-profit world.

    Thousands of local, national, and international non-profits receive donations each year.

  3. admin February 2, 2011 1:26 pm
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    Thanks for your comments, Bill. I appreciate your input on this issue! Indeed, there are many good reasons for the “give without strings” motto. General fund donations allow us to put funds towards projects that we have found to be most successful, rather than just what looks good from the outside.
    Thanks again, Tanya

  4. Gloria Knapstad September 5, 2012 12:43 am
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    As a Bd member I know full well that our donations are used wisely and lovingly and that you Tanya earn every cent you are paid as administrator.

    I appreciate the message from Bill Huddleston whose experience and expertise helps him who understand fully how SIA functions. Thank you Bill and Thank you Tanya. Love, Gloria

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