In Response to “It’s Time to Start Judging Nonprofits like For-Profits”
I was elated to read Alexa Clay’s and Jon Camden’s article, It’s Time To Start Judging Nonprofits Like For-Profits, back in January when the article was published on Fast Company’s Co.Exist platform and, although the article is a few months old now, the points that the authors make it far from outdated.
Although I am glossing over some of the article’s subtleties, the basic argument is that Americans have a skewed view about what is required to run an effective nonprofit organization and how crucial overhead is for nonprofits to be able deliver on their social mission objectives. Sadly, our culture of philanthropy in America has lead so many donors to think that every penny that goes to cover overhead costs is actually at odds with or somehow takes away from achieving social impact. This perspective fails to consider that high overheads (relative to program budgets) may in fact be critical to achieving social impact and that these overhead costs are actually investments in the long-term success, efficiency, and impact. The article elaborates on this point with the following:
This constant pressure that nonprofits feel from both their mission-driven world and the donor landscape toward minimizing anything that could be counted as “overhead” is destructive and efficiency-killing. Low overhead means burning staff out at an alarming rate, and having trouble sourcing or retaining skilled workers. It pushes organizations toward duplication over cooperation to attract and maintain funding. Worst of all, it forces a short-term view on what should be a long-term mission.
In addition to the argument made about crippling long-term success, efficiency, and impact, there is also another dimension that makes the use of evaluating nonprofits by the percentage of money spent on overhead relative to the percentage spent on programming even more inappropriate. This dimension is nontraditional nonprofit models, such as those that can be classified as social enterprises, that use philanthropic money in new and innovative ways that cannot easy fit into traditional categories of resource allocation.
For example, The Small-Scale Sustainable Infrastructure Development Fund (S3IDF), as a nonprofit, leverages philanthropic and development capital to encourage local financial institutions in countries like India to provide co-financing for household or community-level infrastructure projects (solar-powered lights, village drinking water plants, pico-hydro power generators). This is often accomplished through offering partial guarantees via a revolving fund and by providing the often absent business training and supply chain development support. Reaching the Base of the Pyramid (BoP) with this type of approach is expensive from an administrative or overhead standpoint, especially at the outset since pre-investment work is critical to successful projects. But this work can and does yield tremendous results in terms of long-term impact and scale.
In short, the current 990 overhead vs. program expense ratio evaluation cannot capture this type of correlation between upfront overhead costs and the tremendous social good that is achieved. Instead, in the realm of infrastructure development, the ratio favors organizations that simply distribute technologies to everyone over those that adapt technologies to local conditions and build partnerships that can sustain long-term use of equipment and products.
Let us all hope that more people like Alexa and Jon think through these issues and work to challenge the current evaluation standards while working on better, more effective ways to evaluate social impact.
