This post is by Jacob Smith, co-author of the The Nimble Nonprofit: An Unconventional Guide to Sustaining and Growing Your Nonprofit. The book is so awesome that I asked Jacob to post excerpts from it here for you, every Friday for ten weeks.
Overhead is like cholesterol. There’s good overhead and there’s bad overhead. For a variety of reasons, overhead spending has become a widespread measure of nonprofit organizational efficiency. The reasons for this are mostly bad, and the implications are mostly detrimental. Why? Overhead seems simple to measure and easy to compare across organizations. Here’s the problem: much of what gets called “overhead” is actually quite important to the long-term capacity and health of your organization.
Consider some examples of “good overhead” and why these are cases of money well spent. Renting good office space with enough room and natural light is an investment in your staff’s job satisfaction. Purchasing new computers that boot up quickly and that don’t crash is an investment in your staff’s productivity. Spending on professional development for your staff is an investment in your organization’s long-term success. The issue shouldn’t be one of minimizing your overhead expenditures but, rather, maximizing the quality of your overhead investments.
Not only does the misguided preoccupation with minimizing overhead encourage you to underspend on organizational infrastructure and capacity, it also places the evaluation emphasis in the wrong place. You end up focusing on inputs (how much money your organization is spending on each line item in your budget) instead of outcomes (what you’re accomplishing with the dollars you spend). In the world of private sector start-ups, an organization that doesn’t ask for enough funding for overhead raises just as many eyebrows as one that asks for too much—one wonders how this outfit can hope to accomplish what it claims with so little capacity.
Thus, executive directors find themselves in an almost impossible position: discouraged by funders from making the very investments they know are required to sustain a thriving organization. Our advice: make sure you are able to explain and justify your overhead to the more enlightened funders. As for the funders who insist you minimize your overhead beyond what’s reasonable, the only thing you can do is avoid them altogether, or, if that’s not possible, figure out how to bury your overhead costs in your program work and meet their requirements—and then get back to making critical long-term investments in your organization and your staff. If you have any funders that—rightly so—value these kinds of organizational investments, either because they recommend a target overhead range (which is a more sensible approach) or because they don’t bring up the issue at all, stick with them.
Note that making good capacity investments doesn’t mean that every possible capacity investment is justified. Without a doubt, it’s possible for an organization to spend more than it should on office rent, computers, professional development, and every other type of overhead expenditure. And there isn’t a formula that provides a precise capacity investment target for nonprofits. The right amount will vary depending on the work, the strategies, the location, and a host of other factors. The point is that you can’t measure organizational effectiveness simply by looking at the overhead spending ratio. You’ll need to think through what it will actually take for your team members to excel at their work, and consider the performance benefits of various kinds of capacity investments. It’s up to you, as an executive director, to build an organization with sustained capacity to tackle your community’s vital issues. And you can’t build a strong, sustainable organization without investing in your organization’s ability to do the work.