It’s been called the nonprofit starvation cycle, indirect cost issue, or overhead problem. It’s the subject that nonprofit leaders reluctantly broach with funders, but spend hours bemoaning. Honest communication between donors and grantees will produce more effective collaboration and better long-term outcomes.

Successful nonprofit programs get the spotlight and attract funders. But behind the scenes are people and administrative processes (overhead) supporting the programs, yet not considered program costs, including salaries, training, planning, rent, utilities, and computer systems, costs of doing business. Funders’ expectations of grantees can only be met if the grantee has what it needs to get the job done, as described in our Donor-Grantee Trap.

But funders limit overhead payment, and less is “better,” with many organizations trapped in a “starvation cycle.” Nonprofits often can’t ask for these costs because they don’t know how much they are spending. Unsurprisingly, overhead has a bad reputation, but ultimately the beneficiary suffers the most.

Now many leading foundations, such as the Edna McConnell Clark Foundation, the Packard Foundation, Atlantic Philanthropies and the Hewlett Foundation, have committed funds to building grantees’ organizational capacity (leadership and administrative infrastructure) for better results. Unrestricted grant dollars are also becoming more common among funders who understand that a well-run nonprofit knows how to deploy scarce resources wisely.

Influential organizations that evaluate nonprofit performance are also pressing for rethinking overhead. In the June 2013 “Letter to the Donors of America,” the CEOs of GuideStar, Charity Navigator, and BBB Wise Giving Alliance wrote: “The nonprofit sector…has too often erroneously focused on overhead over the past few decades, which has starved nonprofits from investing in themselves as enterprises.” In December 2014, the federal Office of Management and Budget required that nonprofits receiving federal funds receive a minimum of 10 percent reimbursement on indirect costs (it had often been zero).

Nonprofits, too, are changing. Leaders are getting better at tracking the true costs of running programs and making the case for full funding. They also are thinking strategically about their funding models, rather than running from one financial emergency to the next, and demonstrating the benefits of infrastructure investment to improve outcomes. These positive trends will likely continue and funders can help.

First, funders need to understand the impact of underfunding nonprofits. A nonprofit starved for overhead funds is like a ship on the verge of capsizing. It creates psychological stress among employees and haphazard program management. Funders should look for signs of stress and weak management, and not underestimate the costs of hiring and training talented employees, conducting strategic planning, and maintaining adequate infrastructure, from computers to office furnishings.

Second, funders need to realize that many nonprofits are caught in being expected to do more and more with less and less. This may create a productive, fast-paced environment, but it’s more likely to create program disruptions and organizational dysfunction. It’s hard to maintain continuity in leadership and grow successful programs when an organization is understaffed, overworked, and starved for resources.

Third, funders need to build true partnerships with grantees, where the power dynamics of grantor and grantee are sensitively understood. Of course, funders can’t be expected to shift their focus from programs that achieve meaningful results. But a real partnership begins with a willingness to see the world from the grantees’ perspectives, to value the grantees’ expertise, and to understand the “cost” to the grantee of working and complying with donor requirements. This would allow nonprofits to feel they could have a frank, data-informed discussion with donors about the costs to assemble the staff and hone administrative capacity to deliver current and future programs.

Overhead is not a dirty word. It’s part of normal nonprofit functioning, just as it is in a well-run for-profit entity. Understanding and covering overhead costs – a challenge for nonprofits and their funders – will make it easier for nonprofits to improve and increase their impact on society.

 

Andrew Belton is a Bridgespan partner who advises a wide range of global leaders on issues in mission, strategy, and team development. His experience includes maintaining long-term relationships with multinational corporations across three continents, developing and leading major strategy changes at major philanthropies, and working with ambitious leaders of a wide variety of social enterprises. http://www.bridgespan.org

 
This article is reprinted from Issue #4 of Nonprofit Performance Magazine. Subscribe today!

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