When Stewardship Comes to Terms with Overhead
Spending, Serving, and the Guilt Dilemma in the Nonprofit Sector
Nonprofits face constant pressure to cut overhead costs. When annual reports are sent to donors, the overhead slice of the financial pie faces the most scrutiny. It is common for nonprofit employees to feel a sense of guilt when resources are allocated to their own professional development, office environment, or new technology.
Overhead costs and program costs, though often perceived as competing concerns, are actually more complementary than oppositional. In fact, allocating funding for overhead is an important part of investing in the strength, impact, and sustainability of programs.
The nonprofit sector is held to a completely different standard than the rest of the world when it comes to operational costs, and this double standard is keeping many organizations in a starvation cycle. We believe that embracing a more accurate view of stewardship as it relates to overhead could empower nonprofits to not only improve their health, but expand, innovate, and do more good in the world.
What is a Starvation Cycle?
So what is a starvation cycle, and how do some nonprofits find themselves in one? A 25 year long study published by Nonprofit and Voluntary Sector Quarterly defined a starvation cycle as a “self-reinforcing feedback loop of competitive pressures, misleading reporting, and donor expectations that place a steady downward pressure on overhead.”
Let’s unpack that a bit. Competitive pressures stem from the fact that the nonprofit field has been growing, and many nonprofits have to spend more energy on locating and retaining volunteers, donations, and staff. As more nonprofits join the scene, there are more nonprofits doing similar things. This can lead to a scarcity mentality. These pressures have been multiplied by reporting that exaggerates the importance of overhead ratios as a way of assessing what nonprofits are most efficient in delivering on the bottom line.
The Overhead Ratio: An Inaccurate Gauge of Stewardship
A low overhead ratio, which is the measurement of operating costs compared to income, is a flawed way of measuring whether or not a nonprofit takes stewardship seriously. A study by Nonprofit Management & Leadership in 2018 found that overhead ratio is in no way a useful measure of efficiency. An overhead ratio is a flawed measurement of stewardship because it is too simple. There are many factors and considerations that play into measuring financial responsibility in nonprofits, and a single ratio does not allow for those complexities. Low overhead is not directly associated with high impact. In fact, low overhead is more realistically associated with low impact.
Low overhead is not directly associated with high impact. In fact, low overhead is more realistically associated with low impact.
Investing in Sustainability (Without Guilt)
Nonprofits that have been pushed to starvation inadvertently keep themselves from achieving their full potential by shying away from overhead. When overhead spending is continually reduced, an NPO may end up spending their own resources on fundraising, which hurts their ability to meet their baseline goals, and stretches staff incredibly thin. As a result, program-related spending increasingly trumps the investment and infrastructure costs, and as that margin widens, nonprofits are asked to run larger and larger initiatives with dwindling allocated resources. This has been a continual trend since the 1990s.
Strictly limiting any organization’s ability to invest in infrastructure, excellence, and operations deprives staff of the resources that are needed for sustainability. Internal investment is vital to all organizations, nonprofit or otherwise. It is troubling to see a trend where nonprofits routinely function on less than what most organizations would even consider surviving on. Nonprofits should not have to function on less, and staff should not be overworked and exhausted, purely because the goal nonprofit work is altruistic.
The purpose of overhead is to empower nonprofits to have a greater impact and longevity. Internal investment aids nonprofits to achieve their mission. Yet, these nonprofits can be hesitant to put money into overhead when they could funnel funding into programs for the people they serve. This is where the guilt dilemma comes out to play — but it shouldn’t. Investing in overhead will empower an NPO to have a far greater impact in the long run.
Increasing Overhead Can Increase Impact
After traveling across the world and gathering years of experience and research, we think it is time to challenge the assumption that overhead spending is linked to poor stewardship. Placing value in the services gained through overhead investment allows organizations to access and update the very tools, expertise, and personnel that allow them to bring about tremendous good in the world. Access to information in a timely manner is cited as an obstacle to the work process 70% of the time, and this is just one obstacle that can be overcome through smoother collaboration, which is nurtured through relevant overhead investment. Overhead expenses are not just unavoidable outputs — overhead is a way to truly increase the impact of a nonprofit and empower staff.
We know how difficult it is for starved nonprofits to serve well when the nonprofit itself is underserved. Imagine the difference in productivity between a staff member who works from an uncomfortable chair that causes back pain every day and a staff member who has a supportive chair. The first staff member struggles to focus while the second staff member is able to work diligently. Investing in a new chair more than pays itself off in output quality. The same analogy is true on micro and macro levels within organizations. Stanford Social Innovation Review backed up this idea in an article where they wrote, “We can’t separate a program from the people who develop and deliver it. To ensure that a program can achieve maximum impact, we must actively invest in the staff who are supporting the program and make sure we have the best people on the job.”
Maximizing Value: Frugal vs. Cheap
Stewardship has a lot more to do with maximization than minimization. One distinction that never fails to set off lightbulbs is the difference between cheap and frugal approaches to using resources. A cheap organization cares about minimizing costs while a frugal organization cares about maximizing value. Investing in relevant education, a healthy workplace environment, and collaboration are all worthwhile pursuits for a frugal organization that values long term outcomes.
A cheap organization cares about minimizing costs while a frugal organization cares about maximizing value.
Investing in Collaboration and Well-being
Maximizing outcomes through syncing up overhead and program investment can boost the wellbeing of an organization on every level. In starved environments, one of the main things that suffers is collaboration and culture. This happens for many reasons. Staff are busy, spread thin, and often deal with high turnover rates that shift roles and expectations. These factors make it difficult to find margin for collaboration within an organization, not to mention collaboration with outside organizations. However, when staff know that their work environment, culture, and wellbeing are genuine concerns to the organization they are a part of, the workspace can transform into a place where people are fulfilled and fully engaged. Collaboration is the linchpin of successful organizations and is one of the main reasons we believe investing in overhead contributes to the health of a nonprofit.
The competitive advantages of increasing collaboration through investing in an organization’s environment are incredible. Spaces that inspire creativity make a difference in the attitudes and efficiency of staff. A study by the International Workplace Group found that organizational competitiveness improves by 85%, organizations grow 89% faster, and retention and attraction of top talent skyrockets when flexible work strategies are implemented. Additionally, 88% of office professionals have their best ideas when working in flexible spaces. The environments people work in have direct impacts on the quality of work that they can produce. As Business Office Systems wrote, “It is imperative to create a workspace where your employees feel challenged, inspired and appreciated for all of their hard work…Making a people-focused investment in the spaces where your employees spend most of their days is a major step in the right direction.”
There is an observable boost in morale, innovation, recruiting and retention, motivation, and efficiency in organizations that place importance in investing in their physical workspace environment. Organizations that invest in staff development and training see a 26% increase in revenue per employee and a 40% lower turnover rate than peer organizations. A nonprofit’s external outcomes are inherently tied to its internal culture, so it is essential to invest internally to create the best results externally.
It is time to move away from asking how little a nonprofit can run on and start asking what it takes to build strong organizations and achieve impact. This is the mentality that fosters a thriving culture, maximizes resources, and meets the need the nonprofit set out to serve in the first place.
Closing Thoughts
Slowing the starvation cycle will require open and honest conversations about costs, and adjustments in unrealistic donor expectations. As we all consider the organizations that we generously support, don’t look to the overhead percentage as a gauge for success or stewardship, consider their dreams and results! Encourage and support nonprofits that invest in innovation, staff development, and organizational culture. It will allow them to scale and ultimately increase impact and do more good in the world.
