Robbins on Pallotta on The Overhead Myth
Dan Pallotta, Dreams, Overhead and AccountingBy Dani Robbins
Re-published with permission from nonprofit evolution blog
Have you seen Dan Pallotta’s TED Talk entitled “The Way We Think About Charity is Dead Wrong?” It challenges us to question the way the public thinks about nonprofits and also the way we think of ourselves.
He says the right question is to ask “about a nonprofit’s dreams.” The wrong question is to ask about a charity’s overhead. Overhead is not the enemy.
Overhead including part of the CEO’s salary, the fundraising & support staff, the facility, utilities and the equipment in the administrative offices supports the provision of programming.
Organizations that have minimal overhead also have minimal capacity. Overhead is a part of growth, and challenging a non-profit’s ability to increase overhead comprises their ability to grow program services.
I’d also add that non-profits, like the rest of the world, get what they pay for.
While many nonprofit leaders are exceptional at getting goods and services pro-bono (read: free), it is hard to find excellent leaders to work for free. Some have the financial luxury to be able to do that – and that is wonderful – but most of us don’t. As such, I love Pallotta’s point about our society not wanting to pay a lot of money for people who are helping other people, but having no problem at all with people making a lot of money not helping people.
The other part of the overhead issue is this: It’s sometimes an accounting choice.
I used to have a Board member who said “There’s cash and there’s accounting.”
If you have a non-profit who books their CEO’s salary across the programs (based on a time study that reflects how much time they actually dedicate to programming) it will look like appreciably less overhead than the one who doesn’t. Even though the first CEO probably makes more than the second.
If you ask the question about overhead and don’t ask any follow up questions, you won’t get the right information. And any question that doesn’t get you the information you seek isn’t the right question.
Pallotta’s illustration of someone who really cares about hunger yet chooses against becoming a non-profit leader and ‘takes a huge salary working for a for-profit company and then gives $100,000 to a hunger charity, becomes a celebrated philanthropist and Board member of that charity supervising the person who became the CEO, while still making multiples of that CEO’s salary’ is brilliant!
He goes on to challenge us to “ask about the scale of their dreams; how they measure their progress toward those dreams and the resources they need to make those dreams come true.” Also brilliant!
I once heard someone say that to raise a million dollars you need to have million dollar dreams. The guardian angels who will fund your agency in full, no questions asked, are far and few between. As such, some questions for your consideration:
- Do you have million dollar dreams?
- Does your non-profit have a generous, or even reasonable, compensation package for the staff?
- Can you communicate your organization’s impact?
- Do you challenge the status quo?
For Board members and community leaders: Are your expectations for non-profit staff different than your expectations for your own staff?
Culture change is hard and so is changing the world. Let’s start asking the right questions, getting the right answers and allowing our non-profits to dream. Let’s fund the dreams that improve our communities!
The overhead myth is still alive and well
It wasn’t even a year ago when the CEOs of BBB Wise Giving Alliance, Guidestar and Charity Navigator all signed a letter encouraging donors to stop looking at the concept of “overhead” to determine the effectiveness and efficiency of non-profit organizations. This letter was the culmination of many efforts and lots of voices including Dan Pallotta, who is the author of “Uncharitable”. Bloggers and non-profit professional everywhere heralded this as a campaign that will put an end to what is commonly referred to a “The Overhead Myth“.
Over the years, I have written a number of blogs on this subject including:
- July 17, 2012: “Does your non-profit make a difference? Americans don’t think so!“
- July 18, 2012: “Why is the non-profit sector hamstrung?“
- July 19, 2012: “Stop thinking. Stop planning. Start doing!“
- June 27, 2013: “Ending the ‘overhead myth’ is everywhere“
- July 26, 2013: “Is your non-profit only living for today? Then you need Picasso!“
At the end of my June 27, 2013 post, I wrote the following:
“I personally don’t think anything is going to change as a result of this “overhead myth” campaign push. I think donors are set in their ways. I believe Dan Pallotta was right about the Puritan influence on our culture. I don’t think “culture” and “values” and “habits” are easy to change. AND I think talk is cheap.”
As you can imagine, I was roundly criticized for being a “negative, glass-half-empty” kind of person. That’s OK . . . I have thick skin.
Besides, I knew I was right which always goes a long way when it comes to swallowing criticism. 😉
As they say, the proof is in the pudding which is what inspired today’s blog post. The pudding, of course, is an article that washed into my email inbox from LinkedIn on November 30, 2013. The author was John Wasik and the article was titled “Digging Into Non-Profit Finances: Four Things To Check“.
In his post, Wasik talked about illegitimate non-profit organizations and the lack of real oversight for our sector. He shared four tips with readers/donors on what they should look for before making a charitable contribution.
Yep . . . you guessed it. He points to the classic definition of “overhead“. Here is what he said:
“What percentage of the non-profit’s income went towards it mission? This is also a key red flag. This percentage is also known as ‘the overhead ratio,’ which tells you how much was spend on non-program expenses such as fundraising and administration. A fairly well-run non-profit will spend at least 80% on its mission.”
The truth of the matter is that this morning’s blog post isn’t really a victory lap or an “I told you so…” article. The reality is that I am annoyed at my fellow non-profit professionals.
Did we really think that an open letter to the world was going to suddenly change everything?
I certainly hope not!
As I said back in June, “I don’t think “culture” and “values” and “habits” are easy to change. AND I think talk is cheap.”
All of this leads me to wonder . . . what have you been doing on the front line to educate your donors and bring an end to “the overhead myth“?
Ohhhhhhhhh . . . you don’t know what to do about it? Well, here are a few suggestions to get your creative juices flowing:
- Post the open letter from BBB, Guidestar and Charity Navigator to your website.
- If your agency runs a blog aimed at a donor audience, then blog about it.
- During your year-end stewardship meetings with your top donors, figure out a way to talk about it.
- Organize a focus group of board members around reading Dan Pallotta’s book “Uncharitable” and talking about it.
- Stop highlighting and reinforcing “the overhead myth” in your annual report documents with pie charts showing how much you spend on programming vs. administration vs. fundraising. STOP!
OK . . . I got the ball rolling for you. Please scroll the down and use the comment box below to share additional ideas with your fellow non-profit professionals.
Not only can we learn from each other, but we can also inspire each other to solve bigger problems together. Please take 30 seconds out of your busy day to share one idea. Please?
Here’s to your health!
Founder & President, The Healthy Non-Profit LLC
Ending the “overhead myth” is everywhere
For the last few years, I’ve come across snippets and whispers from non-profit thought-leaders about how we need to help donors change their views about evaluating a non-profit organization based on how little it spends on administrative and fundraising costs. It was mentioned in polite conversations. A few bloggers were chattering about. I even saw it on a website owned by a charity watchdog group.
Then a few years ago, Dan Pallotta published a book titled “Uncharitable,” and this discussion emerged from the shadows of the non-profit sector. For the last few years, everyone I know has been engaged in this discussion or pieces of it such as:
- Executive compensation
- Marketing & advertising
- Risk aversion
- Return on investment for donors
- Spending on today versus tomorrow
The overhead myth has been building momentum for a few years now. I even jumped on this bandwagon a year ago with the following series of blog posts:
- DonorDreams blog: “Does your non-profit make a difference? Americans don’t think so!“
- DonorDreams blog: “Why is the non-profit sector hamstrung?“
- DonorDreams blog: “Stop thinking. Stop planning. Start doing!“
AND THEN IT WENT VIRAL . . .
A few weeks ago I received an email from a dear friend of mine with a link to “Letter to the Donors of America” from the BBB Wise Giving Alliance, Guidestar and Charity Navigator. The letter was simple and straightforward. It asked donors to please stop looking at overhead when making charitable contributions. It was a case for support document. Pure and simple!
After this first email from a friend, I received another and then another. I started to see bloggers tackle the subject, and then non-profit agencies started talking about it on their websites. Before long, it was all over social media and everyone in my circles was talking about “the overhead myth“.
For the record, I’ve always thought that the idea of using overhead to evaluate a non-profit organization’s worthiness was silly for two reasons:
- Through the magic of accounting, every smart executive director keeps at least one eye on what donors consider the “percentage of overhead” and tweaks their allocation formulas to keep that percentage where it needs to be. So, this number really means nothing. It never has and never will.
- When I am purchasing goods and services, I never hold for-profit companies to this standard. When I hired a marketing firm to help me during the start-up phase for The Healthy Non-Profit LLC, I didn’t look at how much money they spent on administration, executive compensation or their advertising budget. Heck no! I looked at the quality of their work. As a donor, I like to invest in organizations whose programs are having impact regardless of how much they pay their executive director.
I’ve been asked by some readers of this blog to write something about the “overhead myth“. As flattering and tempting it is to weigh-in on a compelling subject like this, I’m going to use some self-restraint and decline. (Surprising? I know!)
Have you see how much has already been written out there? OMG!!! Everyone with a blog, website, Facebook page, and Twitter account has jumped on this bandwagon.
I’m will use the remainder of my space to post links to those other blogs, websites, etc. If you are very interested in this topic, please click your heart away.
- The Overhead Myth website: “It is Time to Move Beyond Overhead“
- Bloomerang: “The Most Important Statement in the Nonprofit World in the Last Decade“
- Nonprofit Association of the Midlands: “Help End the Overhead Myth“
- The Rebecca Gordon Group: “Tackling the Overhead Myth — An Upcoming Blog Series“
- Philantech: “Financial Ratios for Nonprofits — The Overhead Myth“
- Huffington Post: “How a TED Talk Destroyed the Charity Overhead Myth“
- Nonprofit Quarterly: “The Overhead Myth“
- Sasha Dichter’s blog: “The Overhead Myth“
- Sidekick Solutions: “Value Can Unlock the Nonprofit Overhead Myth“
- Childfund International: “End the Overhead Myth”
- Jazi: “End the Overhead Myth“
- And this list is just the tip of the iceberg. If this doesn’t quench your thirst, then go to Google and click-click-click.
Let’s start a discussion using the comment box attached to this DonorDreams blog post.
I personally don’t think anything is going to change as a result of this “overhead myth” campaign push.
I think donors are set in their ways. I believe Dan Pallotta was right about the Puritan influence on our culture. I don’t think “culture” and “values” and “habits” are easy to change. AND I think talk is cheap.
In the comment box below, please tell me why you think I am right or why I am wrong.
Here’s to your health!
Founder & President, The Healthy Non-Profit LLC