09/21/2013 08:48 am ET | Updated Nov 21, 2013

The Irony of Overhead

Click here to read an original op-ed from the TED speaker who inspired this post and watch the TEDTalk below.

Allow me to begin with a back-of-the envelope estimate: every year nonprofits have one billion interactions with donors in which they prominently focus on their "overhead ratio" -- the proportion of their expenses that goes to administrative and fundraising expenses.

Thus, nonprofits find themselves telling the story of work to house abused children or fight climate change... through an accounting ratio. They are responding to the tragedy of the "Overhead Myth": the common belief that such a ratio is a proxy for nonprofit performance (instead of a filter for rare cases of fraud.)

But, worse, nonprofits find that they are reinforcing that myth every time they communicate with a potential donor. Unlike Alanis Morisette's famous song, this actually fits the classic definition of "ironic": in order to raise money to do good, nonprofits highlight a ratio that constrains their ability to do good.

Indeed, the focus on overhead is more than ironic: it has very practical consequences for nonprofits. As described in a seminal article in the Stanford Social Innovation Review, the overhead myth creates a "starvation cycle" that undermines nonprofits' capacity to solve our world's most fundamental problems. Nonprofits find themselves choked by explicit or implicit funding restrictions, and sometimes even starved to death by under-investments in infrastructure.

And yet, there are glimpses of light. We've seen multiple examples of work to shift donor behavior. This summer, I joined with the CEOs of Charity Navigator and the BBB Wise Giving Alliance to write an open letter to the donors of America denouncing the "overhead ratio" as a valid indicator for nonprofit performance.

We will continue our work to educate donors and change this conversation. But we need nonprofits' help. We understand if they -- temporarily! -- feel compelled to continue sharing the overhead ratio in their fundraising materials. But if we're going to move beyond the Overhead Myth, we need to begin to offer donors an alternative. Help donors pay attention to the factors most relevant to nonprofit performance: transparency, governance, leadership, strategy, measurement, and results.

In particular, nonprofits can join the 95,000 organizations that have shared information through the GuideStar Exchange -- with 43,000 achieving one of our three levels of participation (Gold, Silver, or Bronze). Gold-level participants answer the five Charting Impact questions to populate the impact tab on their GuideStar nonprofit report. And through their own materials, nonprofits can begin to cite meaningful data about results instead of the overhead ratio. (Donors have other great resources available, too --they can find top nonprofits identified by Philanthropedia, Great Nonprofits, or GiveWell.)

The shift to a results-based approach to philanthropy will take time, but the path ahead is clear. Instead of promulgating the myth that low administrative costs are associated with high performance, let's focus on helping donors give with both their hearts and their heads.

It's time to retire the overhead ratio in favor of a multidimensional, impact-oriented framework to achieve what really matters: getting more money to the best performing organizations.

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