Don't yawn and click on another link yet. Administrative costs and overhead sound really boring, but they're critically important for nonprofit organizations and also for donors, most of whom don't appreciate their importance. This post will set out the basic concepts, and the next will apply them to Dan Pallotta's provocative book, Uncharitable.
The ideal of every organization and those who support it is not to minimize, but to optimize all costs, including administrative costs. That is, the costs incurred by an organization are appropriate to the extent, and only to the extent, that they contribute net value to the organization's mission.
To use an example from the business sector, assume that a widget manufacturer's only mission is to make a profit for its owners. Then, an additional administrative expense of 1¢ is justified if it is likely to produce an additional 2¢ of profit.
The underlying idea is not different for nonprofits. Their missions are to achieve particular social, environmental, educational, religious, health, etc. goals. And an incremental expense is justified to the extent it has the potential to increase the organization's net social value. Administrative costs include items such as utilities, back-office functions, and strategic planning. Many of these are treated as "overhead" or "indirect costs" because they are not directly connected with any particular program the organization operates but rather support all of its programs.
Whether in the business or nonprofit sector, the concept of optimizing administrative costs has this implication: You can only assess the reasonableness of an organization's costs in terms of their effect on its achievement of its mission. A high-performing organization may have high administrative costs that contribute to its great impact, while another organization may have very low administrative costs and have little if any impact on the problems it seeks to address.
The practices of other nonprofit organizations can provide a useful benchmark for one's own practices. All things considered, organizations of the same sort and size--for example, food banks, symphony orchestras or large staffed foundations--tend to have administrative costs in the same general range. Having to justify significant variances imposes a healthy discipline on an organization' management and trustees.
Unfortunately, many funders are reluctant, or even unwilling, to pay their fair share of administrative costs, especially when these costs are characterized as "overhead." This tendency is exacerbated by many funders' unwillingness to provide organizations with unrestricted general operating support.
Some services that evaluate nonprofits actually contribute to donors' misunderstanding of the role of administrative costs by rating organizations based on their administrative costs as if these costs had meaning apart from their contribution to its social impact. In fact, some organizations with very low administrative costs may be under-investing in financial accounting systems, human resource development or other administrative functions that that are critical to effective governance, achieving their organizational missions, and public accountability.
We have to move towards a "new contract." Non-profits are often handcuffed by inflexible, siloed funding (picture a small business owner restricted to spending each kind of revenue in only specific ways; absurd on its face). What non-profits want is more flexible, longer-term funding which enables them to also build a strong organization, i.e. help not just 50 kids today, but also help the next 500.
The MAIN reason they can't get such funding is because often (with exceptions) their outcomes are unclear. Non-profit outcomes are not as clean as one EPS number, but that doesn't mean they can't measure. Every non-profit should be clear about its theory of change and then articulate its positive outcomes (or not).
If non-profits do this hard work, funders must fund the way Brest suggests. It's hard to get there, but the solution (forward progress, not panacea) is easy to understand.
They suggest that giving to admin is a license to steal. In fact, the opposite is typically true. Nonprofits spend far too little on the basic infrastructure costs like technology systems, salaries, facilities and the like. They are forced to skimp on important items that could help them improve their outcomes because of arbitrary caps on overhead imposed by government and private donors and misconceptions (like the ones evidenced in the responses to Paul's post) about frivolous spending or lack of accountability. Of course there are bad actors in all sectors and donors need to do the appropriate due diligence, but once you've decided to fund a charity's work, then it is only appropriate to pay a portion of the overhead costs.
To my mind, I'd rather support a nonprofit that prioritizes investments in the people and systems that are critical to accomplishing their mission.
Paul Brest's points are the right ones. I hope others will join his efforts to correct the misconceptions that are so evident in many of these posts. Here's a quick video on YouTube that you might also find interesting. http://www.youtube.com/watch?v=lEXdiWFmh9c
Admin costs in not-for-profits are a license to STEAL...... Nice try with the explaination. John Thain School of Rationalization.
Ps - to "contributors..... Give directly to a charity, if you donate to a Non-Profit you are paying for office buildings and executive perks. End of story.
A non-profit organization is compelled to spend its budget to the very maximum. This is so it can justify the same, or increased, budget for the next fiscal year. The entire concept feeds upon itself: Dollars that should rightfully go towards the non-profits "mission" go to feed ever bloating administrations (overhead). You can apply this to government and school administrations also.
In the commerial sector, overhead attempts to self-replicate too, managers love to create their own fiefdoms. However, now and again common sense (business acumen) prevails and a company will "clean house".