THE BLOG
08/12/2010 02:12 pm ET Updated May 25, 2011

The Overhead Dilemma

The discussion concerning overheads remains an important point for news organizations, donors and organizations. Sean Penn was featured in "The Guardian" telling of how services were not being delivered and money spent. ABC even decided to go back and see how the money has been spent. What has been missing from the discussion is the complexity of how aid money is used. One example of this is illustrated by the dilemma of the burn rate. In addition, statistics are a concern as they can sometimes be self-serving and/or paint an incomplete picture.

Aid and development are not matters of simple arithmetic. Think of it this way: what are the benchmarks when determining the successes of American schools? Whether you like it as a metric, the most important measurement is test scores. Those who argue for or against their use are settled around a debate that is nested in outcomes. In the end, the success of a school is determined by its ability to educate the students. However a person chooses to measure success, the focus remains aimed at the students.

When designing programs around the betterment and improvement of the livelihood of individuals or groups, what should be the metric for determining success? Should it be how individual programs work to enable economic and social growth? Or, is success determined by how much money is being spent on the recipients?

A study by the Center for High Impact Philanthropy found that donors were not as concerned with costs as other sources. One person said:

[T]he whole issue of overhead expenses as a percentage of your total budget is...not regular. It seems like the wrong way to think about it.

However, they recognize the need to learn more:

In the past few years, the amount that we've been able to give has grown to an amount that will shortly [require us to give it] some thought rather than just handing [the money] out.

Despite the desire to learn more, people allow and seemingly encourage the focus to shift away from outcomes. The Straw Man will deceive you into thinking that every dollar you send will go straight to the people. He will make you feel better. 99 cents of the dollar you donated will go directly to the recipients. Sounds like a shower of money for every person!

Imagine for a moment, Steve Jobs comes up to the stage in his black turtleneck. It's the newest launch for an Apple product. After the iPad, Jobs has gone in an even more radical direction. In his right hand is his iPod shuffle, the left a MacBook. Holding both up, Jobs announces, "We have created the most powerful notebook ever and the most compact device for delivering music. Moving forward, Apple will operate like this iPod to achieve the grandeur of this MacBook. We will slash our overhead to bring you the best products possible!" The crowd erupts into a frenzy, kicking over chairs as Jobs stands holding the nano up with his knowing grin.

What makes this improbable is that 1) Jobs would never do this and 2) people would not care. Number two is more important of the two reasons. People would not care because they want Apple to produce sleek, cutting edge products that work well and travel easily. The final product is what matters most. As long as the price is not too absurd, people will buy an Apple product. Branding has to be recognized here, but it would not have gotten this far if the products were of poor quality.

With less money being spent on research, development, testing and so on, could Apple continue to compete with the fast rising Google? Do you show up at the Apple store and demand to only pay for the exact cost of the iPod you want?

If we expect for profit organizations to do what it takes to achieve positive results why does the standard not apply to nonprofits? Getting the nonprofit status means that the success of the program will be based on the delivery or services, not profit margins. Donors give money with the intention of support specific programs that they assume need financial support to succeed.

Overhead should not be ignored, but results should carry much more weight that they are presently given (but they cannot be the only form of measure). A well run organization will require some overhead. What matters is the ROI. If a program guaranteed that they will spend 70 cents on the dollar and eradicate malaria in Kenya (with proof that unquestionably shows their claim to be true). Would you donate? How about to a program that says 99 cents on the dollar will go to AIDS awareness and make no mention of outcomes. Would you donate to them? It is my hope that you will have answered yes and no respectively.

Beware, organizations use the fallacy low overhead costs to trick donors into thinking that that makes them effective. Don't be fooled.