Tuesday, May 24, 2011

Jack be nimble, Jack be quick

This week, we will give for disaster relief, and we will not restrict our gift in any way. Why not? Organizations need operating expenses to remain open and ready for disasters. Without preparedness, there is no rapid response, no search teams for Joplin, MO, no volunteer network to help set up shelters. All of those take people to organize, and those people need telephones, offices, copies, custodial services, insurance, and accounting services. All of those are overhead or operating costs.

Many donors prefer not to support operating expenses. A former supervisor told me that the notion of low overhead costs for charitable organizations started in 1997, when Ted Turner pledged $1 billion over 10 years to create the United Nations Foundation. My boss said Turner pounded the table and said, “Not one penny for operating costs.”

I did a little research and learned that the administrative costs Mr. Turner refused to pay were not those of the United Nations Foundation, which his gift created, but those of the United Nations itself, as reported by legal scholar Stacy Williams in the Georgia Journal of International & Comparative Law (1998-99, p. 425-456).

The UN Foundation does have operating costs, very low ones. The organization reports that 94 cents of every dollar spent went directly to support UN programs and causes. The other 6 percent paid for services that almost all functioning charities need to fund. When nearly 100% of your operating budget comes from one donor and you do not yourself implement many programs, keeping overhead costs low is pretty easy.

The BBB Wise Giving Alliance publishes a guideline that 35 percent of total expenditures is typically acceptable for overhead (which includes management, fundraising, operations and more). The alliance makes allowances for variations from that, reflecting the findings of a major, multi-year overhead cost study project released in 2005 by the Urban Institute and the Center on Philanthropy at Indiana University.

In fact, there is no “one size fits all” ratio for overhead costs. Management expenses vary along several dimensions, including the organization’s age, operating budget, reach (local or international), and specific type of service such as for short-term assistance or long-term change.

The Bridgespan Group took the Cost Study work further in 2008 and found “organizations and their funders are locked in a vicious cycle in which nonprofits are pressured to under-invest in overhead and to under-report their true overhead costs. . . In the short-term, staff members struggle to ‘do more with less.’ Ultimately, though, it’s the beneficiaries who suffer.”

Despite these research findings, some donors still insist on "not one penny for overhead." Most recently, I've seen the claime made by groups fundraising for relief in Japan, and we will almost certainly see it for relief in Joplin.

We prefer to follow an older adage than “not one penny for overhead," a Latin phrase for a fundamental precept of emergency care: Primum non nocere: First do no harm. So when we give to an organization for disaster relief, our gift is completely unrestricted because we know when disasters hit, we want the responding organization to be there and ready.

1 comment:

Warren Robert said...

Interesting topic -- thank you for writing about it.

One of the funny things about operating expenses in my experience is that the same people who look askance at that broad category for charities also argue passionately that you need to 'pay for performance' when it comes to the managers of for-profit concerns.

The salaries of CEOs (and many other management levels) at investment banks are typically overhead, but are looked at as rewards for exemplary leadership (a questionable characterization itself) rather than a drain on shareholder value. Funny, that.