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Telling The Story Of Your Overhead

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Our friends at the Non-Profit Happy Hour Facebook group shared the Furniture Bank’s Charity Overhead Manifesto. In the post, the Furniture Bank talks about how much damage resistance to covering overhead can do to their programs.

We have heard many of these arguments before, but Furniture Bank takes the next necessary step of humanizing and discussing the impact of the work “overhead employees” perform.

The reason this is important is because it takes an abstract concept of overhead and specifically shows how overhead costs are manifested in the organization’s operations. Absent this specificity, it is easy to envision overhead going to senior administrator salaries or unsexy equipment and supplies like filing cabinets and copy paper. While this is inevitably the case to some degree, it isn’t the whole story.

This reminds us how important a compelling story can be. Furniture Bank lists what their overhead helps them accomplish:

  • Maintain, insure and run a fleet of 11 trucks, and a team of movers, picking up furniture from donors and delivering them to clients every day;
  • Employ 25-30 individuals each year who would otherwise face barriers to employment;
  • Pay market rent on a 30,000 Sq Ft client showroom;
  • Sustain an organization with 40 hardworking and big hearted employees who:
    • take orders,
    • track inventory,
    • book client appointments,
    • schedule and complete pickups & deliveries,
    • answer donor inquiries,
    • process donations,
    • ensure we have the right technology to run our operations, and
    • undertake the numerous other tasks that must occur every day to ensure that the community’s unwanted furniture goes directly to a family transitioning out of homelessness or displacement.

That format can be a little boring though. They also participate in the Charity Defense Council’s “I’m Overhead” campaign that has created images with Furniture Bank employees discussing what they do which end with a line about the impact they make, (you can see examples of the full ads on the Furniture Bank site.)

“My name is Miro Janes-Richardson. I make sure families have a place they can finally call home, and I’m overhead.”

My name is Yuri Hernandez. I make sure clients have the dignity of choice and don’t have to sleep on the floor, and I’m overhead.”

Miro is a truck crew leader and Yuri is a client services coordinator.

It may be difficult for arts organizations that don’t have a strong human services aspect to their operations to tell as compelling a story as these, but there are still opportunities to illustrate that staff help the organization be good stewards of donations.

For example:

“Do you recognize this flat? It has been in some of your favorite performances over the last five years including Dangerous Liaisons, Amadeus, A Raisin in the Sun and Christmas Carol. Here at the theater, we are great recyclers, repainting and repairing set piece dozens of times, extending their useful lives for years. This reduces our need to purchase lumber, which is good for the environment. But to make it happen, we need to store flats like this one and be clever about changing its appearance so you don’t recognize it when it appears again.

I am Steve and I work magic to make fake trees look real so that real trees can live, and I am overhead.

That five minutes of typing may not have resulted in the most compelling argument for theater operations, but you get the idea.

It isn’t just enough to tell people that they shouldn’t use overhead ratio as a measure of effectiveness, it is also necessary to communicate specific examples that illustrate that what they may envision the raw numbers represent isn’t necessarily the reality.

I don’t doubt that there will still be people who want 95-100% of their donation to be devoted exclusively to program beneficiaries, but linking overhead activities with impact outcomes can help combat decision making strictly by the numbers.

Positive Signs For Reimbursement Of Overhead Costs

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You may remember back in January that I wrote about the new rules promulgated by Office of Management and Budget (OMB) requiring that any entity receiving federal funds much cover at least 10% of a non-profit’s overhead costs.

Don’t worry, its okay if you don’t remember. But this is relatively important and bears repeating.

One of the concerns at the time was that state and local governments and other funders might pressure non-profits with whom they contract or provide grants to waive a their right to receive overhead costs. The OMB rules prohibit this, but if a non-profit isn’t aware of the rules or are afraid to advocate for themselves, the problem may continue.

Given this context, it was a positive sign when the L.A. County Board of Supervisors voted to adopt the OMB guidelines and to write a letter to the state government to do the same.

It may not seem significant for a governing body to agree to adhere to the conditions under which federal funding was allocated, but as Non-Profit Quarterly notes there are “rob Peter to pay Paul” concerns about how funding may be manipulated.

Rules do not implement themselves without strong nonprofit monitoring and oversight—hopefully, as in this case, in partnership with government authorities. In this case, not only are the supervisors talking to state officials, but they will also be developing an implementation strategy in consultation with Los Angeles nonprofits, which we presume, based on what we have seen as policy statements from CalNonprofits, ought to address how to ensure that higher indirect cost reimbursements do not occur at the cost of lessening service delivery.

As I had noted in my earlier post, the National Council of Non Profits created a guide to educate organizations about the rules and provide responses to assertions from funding entities that the rules don’t apply.

One thing I had mentioned was that arts organizations should note that these rules likely apply to the funding you receive through your state or regional arts organization:

One- it doesn’t matter whether it is called a contract or grant or any other term, the rules are based on the substance of the transaction.

Two – Sub-recipient non-profits who are required to acknowledge part of the funding is received from the federal government are covered under these rules.

Info You Can Use: Figuring Out True Program Cost

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After reading my post yesterday about how the federal government is requiring that non-profits receive at least 10% of grant/contract funding to cover indirect costs, you may be wondering how to accurately determine direct and indirect costs for your programs.

Getting an accurate picture of program costs is not only important for making sure you get proper allocations from government funded programs, but also for working toward a larger goal of providing boards of directors, funders and the general public with an accurate picture of the true costs of programs.

Providing an accurate picture is key in the campaign to diminish the use of overhead ratio as a measure of non-profit effectiveness.

In a piece on Social Velocity, Nell Edgington, emphasizes the need to present an accurate picture of costs and “break out of the nonprofit starvation cycle”

She also notes that it can help decide what programs really needs to be cut.

But don’t stop there. Turn this new knowledge about the financial impact of each of your programs into a strategic tool. Once you figure out what each individual program fully costs, you can compare the financial and social impact (how well it contributes to your mission) of each program to each other, like this in order to understand how well your entire program portfolio contributes to the money and mission of your nonprofit. Through this analysis you can determine what programs you should expand, which you should continue, and which you may need to cut.

She provides links to a rather detailed guide to determining the true costs of programs published by Bridgespan.

It isn’t an easy process. The estimated timeline in the guide is at least a month. Smaller organizations with fewer programs will take less time.

The guide discusses each stage of the process in detail, suggesting what staff roles need to be involved. It also provides some clear definitions and examples for what needs to be considered.

For instance, indirect costs:

Indirect costs can include general administration and management expenses (e.g. management staff salaries and benefits), infrastructure costs (e.g. rent and utilities, transportation, equipment depreciation, technical licenses), and other costs that are incurred for the benefit of all the programs within the organization (e.g. marketing costs, advocacy expenses).

It addresses questions about determining whether some salaries like those of the executive director and human resource personnel should be allocated across different programs or not.

(Just a note – The guide is about six years old and some of the internal links to templates and examples no longer work, but don’t be discouraged, most of them may be found in the appendix.)

Since there seems to be a slowly developing trend toward removing the stigma of overhead costs (that may evolve into a demand for a high level of transparency), nonprofits may want to start to invest in practices that will allow them to evaluate the true costs of their activities.

Info You Can Use: Know Your Funding Rights

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An event of note to be aware of is that last month the federal Office of Management and Budget said “that when governments hire nonprofits to provide services, those nonprofits legitimately need to incur and be paid for their “indirect costs”—which is government-speak for overhead and administrative expenses.”

According to Chronicle of Philanthropy, non-profits should receive at least 10%, if not more, “of the direct costs of their grant or contract to pay indirect costs.”

Given that non-profits are frequently anxious about revealing their true overhead costs for fear of having it count against them with donors and foundations, this mandate is seen as a victory because it starts to institutionalize the practice of covering those costs.

However, according to the Chronicle of Philanthropy story, the enforcement of these rules may depend on the self-advocacy of non-profits.

While the new rules are now the law of the land, the indirect-cost regulations must be interpreted and applied consistently by tens of thousands of individuals in fragmented departments, agencies, and offices at “pass through” entities (usually state and local governments and large nonprofits) that use federal funds to hire nonprofits to provide services in their communities.

The regulations are already in effect, but the multiple levels and layers of government have not learned about or communicated the existence of the new rules, let alone provided consistent training programs, to employees scattered across these pass-through entities.

Making matters worse, there has been no transition time for the thousands of jurisdictions to purge and modernize their outdated statutes and regulations to enable them to comply with the new federal requirements.
[…]

Unless we all take concerted action, it’s quite possible that we will slide back to what had been the status quo: inconsistencies in our nation’s archaic, patchwork government-nonprofit grants and contract “system” that have left nonprofits at the mercy of often contradictory policies and practices of disconnected federal, state, and local government departments, agencies, offices, and employees. Arbitrary, unjustifiable caps on indirect costs could remain routine.

The author of the piece, Tim Delaney, chief executive of the National Council of Nonprofits, encourages foundations to lend a hand with this advocacy. He points out that often grant makers end up filling the indirect cost gap that government entities may refuse to cover. Correct practices could mean a savings for grant makers who would no longer need to provide this assistance.

As an arts organization, you may be thinking that you don’t have any government contracts so this doesn’t apply to you. However, notice that these rules apply to pass through agencies which, depending on the program, may include arts councils and other organizations receiving funding from places like the National Endowment for the Arts.

The Council of Non-Profits has put together a guide to help people know their rights and advocate for them. It presents different scenarios where you may be told these new rules don’t apply and how to respond to them.

Two points brought up in the guide that lead me to think these rules apply to state and regional arts councils: One- it doesn’t matter whether it is called a contract or grant or any other term, the rules are based on the substance of the transaction.

Two – Sub-recipient non-profits who are required to acknowledge part of the funding is received from the federal government are covered under these rules.

If you have been required to acknowledge part of the funding is received from the NEA, these new rules are applicable to that program unless specifically excluded by by legislation.

Info You Can Use: We Are More Than Just Our Overhead Ratio

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Well, the timing could be a little better.

Part of the big news today is that GuideStar, Charity Navigator, and BBB Wise Giving Alliance joined together to sign an open letter to all donors asking them not to use overhead as a primary criteria for giving.

The letter does a pretty good job in a short space of discussing how inaccurate the ratio is and the consequences for non-profits when they feel they have to hobble themselves to maintain a low number.

The letter specific cites Stanford Social Innovation Review‘s article, The Non-Profit Starvation Cycle which does a good job explaining the problem in detail.

The reason why I said the timing could be better is because it comes on the heels of a weekend where CNN has been majorly featuring a story about charities that have been fleecing donors with the causes only getting 4% in some cases.

Now make no mistake, I am not defending a 96% overhead by any means. There are a lot of scams out there and it appears pretty clear that the organizations featured in the story set out to deceive right from the moment they generated names that sound very close to nationally recognized charities.

My concern is that to people unfamiliar with charities, the timing of the letter’s release makes it almost appear to be an apologist for the high overhead ratios these dishonest groups had. Especially since a picture of the website of the one of the groups CNN damns contains a claim that Charity Navigator gave them a 3 star rating.

The proximity of these two announcements aside, the public recognition that charities should not be judged on overhead alone is a real advance in the effort to get non-profits evaluated on less superficial criteria. It will likely still happen for some time to come, but it is an encouraging sign.

Oh What A Tangled Web…

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Today at lunch a musician friend was picking our brains about a fund raiser he wants to do for a cause he really believes in. He outlined his vision and then asked for ideas of places he could hold it. There were a couple assumptions he made about his budget that were unrealistic which we helped him to re-evaluate.

The discussion made me think of an article someone I follow on Twitter recently linked to by Nell Edgington, “5 Lies to Stop Telling Donors.”

Edgington lists the lies as:

1. X percent of your donation goes to the program
The distinction between “program expenses” and “overhead” is, at best, meaningless and, at worst, destructive… It is magical thinking to say that you can separate money spent on programs from money spent on the support of programs…“overhead” is not a dirty word…

2. We can do the same program with less money
No you can’t. You know you can’t. You are already scraping by…Politely, but firmly, explain to the donor that an inferior investment will yield an inferior result…

3. We can start a new program that doesn’t fit with our mission or strategy
Yes, that big, fat check a donor is holding in front of you looks very appealing. But if it takes your organization in a different direction than your strategy or your core competencies require, accepting it is a huge mistake…Don’t let a donor take you down that road.

4. We can grow without additional staff or other resources
Nonprofit staffers truly excel at working endless hours with very few resources…But someday that road must end…

5. 100 percent of our board is committed to our organization
If that’s true, then you are a true minority in the nonprofit sector. Every nonprofit board I know has some dead wood…It’s a fact that funders want to see every board member contributing. But instead of perpetuating the myth that 100 percent is an achievable reality, be honest with funders…It is far better to demonstrate that you are tirelessly working toward 90 percent.

I have frequently linked back to a post Andrew Taylor made about 6 years ago where he suggests non-profit organizations aren’t doing themselves any favors by keeping funders expectations high when they report everything went as good, if not better, than planned every single time.

In recent years “overhead” has come to the fore as a problematic measure of effectiveness. I think the whole idea about low overhead being a measure of effectiveness is the root of the other evils Edgington mentions in her article, in the pursuit of portraying themselves as having low overhead non-profits will say they can do more with less money, do more with same/fewer staff and the organization has a super efficient board.

An April article in the LA Times talks about why overhead is such a poor measure of a charity. In that column, Jack Shakely, president emeritus of the California Community Foundation, cites the example of a group that was buying its medicine in Canada but was using the cost of the medicine in the U.S. as a basis to report the difference in price as an in-kind donation in order to make their administrative costs appear to be a smaller portion of their budget.

Writes Shakely (with my emphasis added),

Don’t get me wrong. Low administrative costs could indicate prudence and sound judgment at a charity, but they could just as easily indicate inadequate staffing, insufficient salaries or, shall we say, fudging. Moreover, administrative costs aren’t the primary measurement of for-profit excellence. Are McDonald’s admin costs lower than Wendy’s? Apple’s lower than Microsoft’s?

[…}

But our intuitive thinking system wants an answer now, and because we are intuitively inclined to believe that the nonprofit sector is filled with soft, amateurish executives, we latch on to the pseudo-science of administrative costs as a measure of excellence. It’s hogwash; there is absolutely no way of telling that an organization with 5% administrative costs is superior to one with 20% costs based on that criterion alone. In fact, the exact opposite may be true.

As Shakely notes, it will be hard to get donors and funders to shift to better criteria when the overhead ratio appears to be so clean and rational a measure. But as both he and Edgington comment, no funder is going to use any other measure of evaluation if they aren’t told the criteria is unfair and unrealistic.

Think about what you can do to change assumptions as you make your next pitch or write your next grant proposal.

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Butts In The Seats by Joe Patti is licensed under a Creative Commons Attribution-NonCommercial-NoDerivs 3.0 Unported License.
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