More people have started looking at nonprofits differently, thanks in part to Dan Pallotta’s Ted Talk and letters regarding the Overhead Myth. We have a long way to go and YOU can help change the conversation to what really matters – impact. It’s misguided and ineffective to base decisions solely on some ambiguous overhead number that isn’t measured the same way throughout the sector. And yet, I hear CEO’s regularly say they need to find a way to reduce expenses to meet a funder’s expectation. This makes no sense to me.
Effectiveness is measured by several criteria and we certainly want to be sure resources aren’t being wasted irresponsibly. But let’s help funders and the broader community stop asking what a nonprofit spends on overhead because financial ratios are not indicative of overall nonprofit performance.
Low “overhead” isn’t necessarily something to be proud of!
It could indicate you aren’t investing enough where it’s needed. Less isn’t more if it keeps you from delivering the impact your community is counting on you for.
In order to talk to potential investors in a meaningful way, focus on these 3 steps:
1. Help board members understand what is required to deliver the impact you promise. We hear about “building capacity” all the time – is it clear what that means? It’s about allocating the necessary resources to ensure your nonprofit can address needs in the community now, and also sustain that impact over time. The conversation needs to include things like the current state of your technology – do you have the systems you need to monitor, manage and report on key metrics, for example. Do you have the right people in the right places and does the current structure serve you well for the short-to-midterm? Are you investing in staff through training programs to get the very best results? Is your marketing strategy strong and effective – how do you know?
All of this and more must be included in your operational expenses. That’s what it costs to run programs and make an impact. We need to stop using overhead ratios as a sole indicator of success because it doesn’t paint the whole picture.
When your board members don’t have a grasp of your organization’s ability to optimize impact, it’s tough to get buy-in on key issues, engage them in your work, make critical decisions or expect them to be successful ambassadors. Educate your board members on the cost of impact.
2. Change your language. Never ever use the word overhead again. Seriously. By definition, it means different things to different people and usually just ends up confusing the conversation. Try using the word “investment” instead. And please don’t print these ratios in your annual report – they aren’t a uniform measure and it hurts the whole sector.
Instead, shift the conversation to the outcomes of your work.
This is essential to your success – if you aren’t changing the world, who cares how much you spend on overhead? People will rally behind a winning team – share your bold goals! Share your performance data – both quantitative and qualitative – what can you point to that proves you deserve to be supported? Did graduation rates improve as a result of your work? Have there been less falls by seniors? How many more kids did you serve this year?
Impact is definitive and clear and more meaningful than a nebulous number about “overhead.”
3. Now coach board members and staff to talk about impact to potential donors and investors. They will be proud to speak knowledgeably and honestly about how much money needs to come in the doors in order to deliver the social outcomes you’re committed to. Do some role playing and you may find that it reconnects them to their passion and reason for being part of your work.
Once everyone on the leadership team recognizes what it takes to run this nonprofit business, your board can confidently talk to others about why strong partners are needed to accomplish this important work. The goal is to connect the people who care about your cause to the organization in a way that matters to them while at the same time advancing your mission.
I am optimistic that the dynamics around this issue are moving in the right direction as I see more impact investing taking hold, and social enterprise is no longer a new concept. If you need help shifting the conversation for your organization, let me know.