Doing More With Less Often Gets You Less
In previous blogs, we have been critical of the way in which nonprofits are often evaluated—their so-called “overhead ratios.” An overhead ratio compares the operating costs of the nonprofit with its income. A low-overhead ratio implies that the organization is minimizing its expenses (e.g. salaries, office rent) and, therefore, has more resources available to dedicate to its mission.
This leads to a “less-is-more” mindset. Less paid to staff, investment in technology, consulting, etc. An article in the Stanford Social Innovation Review titled, "The Nonprofit Starvation Cycle," concludes that, “A vicious cycle is leaving nonprofits so hungry for decent infrastructure that they can barely function as organizations, let alone serve their beneficiaries.” It starts with donors’ unrealistic expectations about the costs of running a nonprofit. This results in the nonprofit misrepresenting the actual cost of doing business, while attempting to operate on as lean a budget as possible. This, in turn, reinforces the donors’ unrealistic expectations. And the wheel goes round and round.
In the end, this cycle is bad for the nonprofit, and bad for its constituents.
A 2018 article in Nonprofit Management & Leadership, "Toward a Valid Approach to Nonprofit Efficiency Measurement," describes a better approach. Researchers at North Carolina State University’s public administration department, Jason Coupet and Jessica Berrett, utilized two statistical approaches to compare how organizations utilized resources (for example, staff and volunteers) to produce goods and services. They also compared how well nonprofits with similar missions produce and deliver services with the resources each have.
These methods work particularly well when the units of evaluation are straightforward, like meals delivered, homes built, refugees relocated.
Habitat for Humanity provided data to the researchers on the number of homes built or rehabilitated in a single year by its 792 affiliates across the U.S. They compared overhead ratios for the affiliates with the product produced—the number of homes each made available. What they found was that by using more sophisticated statistical measures, many affiliates with higher overhead ratios ranked very high when the measure of success was based on their goods produced—habitable homes.
Depending on which statistical measure was employed, the highest-ranking affiliates had overhead ratios of 32 and 36 percent. This was in contrast to another affiliate that boasted an overhead ratio of only 2 percent, but delivered far fewer homes.
The nonprofit world has fallen prey to this starvation cycle in part due to the behavior of bad actors who have spent lavishly on things like salaries, offices and transportation. We need to better communicate with our funders that the measure of our organizations’ success isn’t in a single number, the ratio of operating costs to income, but in the goods and services provided.
Until funders understand that doing more with less isn’t always the smart play, the starvation cycle won’t be broken. In the end, it’s the missions we serve that suffer.
Otis Fulton, Ph.D., spent most of his career in the education industry, working at the psychometric research and development firm MetaMetrics Inc., Pearson Education and others. Since 2013, he has focused on the nonprofit sector, applying psychology to fundraising and donor behavior at Turnkey. He is the co-author of the 2017 book, ”Dollar Dash: The Behavioral Economics of Peer-to-Peer Fundraising,” and the 2023 book, "Social Fundraising: Mining the New Peer-to-Peer Landscape," and is a frequent speaker at national nonprofit conferences. With Katrina VanHuss, he co-authors a blog at NonProfit PRO, “Peeling the Onion,” on the intersection of psychology and philanthropy.
Otis is a much sought-after copywriter for nonprofit fundraising messages. He has written campaigns for UNICEF, St. Jude’s Children’s Research Hospital, March of Dimes, Susan G. Komen, the USO and dozens of other organizations. He has a Ph.D. in social psychology from Virginia Commonwealth University and a Bachelor of Arts from the University of Virginia, where he also played on UVA’s first ACC champion basketball team.
Katrina VanHuss has helped national nonprofits raise funds and friends since 1989 when she founded Turnkey. Her client’s successes and her dedication to research have made her a sought-after speaker, presenting at national conferences for Blackbaud, Peer to Peer Professional Forum, Nonprofit PRO, The Need Help Foundation and her clients’ national meetings. The firm’s work is underpinned by the study and application of behavioral economics and social psychology. Turnkey provides project engagements, coaching, counsel and staffing to nonprofits seeking to improve revenue or create new revenue. Her work extends into organizational alignment efforts and executive coaching.
Katrina regularly shares her wit and business experiences on her and Otis Fulton's NonProfit PRO blog “Peeling the Onion.” She and Otis are also co-authors of the books, "Dollar Dash: The Behavioral Economics of Peer-to-Peer Fundraising" and "Social Fundraising: Mining the New Peer-to-Peer Landscape." When not writing or researching, Katrina likes to make things — furniture from reclaimed wood, new gardens, food with no recipe. Katrina’s favorite Saturday is spent cleaning out the garage, mowing the grass, making something new, all while listening to loud music by now-deceased black women, throwing in a few sets on the weight bench off and on, then collapsing on the couch with her husband Otis to gang-watch new Netflix series whilst drinking sauvignon blanc.
Katrina grew up on a Virginia beef cattle and tobacco farm with her three brothers. She is accordingly skilled in hand to hand combat and witty repartee — skills gained at the expense of her brothers. Katrina’s claim to fame is having made it to the “American Gladiator” Richmond competition as a finalist in her late 20s, progressing in the competition until a strangely large blonde woman knocked her off a pedestal with an oversized pain-inducing Q-tip. Katrina’s mantra for life is “Be nice. Do good. Embrace embarrassment.” Clearly she’s got No. 3 down.