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.