No Donor Pays for Overhead

There is something about overhead that is so toxic to major gift officers (MGO) that they literally run away from it every time it gets close to them.

And the topic doesn't only repulse MGOs. Managers and leaders feel pretty squeamish about it too. If you bring up the subject, you can see their bodies tighten, as they get ready to defend this nasty but necessary thing.

I was in a meeting recently with some managers when the “O” word came up. You would think we had just moved into the ring of a major boxing match. Goodness. Some managers were defensive. Others quietly retreated into their spreadsheets. Still, others moved into some language about “we’re doing the best we can to keep costs down.”

So, I stepped into this swamp with the following question: “What do you think donors think about overhead?” And we were off on a fun journey that mixed one cup of philosophy with one cup of reality and 10 pounds of anxiety.

The core assumption, in this meeting and in nonprofits in general, is that major donors do not like and will not pay for overhead. I think this is wrong for several reasons:

Overhead is a good thing. What? A good thing? Yep, and we need to start talking it up. No more of this sniveling, shifty wandering into a dark corner about this subject. We need to embrace it for the good that it is.

Overhead is necessary. Here is what is so funny about this topic. If you didn’t have overhead, you wouldn’t have anything. It is still mind-blowing to me to sit in a meeting with seemingly intelligent people and have them imply that overhead is bad. It must be pushed down to levels that make it impossible to run the organization and must be hidden in financial reports so ill-informed donors can’t find or discern where it is or how much it is. This is truly comical.

I remember a meeting I attended where the top finance guy and I got into quite a heated debate on the need for overhead. You should have heard the positions he was taking. It was like we were on a different planet.

I said, “But, Bill [not his real name], you just cannot run this organization on the 10 percent you are saying you run it on. Your costs are really in the 20 to 24 percent range. Why don’t you just come out with it?"

“Because the donors won’t pay for it, Richard," he replied. "That’s why!”

And we went round and round. Here’s a guy, not unlike hundreds I have met, who (a) really believes overhead is nasty, (b) can’t find a way to tell the truth about it, and (c) is trapped in the circular argument he has created.

I even made the following argument: “OK, Bill, let’s eliminate this overhead item and that overhead item, etc. Now, can you run the program?”

He had to admit he couldn’t. Which made my point. Overhead is a necessary and needed part of pulling off the mission of the organization. Why is it we can’t get this in our heads?

The nonprofit world and the watchdogs have perpetuated a misconception about overhead. There are many people out there, nonprofit leaders and self-appointed watchdogs, who find virtue in propagating the idea that overhead less than 20 percent is right up there with sainthood. Unbelievable. And many of these people, when you look under the blankets in their organizations, the real number for them is far higher than what they are publishing—they simply have adopted sophisticated legal ways of packaging it all.

I wouldn’t say it’s ethical—but it is legal. This just causes more pressure on the sector and keeps donors in the dark on the subject. There are glimmers of light out there on this subject with some leaders who are showing courage by speaking out and taking action. But it is slow in coming.

There are three things you can do in 2016 to change this overhead discussion from a negative one to one that is logical, that makes sense and that your donors warmly will embrace:

1. First, get your head right about this topic. The way I worked through this topic to get to a balanced place was to look at how much effort it takes to make a product or make profit in a commercial company. I also looked at how much effort it takes to get anything done.

What I mean here is when you start to examine the effort put out to achieve a result, you begin to understand that it takes far more effort to get a result than you thought. As I have examined this in a number of areas of life, I finally settled on the fact that the relationship of cause and effect—of effort to make something happen versus achieving the result—was a lot larger than I had thought. If all you had to do in life was make a 10 percent effort and get a huge result, life would be easy. So, this is how I did it.

You might have a different path. My point here is stop and think about this a bit. And ask yourself the question—what does it take to get the program delivered in a nonprofit? And how important a role is overhead to making program happen? Your honest answer will help you land in a better place.

2. Realize that major donors can understand how overhead is a critical part of delivering program. More and more enlightened donors are really getting it in this area. They know what it takes to get things done. Many major donors are businesspeople and entrepreneurs. They know what they went through to be successful. They know what overhead they had to have to make things work. They really do understand. But you need to talk sensibly about this. And that is why…

3. You can make a difference in this area. If you start talking about this in a calm, professional and sensible way, you can start to change this around as your donors begin to understand that delivering life-changing help to people and to our planet will not happen without these basic support systems in place.

Another way you can make a difference here is to place the overhead costs, on an allocated basis, as part of the program costs. Too many MGOs are presenting programs to donors without two overheads attached—Overhead No. 1 is the overhead of the program itself. Overhead No. 2 is the allocated portion of overall organizational overhead the program should carry. Both of these should be attached to the program as you present it to donors. This makes sense. It’s right thing to do.

I love overhead! And you can too. It is the power—the driver that makes the good happen. It is the fuel in the engine. What a great thing! Start working to really believe this and help your donors believe it as well. It will make such a difference to them, you, your organization and the nonprofit world in which we all are operating.