Overhead Transparency: The First Step to Scalable Growth
Seventy percent of Americans think nonprofit organizations waste money, according to an NYU survey. To combat this concern, donors often try to evaluate the success of an organization before making a contribution. With 72 percent of 2014 giving coming from individuals, (up five percent from 2013) it’s more important than ever to consider the content and language you use to attract donations. And because donors are sensitive to how their dollars are put to use, organizations need to be strategic about how they communicate overhead expenses as many individuals look to an organization’s overhead ratio as a measure of its success.
Evaluating Nonprofit Success
As vital as operating expenses are and as much return as they generate when executed strategically, it’s commonly understood that donors don’t want their dollars to go to the operation of your organization. They want their money to go directly to helping your cause. This is why an overhead ratio tends to be presented to donors using the language, “for every X dollars you donate, X dollars go directly to the cause.” Donors tend to feel a greater sense of altruism when they hear how their contribution touched someone’s life, not how it helped pay for your staff’s salaries.
In a recent study by UCSD economist Uri Gneezy and reported by Nonprofit Hub, 449 college students were given the choice to donate $100 to two different organizations. Each student received various messaging in their appeal. Students were asked to donate to a matching campaign, a seed fund, or a campaign where 100 percent of the donation would go to the cause, as another donor had already covered overhead costs. The mission-dedicated appeal outperformed the seed fund by 80 percent and the matching donation rates by 94 percent.
Ultimately, advertising your operating expenses without the right context will not drive donations. It just won’t have the same messaging impact as an image of a child in need and a 100-percent-to-the-cause appeal.
As such, organizations work hard to keep operating expenses low, and then advertise this to donors to attract gifts. While this strategy might secure more donations, it has dangerous implications. When less money is spent on overhead, less money is spent on attracting and maintaining talented team members and investments in the scalability of your organization. Less money spent on overhead is less money spent on management and fundraising expenses—important elements that help your organization serve its mission.
These expenses include things such as legal and accounting services, insurance, personnel, publications of reports, rent, publicizing campaigns, preparing and distributing fundraising materials, soliciting grants, and many other costs vital to the operation and success of a fundraising organization. Without proper investment in overhead, your organization is forced to survive from campaign to campaign and is unable to realize any dreams of expanding your reach. Looking only to an organization’s overhead ratio as an indication of success is a counterproductive measurement tool that does little to truly differentiate one nonprofit from another.
If overhead is not a fair evaluation of a nonprofit organization’s standing, what should be used to measure the success of an organization? The Charity Defense Council recently displayed their answer to this question on billboards along major roadways in the Boston area: “Don’t ask if a charity has low overhead. Ask if it has big impact.”
Impact is the ultimate goal of your organization. Dan Pallotta, founder of the Charity Defense Council, explains in his famous TED talk how fewer expenses translates to more impact if it is assumed we cannot grow the size of an organization’s total fundraising pie. If the pie grows, the significance of the expense percentage changes entirely. He states, “If it’s a logical world in which investment in fundraising actually raises more funds and makes the pie bigger, then we have it precisely backwards, and we should be investing more money, not less, in fundraising.”
According to Overhead Myth, another organization shifting the belief that financial ratios are the only indicator of nonprofit success, we should “pay attention to a broader set of factors about nonprofit performance: transparency, governance, leadership, and results, as well as finances.”
The Catch 22
How many lives you change depends a great deal on how your organization invests in its operations. You can expand your impact only if your organization can expand its operations. In order to expand your operations, it’s important to help your supporters understand that a donation to your overhead can make just as much of an impact as a donation directly to your cause, if not an even larger impact.
Changing an entire population’s viewpoint isn’t easy. If you step away from cause-driven messaging in your fundraising, your organization will not want to be the only one on the soapbox. Yet, your organization can begin to foster conversations that help the entire sector and increase transparency. With strategic incremental changes in your messaging you can help donors understand the importance of investing in overhead. Here are two ways you can reference the significance of your operations in your communications.
Strategy No. 1: Offer Recurring and One Time Giving Simultaneously to Lend Exposure to the Importance of Funding Your Organization
Present donors with different options in order to reflect the different interests of your donors and increase your organization’s transparency in its operations. Through strategic messaging, you can appeal to one group of donors to cover your operational expenses and another to contribute directly to your cause. In this first option you can start a recurring giving program to fundraise for your operations in order to raise awareness for the importance of investing in overhead. This approach also allows you to use the traditionally effective “100%” language in your appeal to one time donors at the same time.
Group 1: The Nonprofit Association of Oregon recommends asking your most supportive donors to fund your infrastructure. Appeal to superstar donors to support the organization’s operations by presenting it as contributing to your sustainability and growth.
Group 2: Appeal to donors to directly help your cause and have 100 percent of their donation go to supporting your programs.
Liberty in North Korea (LiNK) does a great job of giving donors both the option to contribute once or to join them as a recurring giver. By connecting their recurring giving program to sustaining their work, they highlight the program’s important contribution to their operations and, ultimately, their impact. The way they present their recurring giving program also gives them the opportunity to still use the “100%” language above their one time donate button. This allows them to appeal to both donors who want to support LiNK’s operations and those who want their entire donation to go to the cause.
TIP: Thank donors publicly to help them see how vital their donations are to the work that you do. For example, Executive Director of Rainier Valley Corps and writer, Vu Le suggests in his blog to thank donors with language such as this: “We want to provide special recognition to XYZ Foundation for understanding the importance of providing general operating funds. Without unrestricted funds, our organization cannot run its programs.”
Strategy No. 2: Connect the Dots
Make a more specific appeal that speaks to the importance of overhead spending. Illustrate what a donation made to overhead equates to in terms of impact. For example, you can say, “If we raise X dollars toward our operations, we can hire X more development staff members. We project this will improve our volume of donation dollars by X and help save X more lives annually.” While using numbers in your communications may be a less emotional approach, your projections will help donors connect the dots between supporting your operations and supporting your impact.
Tip: With this strategy, drop the 100 percent language. Vu Le recommends to use key words like “critical infrastructure” and “core support” to make your overhead more attractive to donors.
Overhead Myth recommends asking internal questions to understand if a shift in your overhead spending could positively impact your organization. If so, your next step will be to encourage these conversations to take place in and out of your organization.
The only way to break out of the catch 22 conundrum is to create an environment where organizations and donors can speak the same language. These small communication tweaks are the first steps to creating scalable growth and doing the most good possible. When enough donors understand the true impact of investing in overhead, the 100 percent language can be discarded altogether as donors will evaluate organizations by their current impact and plans for a better world.