Looming Overhead: The Persistent Debate Over Administrative Costs

Tuesday, October 22, 2013
by James R. Knickman
It’s weeks later, and I’m still thinking about the conversation at Philanthropy New York’s “What’s Looming Overhead?” session, where we talked about the sticky issue of foundation funds supporting nonprofits’ administrative costs. The discussion was sparked in part by a growing movement, called “The Overhead Myth,” arguing that nonprofits’ effectiveness and efficiency shouldn’t be measured exclusively by the percentage of their finances that go toward employee compensation and costs like rent and equipment. I agree completely with that idea; nonprofits — like all organizations — need to recruit, pay and develop a competent staff; do some marketing and outreach; and keep the lights on in order to be successful.
At the same time, I lead the New York State Health Foundation, an organization that does not provide grants for general operating support and caps support for overhead at 15 percent of a total grant amount.
Some would argue (and, in fact, did, at the event) that my appreciation for the value of nonprofits’ administrative expenses and my organization’s unwillingness to pay for them are in conflict. But I think most strategic grantmakers agree that not every good thing is something that foundations should pay for.
First, many organizations — large hospitals, universities, disease advocacy groups — have large bases of individual donors who provide general support that can be used for operations and administration. Strategic foundations like ours more likely are investing in a specific project, while individual donors are more likely to support the organization: their alma mater, the place that gave them or a loved one good care, or the group that advocates for a cause close to their hearts. Unrestricted funds from these donors can be used to cover a portion of administrative costs. I do recognize, of course, that nonprofits that work on issues with little of the emotional resonance that inspires people to give will struggle more in this area (policy research, for example, does not necessarily tug at the heartstrings), and some organizations that attract major individual dollars may not be as effective and efficient as those with more shoestring budgets.
But how can we as funders know? It’s nearly impossible to make a case-by-case decision and be fair. If one organization needs $1,000 a year for professional development and another needs $6,000, how can we determine which, if either, is right or wrong? Even a shift toward benchmarking, or establishing industry norms for overhead costs, would be extremely challenging, both to develop and to monitor.
Which brings us back to a set cap on administrative expenses covered by a grant, which is a practical, if imperfect, solution. But I think there’s some value in saying to a potential grantee not, “What will it cost you?” but instead, “We have $100,000 to give you; what can you accomplish?” That slight tweak can inspire some efficiency and energy, and it establishes a project that’s results-driven. (I can’t help but offer an analogy from the health care world: part of what is driving out-of-control health care costs is our fee-for-service system, where we pay for every test and procedure, a model that actually encourages extra health care services that aren’t needed. A more rational system would pay a lump sum to health care providers and say, “Here. Use this to keep this person healthy, however you see fit.”)
The other reality is that foundations don’t have an infinite supply of resources. Every dollar we spend on overhead is a dollar that doesn’t go toward a strategic program. We deal with this ourselves in our own organizational decisions about administrative costs. When we consider a major purchase like new computers or think about our staffing model, every discussion starts with a statement like, “If we do this, it means we make one less grant this year.” And we take those trade-offs very seriously and weigh them carefully.
So, here is where I come out in terms of personal guidelines to shape our overhead policy:
  1. Keep a “fixed percent of direct expenditures formula” as the broad policy.
  2. Think mostly about expected outcomes per grant dollar spent, rather than about how grant dollars get allocated.
  3. Use a “core support” grant rather than a “program grant” to help build and support organizations working on issues we care about; and
  4. Don’t be inflexible: if the fixed percent formula is not appropriate, look for ways to fund some administrative costs as direct expenses in a program budget. Ever case deserves some individual attention.
What are your organization’s principles and perspectives when it comes to overhead? I’d love to hear from you in the comments section.
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