Overhead: The Misguided Metric of the Non-Profit World
Why are people so concerned about overhead?
The first question many people ask me, truly, is, “How much do you spend on overhead?” That means expenses not directly related to a group’s programs, including office rent and the electric bill. Givers want to know that we’re not spending much money on this stuff, that most of their donations go to “program-related activity.”
The assumption is that when 99% of your expenses go to programs, you are fantastic. Not-for-profits proudly proclaim, “95% of our expenses go to programs fighting poverty!” as if they’re a gazillion times more effective than those that spend a pathetic 85%. Web sites that track not-for-profit financials perpetuate the “overhead is evil” myth by lauding groups that curtail it. Perhaps they think overhead is an espresso machine. Or a new jet. Or art on our walls. (Whoops! Then we’d be a bank.)
Why does overhead taken by itself lead to a distorted picture?
Low overhead doesn’t necessarily mean an organization is awesome at fighting poverty, or that its turnover is low and its people productive. And it certainly doesn’t guarantee that the group is spending wisely.
What are examples of good overhead expenditures?
Let’s take an example from the for-profit world, which isn’t so squeamish about overhead. According to Apple’s Q4 2008 report, 78% of its expenses were sales, general, and administrative — the corporate equivalent of overhead. Seventy-eight percent! Yet nobody flinches. Keep spending, Steve Jobs! Your products rock!
Here’s a case study from my own organization. Last year, we spent nearly $200,000 overhauling our Web site, from the content-management system to the architecture to the design. No one likes such expenses on the books: They smell like overhead. But our site no longer crashes, traffic has doubled, and we even won a Webby Award.
But some overhead is bad, right?
Obviously, not all overhead is good. I know one not-for-profit executive who flies only first class, stays in suites at the W, and has a car service schlep him around New York whenever he’s there. This guy has an overhead problem.
So what’s your main point? What should we be concerned about more than overhead?
My point: Stop obsessing about overhead. You can’t assess an organization on one statistic. Instead, focus on effectiveness. That’s a harder story to tell and a trickier thing to measure. But that effort is what everyone ultimately wants — a good investment.
In sum: There is indeed such a thing as bad overhead, and organizations should be as efficient as possible. But efficiency does not equal effectiveness. We should be concerned first and foremost about effectiveness. Focusing too much on “overhead expense” too easily rewards behaviors which may appear efficient on the surface but in actuality decrease effectiveness because they undermine the engines of growth and bold action.