GuideStar, Charity Navigator, and the BBB Wise Giving
Alliance recently put out a letter cautioning donors against placing too much
emphasis on artificially low administrative costs. It seems that they finally
recognized that ranking the effectiveness of nonprofits by how little they
spend to keep their business operations running might be harmful to the health
of nonprofits.
The problem is, they have spent many years carefully and
repetitively convincing (dare I say
brainwashing?) donors that there was some magic percentage that nonprofits
should not exceed for administrative costs. It might be just about too late for
these revered ranking organizations to have their "AHA" moment.
The truth is, just like any other business, nonprofits have
to have a certain amount of money to keep their operations going, and that
number, or more properly the ratio of administrative (overhead) to program
costs, is going to differ according to the operational needs.
Nonprofits with large
staffing requirements, expensive equipment like trucks or warehouse racking or who
require large buildings to house and
distribute goods are going to spend a higher ratio of their funds to maintain
those than a nonprofit that runs a say, a suicide hotline in the basement of
someone's home. Both should be equally evaluated for funding according to how
effectively they accomplish their mission.
Very few businesses can operate efficiently and effectively
and still keep overhead below 35%. All the ranking organizations accomplish by
encouraging reporting of those expenses at 10 or 20% of revenue is to encourage
creative bookkeeping. The result is that many good, useful and effective
nonprofits go under because they simply don't have the infrastructure to maintain
the organization at even minimum operating efficiency.
Another truly irritating metric that is often evaluated is
whether key staff salaries are "too high". Too high compared to what?
It is undeniably true that some
charitable organizations are simply a way for the founders and their cronies to
get paid an exorbitant amount of money. But to say that the CEO of a nonprofit
with 100 million dollars in revenue is overpaid just because of the dollar
amount of their salary is ludicrous. If the CEO of a comparably sized
for-profit is making $500K a year, why should the CEO of the nonprofit be
expected to make a third of that figure?
If the salaries of nonprofit key staff are
considered as a part of the whole, they often make in the aggregate less than 3% of the total revenue figure. Try
hiring a competent CEO, CFO and COO for a for-profit and stay at that level. The
turnover and retraining costs at nonprofits are the subject of much hand-wringing.
Perhaps if the staff was compensated at levels comparable to for-profit
industry standards and evaluated based on results instead of cost, that
wouldn't be such a problem.
No one is advocating that nonprofits should spend the bulk
of their donations and financial donor support on overhead. That's as
ridiculous as spending too little. There is a point where overhead, including
fund raising costs do exceed an acceptable level when compared to results. But starving any operation of reasonable operating
capital is a sure way to put it out of business, and far too many nonprofits
are facing that reality every day.
I'm ecstatic that these three organizations have finally
recognized that their effectiveness measurement metric is flawed. Hopefully they can apply some common sense to
their operations and provide better donor guidance reporting in the future.
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