Overhead ratios are the wrong way to look at charities

Dan Pallotta has a superb TED Talk explaining the fallacies of using overhead as a measure for charities: The way we think about charities is dead wrong.

Just a few highlights to share along with my observations (comments in italics are my paraphrase of his points):

We have created different rules for the for-profit world and the charity world. There are five areas of discrimination:

  • Compensation – Want to make $50M selling gory video games? Cool. Want to make $500K leading a free clinic with 60 centers in 20 cities? You are a bad person.
  • Advertising – we don’t allow charities to advertise to the extent needed or productive. That means we limit charities’ ability to tell potential donors about all the good they do.
  • Taking risk on new revenue ideas – prohibiting risk of failure prohibits innovation.
  • Time horizon – won’t allow charities to build a long-term project – they have to show results now. In this year’s annual report and this quarter’s grant report.
  • Profit to attract risk capital – can’t attract the funds to try something really big or that requires lots of up-front funds.

We still need charities.

Business will lift most people up but some (he suggests 10%) will get left behind for some reason. Social business will provide a market to help some of those left behind.

Other areas of need will require charities for transformation. Caring for and loving on the seriously disabled is his example. Tending to the homeless, coaching moms under crushingly coercive reproductive pressure, and all facets of evangelism are my examples.

He mentions just two of the many problems with the focus we have on low overhead ratios:

  • Perception that “overhead” is not part of the “cause” – That is false. I’ve known for 20 years that having a high-functioning personnel system, properly reporting to the never-ending list of government regulators, and raising sufficient funds to change the world are all integral parts of fulfilling the mission even though doing it right drives up the overhead ratio.
  • Forces charities to forego what they need to grow – If the overhead has to be kept small, lots of corners have to get cut.

We confuse morality with frugality. Good point.

Here is the problem as he outlines it in the presentation:

  • we have been taught that the bake sale with 5% overhead is morally superior to the big, aggressive, professionally managed fundraising organization with 40% overhead.

The question we omit is what is the size of the organization?

What if the bake sale only netted $71 for charity work and the fundraising organization raised $71,000,000? Is the bake sale a better organization more worthy of your support? That isn’t a hypothetical – he lead a charity with that kind of growth and impact. They didn’t have a socially acceptable overhead ratio though.

Please check out the video. It’s a superb summary of his books. Check out his books too.

I’ve previously mentioned his ideas here, here, and here.

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