overhead ratios

More good stuff on overhead ratios and “worst charities” – 6-29-13

An actual conversation is going about how to use overhead ratios and what outcome measures might look like. Lots of writers out on the ‘net are involved.

Writers are actually engaging ideas from other writers. All of us working in the NPO community need this conversation to develop ideas on how to move away from the misuse of overhead ratios that has been going on for decades.  I think this conversation is a good thing.

In addition, the feature articles by the Tampa Bay Times, Center for Investigative Reporting, and CNN on “America’s worst charities” is developing legs.

There are so many articles I’d like to discuss in my own post but time doesn’t allow doing so.

Soooo, I’ll start to aggregate a few of the more interesting articles.

My comments usually will be limited to one or three sentences.

Focus will be on two areas:

  • Overhead ratio discussion
  • Developments flowing from the “America’s Worst Charities” articles

Here’s my first list:

Overhead ratio

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Jim Ulvog

The “worst charities” discussion isn’t about overhead ratios

The ranking approach used by the Tampa Bay Times in their “America’s Worst Charities” articles is focusing on the high fees paid to telemarketers rather than just the overhead ratio. One of the threads of the online discussions is that their methodology is just focused on overhead ratios.

That is not the case. The overhead ratio conversation is a separate issue. The Tampa Bay Times approach focuses on the high cost of telemarketing as a fundraising technique and the issues related to that industry.

The reporters outlined their approach in a separate article here.

As I looked at bits and pieces of the data, I noticed several of the charities had respectable program ratios, so I decided to poke at the data.

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Jim Ulvog

Outcome measures – On the other hand…

Moving to outcome measures won’t make things perfect in terms of evaluating charities.

There are some downsides to consider, as mentioned by Nonprofit Quarterly – Want Charities to be Evaluated Based on Impact? Be Careful What You Wish For.

The article raises three concerns, all of which we need to think about very carefully. I will mention the three issues and comment on each.

First, (more…)

Jim Ulvog

Here is an outcome measure you would love to have. Would this be better than a low overhead ratio?

How would you like to share this with potential donors instead of describing your low overhead ratio?

Let’s say you are a child sponsorship organization.

Here’s your message:

Children sponsored in our program are

27 to 40 percent more likely to complete secondary school, and 50 to 80 percent more likely to complete a university education

than children in their village who were not in the sponsorship program.

Furthermore, when children sponsored in our program grow up, they are (more…)

Jim Ulvog

Guest post – Unintended consequence: the pressure for ‘good’ overhead ratios creates pressure to get GIK

The following guest post was submitted to me by a reader. As with other guest posts, this is his/her opinion and does not represent the opinion or experiences of his/her employer. It also does not represent my opinion.

I wrote the headline. I hope it captures the tone of the post.

For your consideration:

The more and more that I hear about the “controversy” over pharma values, the more and more it shows the completely unnecessary overreliance on overhead rates as a mean of valuing charities. Think about some of the issues that arise from the use of overhead rates:

  1. Charities feel pressure to increase revenue (Charity Navigator expects 10% a year growth in addition to low overhead and high net assets)
  2. Charities may get into a donation that can quickly boost revenue without adding fundraising cost (like GIK, or dewormers)
  3. Charities forgo donations when they no longer provide high enough revenue (charities now are using far less dewormers because they no longer have high revenue value)

What does this mean?

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Jim Ulvog

Guest post – GIK Valuation: The issues not being discussed

The following is a guest post submitted to me from a reader. As I read the article, it became obvious that the author is familiar with the issues of the relief and development organizations.  Whether the author is an outside auditor, accountant inside an NPO, or even a medical vendor does not matter. Obviously the comments reflect the author’s opinion and not those of his/her employer.  This also does not reflect my opinion.

Agree or disagree as you wish, here are ideas deserving your careful consideration:

GIK Valuation:  The issues not being discussed

While there are many, if not dozens, of misconceptions and false information floating around pharmaceutical values, GIK values, and NPOs supposed conspiracy to inflate revenues to improve their Charity Navigator rating, I thought I would point out a few things to try to bring the conversation around to the big picture rather than focusing on the quite narrow discussion around non-FDA approved, 500mg mebendazole.

500mg mebendazole is a red herring

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Jim Ulvog

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.

[ted id=1688]

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: (more…)

Jim Ulvog

Time to un-mis-educate donors about what efficiency looks like

The phrase un-mis-educate is coined by “J” in a post, Rethinking Efficiency, at AidSpeak.

J suggests one of the reasons NPOs (NGOs for my international readers) are under so much pressure on overhead ratios is that NPOs have spent a generation mis-educating donors that organization X is better than Y because 90% or 98% of donations to X go to program services.

I agree.

J says that NPOs need to undo the mis-education, thus the need to un-mis-educate donors.  I think that is a great turn of phrase.

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Jim Ulvog

6 better questions to ask an NPO than “what’s your overhead?”

Looking at the ‘overhead ratio’ is a lousy way to evaluate the effectiveness of a charity.

Once you understand that concept, you are left wondering what else to look at when considering whether to donate.

Dóchas Network offers six great questions to ask instead of looking at overhead. (more…)

Jim Ulvog

We need a new way to evaluate charities – Part 2

Previous post discussed explained that is a major point by Mr. Dan Pallotta in two articles he wrote:

His main point is the excessive focus we as a society have evaluating organizations based on their “overhead” ratios and our intolerance for NPOs paying market salaries.  The unintended consequence is that we are restricting organizations from getting the money to have the full impact they could realize.

Action plan

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Jim Ulvog

We need a new way to evaluate charities – Part 1

That is a major issue for Mr. Dan Pallotta. He suggests the excessive focus we as a society have on rating the effectiveness of NPOs by “overhead” ratios and our intolerance for NPOs paying market salaries are restricting organizations from getting the money to have the full impact they could have.

I read two articles by Mr. Pallotta on the same day. Please check them out.

Why Can’t We Sell Charity Like We Sell Perfume, from the Wall Street Journal.

Charities Must Battle Public Misconceptions About Overhead Costs, from the Chronicle of Philanthropy.

In the WSJ article he says:

We have two separate rule books: one for charity and one for the rest of the economic world. The result is discrimination against charities in five critical areas.

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Jim Ulvog

Two more cautions on how to interpret overhead ratios

Came across two more articles reminding us to be careful in how we use overhead ratios to assess nonprofits. The functional allocation is a useful tool but needs to used and interpreted carefully.

Meaningless Fractions is a guest post at AidSpeak from Fredrick.

His concern is that the way overhead ratios are emphasized creates confusion between inputs and outputs. Overhead is one of many inputs. Delivering aid requires a wide range of inputs. In addition to infrastructure, an organization needs skilled people in the right locations at the right time, corporate knowledge of how to deliver effective aid, and dozens of other inputs.

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Jim Ulvog

Another article on donated meds and overhead ratios – the impact of substitution on our thinking process

An Op-Ed in the Los Angles Times by Jack Shakely, president emeritus of the California Community Foundation, discusses the impact of donated medicines on the functional allocation:  The worst way to judge a charity.

A friend of his was grouching about another NPO buying meds for $0.10 a pill and booking them as GIK revenue at $7.00.  Mr. Shakely looked at the organization’s web site and found they claim 90% of the contributions go to program, with 5% to G&A. That leaves 5% for fundraising.

He then wonders why we are putting so much emphasis on the functional allocation as the main measure of an NPO.

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Jim Ulvog

Q: Are overhead ratios the perfect measure of NPO efficiency and effectiveness?

A: No way.

This is the conclusion of Saundra Schimmelpfennig in her e-book, Lies, White Lies, and Accounting Practices; Why nonprofit overhead doesn’t mean what you think it means

Many people believe that the ratio of supporting services to total expenses is the ideal way to measure the efficiency of a nonprofit organization.

Even at a conceptual level, that is a flawed idea.

At a practical level, Ms. Schimmelpfennig explains it is so easy to play games with the functional allocation that the overhead ratios should be viewed skeptically.

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Jim Ulvog