Recently I heard a nonprofit leader proudly report that his organization spent only 10% on overhead and fundraising. The rest of the organization’s costs went to program. We hear such reporting all the time. Not only from those in the nonprofit community but from the press and the public. It’s a pervasive communication. The focus on this measure needs to be corrected! This measure alone is a poor proxy for determining a particular nonprofit’s impact. Even the leaders from three of the nation’s nonprofit “watchdog” organizations dubbed it a myth to use this data to measure a nonprofit’s impact. You can find these expense allocations on any nonprofit’s 990 tax form. The IRS encourages this thinking by requiring nonprofit filers to divide their expenses into three categories: program, management and general, and fundraising.
We won’t delve deeply here into the fact that the numbers reported across the nonprofit sector on this form are anything but accurate. We know from comprehensive studies of nonprofit tax forms that, in spite of generally accepted accounting principles, nonprofits find it difficult to consistently parse their expenses into program, management and general, or fundraising. However, none of this really matters because the very concept itself fails to recognize what should be measured. The important measure is a nonprofit’s outcomes and impact.
It is not the process leading to the service or product which ultimately is important but the product or service itself. If I go into the local Apple store to buy the latest and greatest iPhone I don’t ask the salesperson how much Apple spent in the last fiscal year on management and sales (fundraising). I’m sure the salesperson would think I was being silly asking such a question. And correctly so. This metric is not a valid measure of the satisfaction I will receive from their product. What I want to know is will the iPhone do what Apple says it will do and what I want it to do.
Similarly in nonprofits, in spite of the fact that there is asymmetry in the economic exchange — the donor may or may not be the recipient of the service or product — what needs to be measured is impact. And the specific overhead and fundraising costs incurred by a nonprofit to produce its product in no way guarantees the quality of its impact. As in a for-profit business the quality of their product may or may not be determined by these expenditures. Typically success is measured by customer satisfaction, sales, margins, and maintaining or increasing market share. So too with a nonprofit. What donors should be asking is: Based on your organizational objectives, how well did you deliver? What was the volume and quality of your service? How satisfied are your customers (beneficiaries and donors)? Compared to other nonprofits in the region or sector how do you compare? Are you listening to the beneficiaries of your service to continually improve your service? The list can go on. The point being the overhead and fundraising metric should go way down the list of measures used to determine a nonprofit’s impact. Indeed making this a guiding principle actually limits a nonprofit’s ability to achieve maximum return.