Getting Clear About Overhead, Part 2: Questionable Fundraising Costs

In my last post on overhead, I discussed the way in which a lack of investment in the capacity for nonprofits to assess performance contributes to overhead ratios becoming a sort of default measure by which donors gauge performance.

I made this point in the context of an important effort by GuideStar, Charity Navigator, and BBB Wise Giving Alliance, announced last week, to change this through an Overhead Myth campaign to educate donors. I appreciate the fact that, in calling for an end to an over-reliance on overhead, these organizations did not take an absolutist view. Instead, they acknowledged that, at the extremes, overhead ratios can highlight problems.

I think that’s important, especially with respect to fundraising costs. I am concerned that we are conflating types of overhead in ways that are not helpful to the cause.

Let me try to explain.

When we overgeneralize about overhead, lumping together fundraising costs that too often are, in fact, questionable, with investment in professional development or performance measurement, we do the cause of reducing the emphasis on overhead a disservice. Unfortunately, some—most prominently Dan Pallotta—fail to adequately make this distinction.

Fact is, donors have a legitimate interest in understanding what proportion of their dollars ends up in the hands of for-profit fundraising professionals. A recent, widely discussed investigative report by the Tampa Bay Times and the Center for Investigative Reporting (CIR) identifies “America’s Worst Charities” on the basis of the proportion of funds raised that were paid to for-profit solicitors. (Topping the list is the “Kid’s Wish Network” which raised nearly $128 million over the past 10 years – $110 million of which went straight to the solicitors they hired to raise money!) Some of these organizations seem to exist as little more than shells for for-profit fundraisers.

Similarly, the Washington Post ran an important story on the use of for-profit solicitors who are less than forthright with donors by prominent nonprofits in September. There have been other media reports exposing these kinds of practices, as well.

Those of us who think overhead is an overused and flawed measure will be much more powerful and credible advocates for our case if we condemn—loudly—the kind of practices exposed by these investigative reports. Yet some, like Pallotta, whose for-profit fundraising business went under when its client organizations and their donors became concerned about the high proportion of funds raised going to Pallotta’s company (and to the promotion of his image rather than theirs), seem intent on defending them.

When the Tampa Bay Times/CIR report came out, Pallotta was quick to criticize the media, rather than the nonprofits and fundraisers whose practices the media had revealed. On Twitter, he said he didn’t trust “a damned thing the media says” unless he investigates it himself and described the Tampa Bay Times/CIR report as among two “big steps back” that week (the other being the passage of a law in Oregon on overhead, which may well be misguided).

In a subsequent blog post, he reveals that he attempted to dissuade the reporters from running their series, but also confesses that he still hasn’t read it in its entirety. To his credit, he does come out against the deceit of donors, but, to my read, seems too willing to justify practices that may be legal (in most states, anyway) but fall far short of good practice.

Pallotta justifies (very) high fundraising costs if they lead, eventually, to incremental increases in funds available to nonprofits. But he does not seem to recognize that donors deserve choices, and most won’t want the bulk of their contributions ending up in the pocket of a fundraising firm (especially when they often aren’t aware that’s where it is going) if they can find a nonprofit that achieves the same or better results with a more efficient fundraising effort.

This matters because, for the important message about overhead to be credible, indeed for it to be heard, it needs to be delivered in a way that acknowledges that looking at a nonprofit’s spending can sometimes be important. And the message needs to be conveyed with openness about the fact that, sadly, there are bad actors—and that the bad actors need to be exposed.

That’s the only way we’ll win hearts and minds on this issue.

Nonprofit and foundation leaders should be smart about who they support in the cause of reducing the focus on overhead. I applaud the Overhead Myth campaign and the organizations that launched it.  Let’s get behind that effort, not Pallotta’s misguided one.


Phil Buchanan is president of CEP and a regular columnist for the Chronicle of Philanthropy. You can find him on Twitter @PhilCEP.

administrative cost ratios, effective philanthropy, leadership, nonprofit sector, performance measurement, role of philanthropy
Previous Post
Getting Clear About Overhead, Part 1
Next Post
Working Well with Grantees: A Guide for Foundation Program Staff

Related Blog Posts