The Overhead Myth

The last 15 years have seen a strong movement towards using financial ratios to rate a charity’s effectiveness.  These financial ratios measure how much of your donated dollar goes to overhead and fundraising costs, versus how much goes to the charity’s actual programs.  This makes sense – it is wiser – and more effective – to give to an organization that can put more of your donated dollar to work for the desperately poor.  But, this has created a problem:  We have come to rely so heavily on these financial ratios, that we have forgotten to ask the more basic questions.  What are the results?  Do their programs work?  In a word, are they effective?

In the biggest piece of news in the charitable world in a decade, last year three major ratings organizations (Charity Navigator, Guidestar, and the BBB Wise Giving Alliance) launched an initiative called The Overhead Myth.
In launching this initiative, they noted that over-emphasizing financial ratios has served to encourage charities to under-invest in overhead, thus limiting their potential for quality, sustainable programs.  As a result, many organizations, smaller charities in particular, have not been making the internal investments in leadership, infrastructure, research, and new approaches necessary to make their programs more impactful and more effective for the people they serve.  Why?  Because such internal investments make their overhead ratios appear worse, and then fewer people donate to them...

So the explicit purpose of this new initiative is to urge prospective donors to look at the whole picture, and in particular, indicators of program effectiveness as the main measure of a charity’s worthiness.

Think of the question this way:  Would you rather give to an organization that raises funds more efficiently, or one whose programs are more effective?  Would you rather support an organization with a lean overhead ratio, or one that has made the investments in infrastructure and talent necessary to field high-impact programs?

For more on The Overhead Myth, go to http://overheadmyth.com/.

This kind of thinking in the charity ratings business is long overdue.  From our viewpoint, this is very good news, indeed!