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Invest in Growth. Then Get Ready to Defend Yourself.

Ready Football Youth --- Image by © Royalty-Free/CorbisI was stunned this week when I saw that Ken Berger of Charity Navigator co-signed a letter with the heads of GuideStar and BBB Wise Giving Alliance and posted it on a website called The Overhead Myth.

The letter begins with:

“We write to correct a misconception about what matters when deciding which charity to support. The percent of charity expenses that go to administrative and fundraising costs–commonly referred to as “overhead”–is a poor measure of a charity’s performance.”

While I agree wholeheartedly with the statement that overhead is a poor measure of a charity’s performance, my first thought was how bizarre to be hearing this from Ken Berger of all people! 

After all, Charity Navigator is the organization that rates 1,000 of America’s largest nonprofits using as its primary indicator of financial health the ratio of program, administration and fundraising expenses.  To call this practice a “poor measure” after they’ve been aggressively promoting it for years seems a sudden turn.

Well, it turns out that in a simultaneously-posted blog, Mr. Berger defends Charity Navigator’s emphasis on overhead ratios because they are “a useful indicator of where many thieves and scoundrels dwell.”  If that doesn’t send out a warning message to potential donors, I don’t know what does.  (Scoundrels?!  Sends a chill down the spine doesn’t it?  That terrible nonprofit sector with the likes of Bill Sykes manipulating innocents like Oliver Twist.)

OK, there are scoundrels.  And I’m all for routing them out, but my primary concern with using overhead ratios is that they only offer a tiny snapshot in the trajectory of a nonprofit’s finances.

I get so tired of nonprofits being pushed to perform within a series of 12-month increments while being given no incentive or encouragement to invest in healthy growth.

Watchdogs like Charity Navigator promote the “perform well this year or you’re out” mentality, foundations literally chain us to it, and even our own boards pin us down.  What corporation functions within the confines of one year?  Even the president gets a four-year chance!

We must be able to invest in fundraising, in staff, in planning and, most importantly, in program innovation with an eye to the long term.  However, when we do these things, they will show up in our overhead ratios, and we should know that this may be used against us.

Dan Pallotta is a champion of investing in the future of nonprofits and here at Front Range Source we’ve been watching his comments with interest, particularly through his recent book, Charity Case.  Not surprisingly, Ken Berger has called Pallotta’s book “extreme” and “inaccurate.”

This issue isn’t going to go away. I suggest that you have in hand a solid strategic plan that outlines where you’re going to invest for growth, the expected outcomes of those investments, and the anticipated impact on your program/administration/fundraising ratios.

You need this not only for your own ability to steward the organization properly, but also for those donors who will ask about these things.

As Leslie’s written before, no one really uses Charity Navigator or GuideStar anyway.  But your foundation donors and perhaps a few major gift donors will likely be keeping a close eye on those ratios, no matter what Dan Pallotta or Front Range Source have to say about it!




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