Overhead ratios aren’t just a suboptimal way of evaluating charities. If that were the case, you could say stand them being part of the mix as people evaluate nonprofits. In reality, they are actively negative ways of evaluating nonprofits — to a point, the nonprofits that do the “worst” on overhead are actually better and more effective organizations. This was highlighted in an excellent 2009 Stanford Social Innovation Review article by Ann Goggins Gregory and Don Howard. They talked about how some purportedly low overhead rates create unrealistic expectations among supporters, which create misleading reporting about overhead, which creates unrealistic expectations, and so on. All of which starves nonprofits of the resource they need to grow.
In the intervening 11 years, there’s been only a tiny amount of progress on this. Charity Navigator, for example, signed on to a letter decrying the use of overhead rates… while continuing to use them as the backbone of its financial ratings and decrying nonprofits who invest in staff and fundraising.
The challenge is that overhead ratios are things donors ask for, and nonprofits can gain perceived legitimacy by showing the percentage of revenues that go out in the form of services. How do you break the cycle and speak positively about your investment for the future of your organization? Researchers show three different ways:
1. Show your performance. Researchers this year looked at an organization with what they termed “high overhead” of 35%. (Even in the research papers on combatting the overhead myth, organizations are getting overhead shamed!). When the organization added that information, the percentage of research subjects who donated fell from 70% to 46% and average gift dropped from $2.70 to $1.72 (out of $10 the subjects were given to potentially donate). So the appearance of that information did impair giving (in large part because the researchers specifically said in their appeal letter “People believe that nonprofits make impact through their programs thus insist that the overhead (non-program) expenses should NOT exceed 20 percent of the total expenses”! A big hint that we probably don’t need to say: don’t put this in your appeal letter).
Anyway, the researchers also tested a section that talked about the organization’s accomplishments:
“This year, our organization received a major international award for our outstanding achievements in the environment protection. This prestigious award recognized our contribution in the following activities:
• Effectively reduced carbon emission by 20% last year in the communities in which we worked;
• Successfully implemented environment friendly protocols for more than 100 major carbon emitting companies; and
• Efficiently organized more than 80 volunteer projects with over 5,000 volunteers that target areas of high waste pollution.”
When that was added to the document, response rate still dropped from the control’s 70% to 63%. However, the study’s equivalent of average gift went up from $2.70 to $4.16, a clear and significant win for Team Performance. This means showing “high” overhead and talking about your performance beat not even mentioning your overhead or performance.
2. Show your transparency. It turned out that wasn’t even the most effective way to combat overhead aversion in the study. The researchers also tested a condition where they talked about their commitment to transparency:
“This year, our organization receives a notable international award for our transparency. This prestigious award recognizes our following activities:
• Constantly using external audits to ensure the organization adhere to the accounting principles;
• Having a clearly stated mission, programs, financial information, personnel information (board, employees, key officers, volunteers, etc.) in the annual report, IRS disclosure form, and official website;
• Having clearly articulated organizational strategies, ethical codes, values, and goals in the annual report and on the website; and
• Making it easy for stakeholders to get information about the organization in different ways, such as emails, apps, official website, and phone.”
Believe it or not (I didn’t — I thought performance data would do better), transparency was the winning strategy. Response rate increased from 70% to 77% and average gift increase from $2.70 to $4.12. One hypothesis for this is it puts the overhead ratio in a better frame — this is part of our commitment to always be honest with you.
3. Be your donor’s preferred nonprofit. I know: this sounds like a cheat. But once nonprofits love you and feel connected to your mission, they don’t care what your overhead rate is. This isn’t just a platitude; researchers tested this. They found out
1) when donors were given overhead information about a nonprofit, they always picked the “most efficient” (that is, lowest overhead) one:
“if you give participants in a study a choice of donating to one of a number of organizations that all support the same general cause, and you provide them with effectiveness information, they will choose the most effective one. They know a good deal when they see it.”
2) … unless there were differences among what the charities did, in which case, they picked their favorite:
“[I]f you give them a choice set that consists of a variety of causes, and you provide that same information on effectiveness and make it really easy for them to understand that information, those are the cases in which people ignore the effectiveness information. The reason is because they care about it, but not enough to sacrifice their own personal preferences when choosing a cause to support.”
Thus, the imperative is as it always was — not just to touch your donors’ hearts, but to make yourself indispensable to them.