The reflexive bias against investing in non-profit overhead

The most pernicious problems facing nonprofits: the reflexive bias that many donors have against "overhead."

"There are two kinds of overhead: good and bad," Tom Tierney and Joel Fleishman, authors of Give Smart, explain. "While it's wrong to waste philanthropic dollars on goods and services that aren't needed, it's equally wrong to limit the impact of philanthropic dollars by depriving nonprofits of the funds they need to sustain, improve, and expand their performance ('good' overhead)."

In his book Managing the Nonprofit Organization, Peter Drucker advocated implementing a range of actions aimed at "converting good intentions into results:" conducting deep market research, incubating new ideas, and training and developing staff and volunteers. He also called for devising timely feedback and measurement mechanisms.

None of these undertakings, however, happen magically. They require talented employees, procedures, and technology to accomplish—all of it costly activity that could be classified as "overhead."

In a 2008 study, the "vicious cycle" is highlighted that many nonprofits fall into as they attempt to please donors who "tend to favor organizations with the 'leanest' profiles" or choose to fund only those specific programs that directly serve the needy. Feeling pressure "to conform to funders' expectations," these nonprofits don't invest in their core organizational capacity and otherwise under-report their spending on general management and infrastructure on tax forms and in fund-raising materials. This, in turn, reinforces the donors' misguided notions about "overhead."

Fortunately, some funders are starting to get it. Nothing else will turn all those grades of C that Drucker handed out into solid A's.

--Rick Wartzman, executive director of the Drucker Institute