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The idea of separating overhead from donations is a important idea that needs to be emulated more in the charitable community.

Most already do, but that's actually a problem for most charities, since they can't figure out how to scale or operate more efficiently because their budget is tied so directly to services.

For more than this, see the reasoning and extensive examples in Ken Stern's book With Charity For All. I wrote about it here: http://blog.seliger.com/2013/06/02/with-charity-for-all-ken-... , and anyone interested in how the charitable subset of nonprofits actually operate should read the book.

(I'm a consultant who does grant writing for nonprofit and public agencies and have heard a million laments on this issue.)

I would be interested in your take on Dan Pallota's perspective (below, several times); he seems to have a lot of exposure with his claim that nonprofit isn't working as well as it could, primarily because of the focus on "overhead".


Dan Pallotta: The way we think about charity is dead wrong

http://www.ted.com/talks/dan_pallotta_the_way_we_think_about... (20 min video)

  > nonprofits [...] are rewarded for how little they spend 
  > -- not for what they get done
Pallotta on Charity and the Culture of the Non-Profit Sector

http://www.econtalk.org/archives/_featuring/dan_pallotta/ (1 hr EconTalk podcast)

  > The use of overhead as a measure of effectiveness makes it difficult for 
  > charities to attract the best talent, advertise, and invest for the future
Uncharitable: How Restraints on Nonprofits Undermine Their Potential

http://amzn.com/B003BLY740 ($15 340 pg. Kindle book)

  > double-standards place the nonprofit sector at extreme disadvantage to
  > the for profit sector on every level

I heard the Econtalk, and he's correct. The problem is that a relatively small number of nonprofits will abuse overhead, which is how you end up with the perennial exposé of some nonprofit where the senior managers drive Ferraris and expense $500 lunches, and then everyone thinks administrative costs get a bad name and wants to restrict them; this is similar to the "every check has a cost" idea Paul Graham writes about here: http://www.paulgraham.com/artistsship.html. Since charities' real clients are funders, charities artificially hold back "administrative" costs, at the cost of effectiveness. Often some form of creative accounting gets used.

In addition, it's prestigious / sexy to see a staff person handing food over to someone, or providing an ear exam to a kid, or whatever. It's not sexy to get a functional CRM or logistics manager or whatever.

There's been some rejoicing in my nonprofit nerd circles about a recent acknowledgement by a few important nonprofit rating orgs that overhead is a bad measure of effectiveness: http://www.guidestar.org/rxa/news/news-releases/2013/2013-06...

it's not universally bad, it's just important to acknowledge corner cases. It's important to remember that a 'high overhead' though, does correlate to bad performance.

  > It's important to remember that a 'high overhead' though,
  > does correlate to bad performance.
Dan Pallota's entire point is that this line of thinking is wrong.

I don't think either of us have real statistics on this. I do know within certain nonprofit (mostly research, but not exculsively) organizations I've been in/worked with, increasing overhead has correlated with my personal dissatisfaction. The place where I volunteer, for example, spent a lot of money on a posh warehouse to prepare food, which was very different from the church that it operated out of - meals then were only delivered MWF instead of daily, and the client base shrunk, there may be a bit of mission creep too (but I'm not quitting volunteering for them quite yet). When I lived in DC, I was dismayed at that location's "parallel" (i.e. does the same thing, but unrelated) organization for similar reasons, except it had gone down the other side and was no longer delivering hot meals even, so I chose a different place to volunteer.

In the sciences, high overhead (as charged on top of grants given by taxpayer-funded organizations such as NIH, NSF, DOE) inevitably means questionably high payouts to the executive-level presidents, and what not. Now that I know how to read 990s, I am looking through the history of a particular nonprofit science research org; 10 years ago it was entirely run off of its endowment and had a promise to the researchers of independence from the tyrrany of grants. Over the course of the decade, the active scientist corpus has shrunk by 3/4, the president gets paid 3x more, the endowment is < 20% of what it used to be, and PIs are being pushed to apply for soft money, and they are negotiating overheads of 60% or more.

Then there are spectacularly bad organizations such as the Harlem Boy's Choir, which I have no personal experience with, but certainly serve as cautionary tales.

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