The unnatural focus on overhead costs in nonprofits

By Regenia Bailey / Guest Editorial

We’d never expect our public works departments to routinely repair our streets using shovels and wheelbarrows or our businesses to use manual credit card machines and typewriters to process customer payments.

Yet, in many ways (although maybe not to these extremes), we expect our non-profit organizations to do their work with similarly outmoded technology and equipment. Investment in organizational infrastructure — technology and financial systems, client and donor tracking processes, staff training and development, routine facility maintenance and upgrades, and other necessary overhead — is severely scrutinized by non-profit boards and supporters as organizations struggle to keep overhead percentages unnaturally low. This unnatural constraint of appropriate growth and development within nonprofits hampers their ability to be effective and have an impact on the societal issues that they are designed to address.

“The Nonprofit Starvation Cycle” (, Stanford Social Innovation Review, Fall 2009) addresses the effect of our focus on overhead percentages. The cycle begins with funders’ lack of understanding of the real cost of conducting business in the nonprofit sector. Admittedly, this understanding is based upon nonprofits’ touting their low overhead costs and underreporting what it costs to do business.

The funders’ lack of understanding creates expectations and standards concerning overhead expenditures. These funder expectations push nonprofits to constrain expenditures when they can and be creative about reporting overhead when expenditures are necessary. This sets an unrealistic standard in the entire sector and the cycle continues, resulting in low overall investment in important infrastructure that could actually help our non-profit organizations be more efficient.

While the article focuses on the funder/grantee relationship, this cycle also exists in the relationships between individual donors and the nonprofit organizations they support. Philanthropically- inclined individuals have adopted similar expectations and standards. And because it is philanthropically-inclined individuals who typically populate our non-profit boards and committees, these expectations are further codified in the policies and the budgets of nonprofits. In our quest for lean non-profit organizations, we have created and celebrated gaunt and resource-starved organizations.

It’s time for us to balance the way we look at non-profit organizations and how we make decisions about the organizations we support. We need to look at both organizational efficiencies — using resources in the best possible ways — as well as organizational effectiveness and community impact. Our obsession with overhead percentages has stunted the ability of many of our organizations to be effective. Many lack systems to track and report on their impact. Some have staff who are not adequately trained to do their ever-increasing complex jobs. Others defer routine facility maintenance, opting instead to manage maintenance by emergency. Most make do with outmoded technology in an environment in which they are expected to use technology to create efficiencies.


Breaking the cycle: what can a board do?

Part of the responsibility to break this cycle rests with boards of directors. Boards need to help us focus on their organization’s impact — how the community is better and what is changing as a result of the work of the organization — rather than how constrained the organization’s overhead costs are. Organizational efficiencies are only relevant when discussed along with organizational effectiveness. It’s time to have honest discussions about the real costs of doing business in the sector.

As boards begin their budget discussions, they need to look at their strategic plans and ask, “Do we have what we need — the systems, the equipment, the staff training — to accomplish what we’ve set out to do this year?”

Boards should be asking, “Do we have the technology infrastructure necessary to track our finances and our donors/supporters/volunteers and clients, and provide information about the impact that we are having in the community? If not, what would it take to get there? If we do, are we maximizing our technology’s potential and providing the right information to staff, board and the community so we have a deep understanding of our organization’s impact and what is changing as a result of our work?”

Language has power and boards should consider their internal and external communications. Does the organization talk about its work in terms of efficiencies and effectiveness or is the focus entirely on getting more things done with fewer resources?

As boards increase their understanding of the link between infrastructure and organizational effectiveness, they must play a role in educating donors and foundations about this. They can stand by their CEOs, supporting them to be more forthcoming about the costs of programs and projects. Understanding the true costs and benefits can lead to better discernment about the mission fit of particular organizational activities. This understanding may lead to more collaborative opportunities, stronger donor commitment and innovation within the sector.

The non-profit sector plays a critical role in enhancing the quality of life in our communities. If we, as donors, board members and community leaders, continue to have unrealistic expectations about the overhead costs in our non-profit organizations, we will constrain the ability of the sector to do its work well. We need to have honest discussions about the impact and effectiveness we expect from our non-profit organizations and what the costs are associated with these outcomes. Until we balance the push for efficiencies with the expectation for effectiveness in our non-profit organizations, all of us will be caught in this cycle that starves the very organizations that we look to, to provide innovative solutions to some of our most complex societal challenges.


Regenia Bailey is a consultant and coach to nonprofits and small businesses at her firm, the Bailey Leadership Initiative. She is a former mayor of Iowa City and teaches business courses at Kirkwood Community College. For more information, visit