Rethinking Overhead in the Nonprofit Sector

The Separate Rule Book for Nonprofits

The for-profit sector can take greater risks to acquire new customers due to different pressures and resources, such as the stock market, which the nonprofit sector lacks.

• Statistic: From 1970 to 2009, only 144 nonprofits grew to exceed $50 million in annual revenue, compared to 46,136 for-profit companies.

The Puritan Beliefs

• Social problems are immense, but nonprofit organizations often lack the scale to address them effectively.
• The ideas that shape the nonprofit sector come from Puritan beliefs:
  • Puritans sought both religious piety and financial success.
  • They were aggressive capitalists but also Calvinists who viewed self-interest negatively, leading to a need for penance.
  • Charity became an "economic sanctuary" for atoning for profit-making, but it disconnected financial incentives from helping others.

The Dangerous Question

This ideology is perpetuated by focusing on the percentage of donations going to the cause versus overhead. This question has several problems:

• It frames overhead as negative, which is not necessarily true, especially if it supports growth.
• This perception forces organizations to underinvest in essential overhead functions like fundraising.
• The common belief is that less spent on fundraising means more available for the cause. However, this assumes a fixed "pie."
• Investment in fundraising can actually enlarge the "pie," generating more funds for the cause.

Examples

• AIDS Rides: A $50,000$ initial investment multiplied $1,982$ times into $108,000,000$ for AIDS services within nine years.
• Breast Cancer Three-Day: A $350,000$ initial investment multiplied $554$ times into $194,000,000$ for breast cancer research within five years.

Would it make more sense to give a researcher the $350,000$ or to give it to the fundraising department to multiply into $194,000,000$?

• In 2002, $71,000,000$ was generated for breast cancer research alone.

The Downfall

• The organization went out of business because the sponsor withdrew support due to media criticism for investing 40% of gross revenue in recruitment, customer service, and the "magic of the experience."
• This kind of investment in growth doesn't have proper accounting terminology and is labeled as "overhead."
• All 350 employees lost their jobs overnight because they were considered overhead.
• When the sponsor tried running the events themselves, overhead increased, and net income for breast cancer research decreased by $84$ or $60,000,000$ in one year.
• Confusing morality with frugality leads to problems.

The Bake Sale vs. Professional Fundraising

• Bake sale with 5% overhead vs. professional fundraising with 40% overhead.
• The crucial information missing is the actual size of the pies.
• If the bake sale nets $71$ and professional fundraising nets $71,000,000$, the choice is clear.

Impact

• Charitable giving is 2% of GDP in the U.S., about $300,000,000,000$ a year.
• Only about 20%, or $60,000,000,000$, goes to health and human services causes.
• Increasing charitable giving to 3% of GDP would add $150,000,000,000$ a year in contributions.
• This could triple contributions to health and human services charities if they are encouraged to invest in growth.
• Forcing organizations to keep overhead low will hinder progress.

Our generation should aim to change the world by rethinking these issues.

Focus Shift

• Instead of asking about overhead, inquire about the scale of their dreams.
• Dreams with Apple, Google, Amazon scale.
• How progress is measured.
• Needed resources for those dreams, irrespective of overhead.

The nonprofit sector can significantly impact those in need with a new "generosity of thought."
Responsibility is on our generation to revisit, revise and reinvent how humanity approaches changing things.