When I first heard about MacKenzie Scott, author and philanthropist, handing out$8.6 billion in unrestricted funding to 786 different organizations (so far!), I was excited about what I saw as a positive disruption to the existing philanthropic model. This approach is a break from the approach many funders take to restricting their support to specific projects to make sure that “their” money is spent on programs, rather than administrative costs (called “overhead”).
I’ve worked in the nonprofit sector for more than two decades, both building new organizations from the ground up and growing existing operations, as well as served on fiduciary boards — so I’ve seen first-hand how nonprofits navigate the tension between reducing overhead and increasing impact as they wrestle with managing their operations in the most efficient and effective way possible.
The core challenge that both nonprofits and funders need to overcome is the understandable impression that overhead dollars are inefficient and wasteful; in reality, these dollars are critical to delivering an organization’s mission. For an efficient and effective nonprofit, overhead includes things like maintaining best practices in financial tracking and reporting, hiring and training staff (and retaining top talent!), and having the right contracts that protect the organization, its vendors and team.
So, how can nonprofits minimize overhead costs without sacrificing their ability to drive their mission? After all, the shared goal of both the funders and the organizations is to maximize impact. Having seen both the funding and operations side of nonprofits, I’ve tried to imagine what kind of solution could align funders and organizations in pursuit of this shared goal.
What I’m calling the Nonprofit Resource Sharing Collaborative would be a new approach to nonprofit financial management; it would be a central hub for providing support that covers the core overhead costs for nonprofits: legal work, accounting, staff training, grant writing, and more. (There’s a great model already that provides software to nonprofit organizations at very reduced costs calledTechsoup.)
Creating a shared resource for nonprofits to turn to for critical administrative needs could dramatically lower their costs, improve their overhead ratio, and focus more funds on delivering the mission. The Collaborative would be funded by donors and would hire its own lawyers, accountants, payroll managers, staff trainers, etc. The organizations would turn to the Collaborative staff as needed and each Collaborative staff member could serve that many more organizations.
As someone who has led a nonprofit as a volunteer, I’ve seen how the smaller the organization, the more critical every dollar is, which means that access to the Collaborative could make the difference between scaling their operations and closing their doors.
If funders and organizations were able to truly partner on this approach, together they could create a second disruption to the current philanthropic model, by addressing what the Bridgespan Group calls “The Nonprofit Starvation Cycle.” This cycle starts with a disconnect between funders and nonprofits how much it costs to run a nonprofit, and leads to the nonprofit underspending on overhead to be able to report fewer costs, purportedly showing funders that the organization can do more with less (and less).
Spending on overhead is in fact how a nonprofit organization invests in expanding its impact, by allowing the nonprofit leadership to invest dollars in the way that will have the greatest return. An organization calledGiving Evidence has found that of the charities they reviewed, “low admin costs do not signal that a charity is good. They signal the converse.” Along those lines, a group of major foundations including Ford Foundation, MacArthur Foundation, and others,have recommended moving away from relying on overhead costs to evaluate the nonprofits they support.The Nonprofit Overhead Cost Study, a five-year research project conducted by the Urban Institute’s National Center for Charitable Statistics and the Center on Philanthropy at Indiana University, found that “overhead, far from a “necessary evil,” is the basis for mission effectiveness.”
Scott’s groundbreaking approach of injecting huge sums of unrestricted funds to hundreds of nonprofit organizations has opened a conversation about how philanthropy can best achieve impact. This reveals the important role that trust plays in funder-nonprofit dynamics, and I hope the idea of the Collaborative can inspire new models for trust and partnership. If there’s a foundation of trust, then funders can feel like their money is truly realizing the vision they have for their philanthropy, and organizations can maximize every dollar they have. True partnership enriches everyone in the long run.