August 21, 2014
I was in a room full of international development professionals at the InsideNGO Annual Conference, and the excitement was palpable. Why? We had all just raised our hands and pledged to fully disclose the true costs of our nonprofit operations to anyone who wanted to see them.
This is a breakthrough for our sector, and affirms that we are willing to transparently and consistently report our costs. What's more, the pledge is based on the understanding that the overhead debate actually undermines nonprofits' ability to deliver transformational results. We are convinced that overhead transparency will lead to more open dialogue, real collaboration with funders, and a greater focus on outcomes and results.
Within the core concept of transparency, however, there are two recommendations we are focusing on right now:
Eliminate functional allocation. This IRS requirement allows organizations to allocate costs rather indiscriminately to programs, fundraising, and general administration categories. While the goal is to shed light on organizational efficiency across the nonprofit sector, the relaxed guidelines allow organizations to manipulate their expenses across categories, often inflating their program costs to appear more efficient. Organizational efficiency is never cut-and-dried, however, and more importantly, the guidelines don't take into account organizational effectiveness.
Eliminate direct and indirect costing on grants. Each funder has its own guidelines around direct and indirect program costs. When funders cap the amount they are willing to pay toward indirect costs, organizations are incentivized to manipulate their numbers in order to recover as much as of their costs as possible, or worse, they cut investments in organizational capacity that can result in them having greater impact.
Failure to eliminate these provisions will only serve to:
- Starve nonprofit organizations from making key organizational investments that boost their impact and increase their efficiency.
- Create division within organizations between program staff (perceived as "wanted" costs) and operation staff ("unwanted" costs).
- Limit consistency and distort real benchmarking across the sector.
- Increase administrative costs (necessitated by having to manage expense reporting in multiple ways to meet a variety of funder needs).
- Reduce transparency.
- Place the focus on administrative costs instead of impact and obscure questions around the real cost of social change.
So that day in D.C., we all raised our hands and pledged to clearly and honestly disclose the full costs of our operations, accompanied by explanations about why our investments were essential to achieving our respective missions.
That was a rather informal affair, but we now have the opportunity to formalize our commitment along the lines of what Bill and Melinda Gates and Warren Buffett did when they created the Giving Pledge in 2010. Since Buffett and the Gateses launched their campaign, 127 of the world's wealthiest families and individuals have pledged to give the majority of their wealth to philanthropy, and the Giving Pledge has become a powerful statement that philanthropy can change the world. It is also an important call to action to the nonprofit sector to prepare to transform these future investments into constructive social change.
As a sector, we have taken some important first steps. This year, two Overhead summits brought funders, nonprofits, and thought leaders together to gain a better understanding of the issues around the full funding of costs and opportunities for greater collaboration. In addition, InsideNGO launched an Indirect and Operations Cost Survey. For the first time, nonprofits have a standard form they can use to fully disclosure their costs. To date, forty-seven early adopters have used the form and are now able to have a data-centered conversation with funders about the true costs of running an international NGO. The data generated by the form also enables organizations to better benchmark their costs against those of their peers. I'm happy to report that the database is expected to double in size by the end of the year, and the increased transparency around costs most certainly will strengthen the sector and, ultimately, lead to real change.
So, raise your hand if you are in!
THE 'OVERHEAD' PLEDGE (Grantees)
I pledge to not display financial data propagating the overhead myth. Instead:
- I will display financial information on the web and in our annual reports in a way that supports our overall purpose, such as total cost per program, total cost per outcome, and unit cost per result, including both direct and fairly allocated indirect costs in the totals.
- I will not deliver or depict financial information that expressly shows indirect costs vs direct costs.
- I will work with my auditors to replace the traditional functional expense statement with a report fully allocating costs to programs and outputs, and/or that does not break out overhead, management, and general or administrative services as separate line items but rather includes them in the line items they represent (salaries, travel, etc.)
- I will create new financial metrics for our organization that track effectiveness in both program and operations.
I pledge not to silently go along with donors' instructions to propose less than the full cost of the program they are being asked to fund. Instead:
- I will show the full costs needed to operate the program and explain why all costs are necessary to achieve the desired outcomes.
- I will work to expand my donors' horizons about the need for funding the true costs of a program and why a one-size-fits-all approach excludes important players that may be critical to the effort.
- I will advocate for changing my donors' point of view when they do balk at the full funding approach.
- If a limited funding opportunity is likely to inflict financial harm on my organization, I will champion "civil financial disobedience" and counsel the leadership of my organization to say "no" unless full funding is made available.
THE 'OVERHEAD' PLEDGE (Donors - excerpted from Donors Forum's "Commitment to Full-Cost Funding")
I pledge to engage in honest and open conversation with grantees. I will:
- Ask about a program's goals and actual results. Seek qualitative and quantitative data. Ask about the strategic plan that should be guiding decisions made and directions taken.
- Discuss a program's logic model or theory of change to understand how the program works and the desired results.
- Explore what types of capacity and expertise are needed to achieve results. What are the IT, facility, talent, and other resources needed to ensure that an organization or program operates at peak performance?
- Relative to talent or human resources, be especially aware and comfortable with the reality that in any organization, to achieve any result, personnel costs will be the biggest piece of the pie. People deliver the program and run the organization.
- When receiving program grant requests that do not include items such as salaries, benefits, rent, insurance, or accounting, ask grantees if they have included the full costs of the program and express our willingness to cover our share of such costs.
- Take the time to understand what it takes for the organization to achieve meaningful results, making sure we and the organization are realistic about the investments in infrastructure it might take to achieve such results.
- Ask where the organization might be under-investing. Often the response will lead to conversations about where investments in operating systems like evaluation and other important functions can propel impact.
I pledge to provide grantees with the support they need. I will:
- Make grants that build nonprofit capacity. By capacity building, we mean better securing the resources and building the systems necessary to achieve organizational goals — whether those resources are board leadership, fundraising firepower, software or hardware, operations and administrative support, or staff professional development.
- Invest in grantees' ability to measure results, such as supporting the development and maintenance of data systems.
- Fund research and evaluation to help understand program impact.
- Underwrite technical assistance to build nonprofit capacity around program effectiveness, leadership, fundraising, and financial management.
- Provide general operating or core support so that grantees have the flexibility to direct dollars where they are needed most.
I pledge to change practices and policies that hinder effectiveness. I will:
- Test my assumptions about what effectiveness looks like. I will ask questions like: How does overhead factor in? Do your policies take into consideration the context for different types of grantees (ex: universities, internationally based organizations, start-ups, etc.)?
- Audit my grantmaking practices and policies. Discuss the implications of policies from a grantee's point of view.
- Remove artificial caps on overhead or administrative expenses.
- Be honest about my knowledge and understanding of nonprofit financial management. Tap in to resources like the Nonprofit Finance Fund to fill in knowledge gaps.