A major announcement was recently made in the charity world regarding a key indicator of a non-profit’s performance. Guidestar, Charity Navigator and Better Business Bureau’s Wise Giving Alliance are the three national organizations that set the leading criteria of a nonprofit’s performance: overhead ratio, the percent spent on administrative and fund raising costs. However, the three organizations just sent out a letter denouncing those criteria as a leading indicator. Steve Zabilski, Executive Director of St. Vincent de Paul and Ellen Solowey, Program Officer for the Virginia G. Piper Charitable Trust, will discuss the development.
Ted Simons: Three of the leading sources of charity -- a move that some see as a paradigm shift in the nonprofit community. Here with more is Steve Zabilski, executive director of St. Vincent De Paul and Ellen Soloway, program officer for the Virginia G Piper charitable trust. Thank you for joining us.
Ellen Solowey: Thank you.
Ted Simons: This is an open letter -- who are these groups and why are they so important?
Steve Zabilski: These are groups, Ted, that people typically look to as they provide advice to individuals and businesses about nonprofit organizations. You can find things like charities, financial ratio, and overhead ratio, information on executive compensation, governance practices, and a whole host of things on their programs.
Ted Simons: And this is guide star charity navigator and a branch of the better business bureau.
Ellen Solowey: Yes, that's correct.
Ted Simons: Alright. Now, they talked about overhead ratio. I read the letter and not coming from the nonprofit community, it took a couple of readings to try to figure out. They seem to have a changing opinion of overhead ratio. What is overhead ratio?
Ellen Solowey: Overhead ratio is the amount of money that you spend, a nonprofit spends on its administrative and fundraising costs and a percentage overall on what it spends to deliver programs.
Ted Simons: What's a healthy percentage?
Ellen Solowey: That is a difficult question. I would argue that there is not a healthy percentage per se. Better business bureau, charity navigator, set a level of about 30%, that they said it should not exceed that but I would argue and would ask Steve if he would agree with that number.
Ted Simons: What do you think, is 30% -- is this one of the things where it is apples and oranges?
Steve Zabilski: It really is. Typically people think that the lower is better. The more money that a charity spends directly on programs and not on things like overhead is good. That really is faulty thinking. Just as an example, they're saying to a charity, if you spend any money on marketing expense or any money on telling your story, on fundraising, that's bad. Even though it might help the charity to grow or serve more people.
Ted Simons: The letter said that this overhead ratio, it is a poor number of a charity's performance and focusing on overhead can do more damage than good. What are they getting at?
Steve Zabilski: What they are really saying is it simply is not as easy as looking at a single number to say this is a really good charity or this charity is not a good charity. You have to look instead at what are the programs? What are the outcomes? What are they accomplishing? Well, gee, they're not investing in their tax return or auditors or human resources or fundraising, as Ellen noted.
Ted Simons: Why is there so much concern over the letter, because that would seem to make sense?
Ellen Solowey: Overhead ratio an easy measure -- when you take away the overhead ratio, suddenly you can't look at that. It becomes confusing. How do I decide whether there is a nonprofit worthy of my investment? The concern is well, if you take that away, how do I proceed?
Ted Simons: It sounds as though from a distance that they might be saying, watch out, because these are the spending too much, 30%. It sounds to me like they're saying a lot of charities should spend more.
Ellen Solowey: Absolutely, and they probably should. Maybe not over an extended period of time. I don't think there was anyone particular number. And that is what makes it confusing for people. Both nonprofits are starved. 62% of people think that nonprofits are spending too much on overhead. That is a very difficult attitude to fight. When in fact, probably they're spending way too little on overhead.
Ted Simons: Some odd 60% of people think charity spend too much on overhead. You have the groups, leading indicators for charity information saying they may not be spending enough. What is a nonprofit to do?
Steve Zabilski: To really come on your show, Ted, and -- this is a fundamental paradigm shift and Ellen is right, that having worked in the nonprofit industry for years, I think every single nonprofit that I've seen, they starve themselves on overhead so that they don't invest in technology. They don't invest in training, fundraising, or development. People will view that as bad when that is how you grow your organization to help more people, to solve difficult problems, to end homelessness, cure cancer. We have to make these critical investments.
Ted Simons: Paradigm shift notwithstanding, or -- how does a nonprofit respond?
Steve Zabilski: I think it gives them permission to say we can make these critical type of investments and not have to apologize for them. We should be judged like any other for profit business should be judged. We see an ad on TV and we don't say gee that business is wasting money advertising. But if we see a charity advertised on TV, many people think that is a waste of money, even though the charity, that can help them raise addition funds, and this goes to that very issue.
Ted Simons: It is either really important or right now it is not all that important, with that in mind, again, how does a nonprofit respond and is this not an opportunity to be a good thing for nonprofits?
Ellen Solowey: Yes, I think it is. And I think nonprofits have to work with their boards of directors to try to make sure that they understand the need in doing this and speak to their donors and funders. It is very important that the donors and funders understand this as well. Never looked at overhead, never, but many funders and donors do.
Ted Simons: That is the big concern here. You mentioned an easy metric here. Look at that and base their decisions and is it not going to be there anymore or are they changing the emphasis?
Ellen Solowey: I think they're changing the emphasis. They're not saying that it shouldn't exist at all but that it should not be the one and only indicator of a nonprofit's working effectiveness?
Ted Simons: How does it impact fundraising, impact salaries, the whole nine yards?
Steve Zabilski: I think, Ted, it gives nonprofits that permission that they can act more as a for profit organization, hire good people and make investments in infrastructure, training, computer and phone system and not have to feel like they're doing something wrong. But in fact, it is enhancing it for both short term and long term, that it is building the very viability, stability of a nonprofit.
Ted Simons: When the letter says that people served by charities don't need low overhead, they need high performance, you would agree?
Ellen Solowey: Absolutely.
Steve Zabilski: Most definitely.
Ted Simons: A change in how things are done and a change in what information donors have, but it is an opportunity --
Ellen Solowey: Absolutely. The overhead ratio was never a proper reflection of nonprofit effectiveness. It didn't tell you about the quality or effectiveness of the program at all. It was a false indicator. And getting rid of that false indicator --
Ted Simons: A little warning probably would have been nice.
Steve Zabilski: It actually was one of those things that caught everyone by surprise. It was a pleasant surprise. It was something that many charities have felt has been an incorrect way they've been judged for many, many years. It is really the starting point of a conversation now, not the ultimate decision on which organization is good, which organization isn't as good.
Ted Simons: Very good. Good to have you both here. Thank you for joining us.
Steve Zabilski: Thank you for having us.
Ted Simons: That is it for now. I'm Ted Simons. Thank you so much for joining us. You have a great evening.
Steve Zabilski:Executive Director, St. Vincent de Paul;Ellen Solowey:Program Officer, Virginia G. Piper Charitable Trust;