Most nonprofit leaders spend an incredible amount of time focused on keeping their organization’s overhead below 10%. They want to be able to state in their annual report that 90 cents of every dollar raised goes to fund their mission. It’s a great goal, but it often prevents organizations from making investments in infrastructure, whether it’s a new IT system that will help track and steward donor relationships or investing in competitive salaries to attract and retain strong leaders. These investments are what can fuel the growth and maximize the organization’s impact, but if done poorly, they can also result in losing donor support. Many organizations consider it the “third rail”: don’t touch it or it could kill you.
The result is what Tom Tierney of the Bridgespan Group refers to as the “Starvation Cycle”. Organizations are motivated to maintain low operating overhead to present the perception that their organization as too “fat” operationally. So they make do by compromising in what they offer for executive pay and limiting what they spend on their programming. Organizations must be strategic about when they recognize expenses to manage when the investment is reflected in their financials. While timing investments also happens in the private sector, there are usually also counter-measures that can offset low salaries such as equity in the company. Nonprofits have fewer tools to use, and the fear is that donors have a lower tolerance for taking risk and investing in nonprofit expansion than they do in the private sector.
But if you can’t invest in growth, how do you grow? The answer is in both planning and communication. While the perception is that donors won’t tolerate operating budgets that exceed the 10% threshold, the fact is that organizations have been burned on this mostly because they haven’t prepared sufficiently for it. Most donors are savvy and understand the need to invest in a business to nourish its growth.
If there is a solid strategy and plan to back up the need to invest, it’s a great opportunity to engage donors in the process. First, the Board needs to understand and actively support the plans. Clear expectations need to be established and communicated for what it means to support the investment. Next, donors need to be informed about new initiatives so they can be aware and buy into the plan. Educating all stakeholders will minimize friction and enable the organization to focus on the plan rather than defend it. Transparency and ongoing communication is essential. Not every donor will agree with the decisions, but if they’re all informed, the success rate will be much higher.
Overhead is considered the third rail for nonprofits because changes are generally not managed well. So the result is considered a failure. With sound planning and strong communication, organizations can break the starvation cycle.