We all know that there are two kinds of cholesterol; good and bad. You get good cholesterol from god fats and bad cholesterol from bad fats. Unfortunately for bacon lovers (I count myself among their number) bacon is high in bad fat. However, good fat is found in salmon. And salmon is awesome.
But why on earth am about cholesterol? Because your nonprofit has good cholesterol and bad cholesterol too. Except we don’t call it cholesterol—we call “overhead.” And we almost reflexively think of overhead as “bad”. And that’s a mistake. If you really examine it, not all overhead is bad.
Like fats in our diet, it is often assumed that overhead in our organization must be cut in any way possible. And that’s true to a degree. You have to cut out the bad overhead and take on more good overhead.
What is good overhead? As Trey Beck and Jacob Smith explain in their book, The Nimble Nonprofit, examples of good overhead might include a comfortable office environment or computers that actually work. Both improve employee morale and boosts productivity. Another example of good overhead would be hiring a staff member who brings in revenue—either from acquiring new association members or new sources of donations. These are “good overhead,” because money invested in them generates more money in return.
Good overhead generates income; an office environment thatlifts morale and productivity. Or a new employee finds untapped sources of revenue. Bad overhead is money that you spend…and spend…and spend. It does not grow your organization. Examples include the necessary evils of IT support, human resources, event-planning, and (arguably) marketing to name a few. So we have a paradox on our hands; these jobs have to be done, but if we want to cut costs, these are some of the best places to do it. Which can lead to the Austerity Spiral.
How many times have we seen the following pattern play out? Income is low, so overhead is cut. This means that people are let go—often the people most responsible for providing service or growing the organization. The result? The nonprofit grows much more slowly, or even shrinks. Which means income is lower. Then it’s wash, rise, repeat; the cycle continues until, eventually, the nonprofit removes all overhead—they close down.
But there is a different way. You can save money and grow. How?
One way is to outsource the jobs you don’t need to be done in-house. Gayla Turner, Deputy Executive Director at EMDR International Association, has helped lead her organization from outsourcing nothing, to outsourcing IT support, HR, and meeting planning. EMDR International Association then took the money saved on this bad overhead to invest in good overhead—they added staff to seek out new membership, resulting in substantial growth. An example of good overhead in action.
So what all nonprofit executives—and those who donate to nonprofits—should realize is that not all overhead is bad. The value of overhead should be judged not solely on its cost to an organization, but on its positive (or negative) impact on the organization’s bottom line. Overhead with a positive return on investment contributes to an organization’s growth; bringing more money and more people together to accomplish its goals.
If you’re not totally convinced, or just interested in hearing more, you can watch this presentation by Dan Pallotta about charities and overhead ...
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