Overhead Myth

“Our generation does not want its epitaph to read, ‘We kept charity overhead low.’ We want it to read that we changed the world.” – Dan Pallotta, entrepreneur and charity leader

Earlier this week, the CEOs of the country’s leading sources of information on nonprofits – GuideStar,Charity Navigator, and BBB Wise Giving Alliance – penned an open letter titled, The Overhead Myth, to the charitable donors of America denouncing the “overhead ratio” as a valid indicator of nonprofit performance. The letter, signed by all three organization’s CEOs, marks the beginning of a campaign to correct the common misperception that the percentage of charity’s expenses that go to administrative and fundraising costs – commonly referred to as “overhead” – is on its own, an appropriate metric to evaluate a charity’s worthiness and efficiency. 

In many ways, this letter surprised the nonprofit sector. The news is almost surreal because it is these organizations that created the very myth that they now are campaigning to dispel. For so long charitable watchdog groups focused heavily on income/expense ratios. Yet, in their open letter they ask donors to “pay attention to other factors of nonprofit performance: transparency, governance, leadership, and results.”

The letter continues,"That is not to say that overhead has no role in ensuring charity accountability. At the extremes the overhead ratio can offer insight: it can be a valid data point for rooting out fraud and poor financial management. In most cases, however, focusing on overhead without considering other critical dimensions of a charity’s financial and organizational performance does more damage than good.

In fact, many charities should spend more on overhead. Overhead costs include important investments charities make to improve their work: investments in training, planning, evaluation, and internal systemsas well as their efforts to raise money so they can operate their programs. These expenses allow a charity to sustain itself or to improve itself."

Trevor Neilson in the Huffington Post commented on why the three organizations had this sudden change of heart. His answer- Dan Pallotta.

Dan is the author behind a now famous TED talk (I encourage you to watch it) called "The way we think about charity is dead wrong" that simply refuted the old argument that “overhead” was the chief determinant of whether a nonprofit is successful or not. The talk has now been seen by almost two million people (you may have had someone share it with you) and changed the ability of self-appointed charity watchdog groups to make the case that overhead matters more than results.

At the Jewish Federation of Greater Portland we are always conscious of our internal costs. Yet, we are focused on developing strong (new and innovative) programs, and recognizing the need for capacity building initiatives. I believe this to be the case for every Jewish organization in Greater Portland – we are all “lean” – yet in many ways, too lean (especially in regard to the number of professionals in the system). We must all do more to invest in our professionals and our program efforts to move the community forward.

We seem to look at the world with two rulebooks: one for the non-profit sector and one for the rest of the economic world. For-profit organizations view capacity building as a means to support innovation, creativity, and improvement; whereas nonprofits tend to view any investment in capacity building as money lost toward direct service programs. If we are to have long-term sustainable organizations that have the capacity to do great things and do them well, then our investments in our organizations must increase.

Dan Pallotta in his TED Talk says, “The real issue is that everything we have been taught to think about charity is wrong. In particular, the single yardstick generally used to measure the worthiness of a charity – how much money goes directly toward the people it seeks to help and how much is used to cover overheadis dangerously unhelpful. According to this thinking, the “best” charities are the ones with the lowest overhead. In fact, that focus may actually be preventing charities from making a real impact. Our social problems are massive in scale, our organizations are tiny up against themand we have a belief system that keeps them tiny.”

McKinsey and Company once proclaimed the nonprofit culture as “low pay, make do, and do without.” This mindset needs to change. We need to hire the best people with the necessary expertise and experience. We need to invest in the latest technologies. And we need to deliver outcomes at an even higher level of quality and/or quantity. Only then can we fulfill our mission.

Should anyone donate to a non-profit that wastes money? Of course not. But now that the charity overhead ratio industry is campaigning against charity overhead ratios, we can get back to what matters: measuring results. That is how the Jewish Federation focuses its allocations process. We are focused on the impact each organization makes. And Federation encourages its partner agencies to invest in themselves, as well as provides funding for capacity building initiatives to help make all our organizations stronger. There is a difference between efficient and effective.

My take away from the open letter from those three groups – the people and communities our organizations serve do not require low overhead – they require high performance.

May all our Jewish communal organizations perform better and dream bigger as we continue to invest in ourselves and Jewish Portland.

Shabbat shalom.


PS – Mazel tov to Jewish Theater Collaborative on finding a new space at El Centro Milago. Read more here.

PPS – There is still time to enjoy the wonderful films currently showing at the Portland Jewish Film Festival. To learn more about upcoming movies, click here.


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