19 July 2010

Overheads Over Your Head?

Bewilderingly, the discussion concerning overheads remains an important point for news organizations, donors and organizations.  Sean Penn was featured in the Guardian (I am not going to link the piece, here because it is a waste of a read and can easily be found) telling of how services were not being delivered and money spent.  ABC even decided to go back and see how the money has been spent.  A great summary of the expected burn rate when it comes to disaster relief was done by Saundra.  Read her post for an eye opening illustration of how it can negatively affect the work of a relief organization.  An equally important supplement is the post written by J. on how reports on the Haiti relief effort cannot be simply believed because they are loaded with stats and red ratings.

After reading Saundra and J’s posts, it should become clear that relief is not a matter of simple arithmetic.  To think of it in a different way; what are the benchmarks when determining the successes of American schools?  Whether you like it as a metric, the most important measurement is test scores.  Those who argue for or against their use are settled around a debate that settles upon outcomes.  Yet another way to look at it is to refer back to my previous post urging donors to think as if they are investors.  When making an investment, the ultimate concern will always be the return on investment (ROI).  If the perspective ROI looks to be little or nothing, a person will likely not invest.  In the end, the outcome is what matters.

By now I am sure you have caught onto the fact that the previous two paragraphs show two entirely different focuses. Now, here is my attempt to hit this out of the park.  When designing programs around the betterment and improvement of the livelihood of individuals or groups, what should be the metric for determining success?  Should it be how individual programs work to enable economic and social growth? Or, measure success by how much money is being spent on the recipients?

If it has not become immensely clear by this point, I will continue to flesh out this discussion.  The Center for High Impact Philanthropy found that donors were NOT actually as concerned with costs as other sources.  One person said:
[T]he whole issue of overhead expenses as a percentage of your total budget is. . . not regular.  It seems like the wrong way to think about it.”
However, they recognize the need to learn more:
In the past few years, the amount that we’ve been able to give has grown to an amount that will shortly [require us to give it] some thought rather than just handing [the money] out.”
Despite the desire to learn more, people allow and seemingly encourage the focus to be away from outcomes.  The Straw Man will deceive you into thinking that every dollar you send will go straight to the people.  He will make you feel better.  99 cents of the dollar you donated will go directly to the recipients.  Sounds like a shower of money for every person!

Imagine, Steve Jobs comes up to the stage in his black turtle neck.  It is the newest launch for an Apple product.  After the iPad, Jobs has to go in an even more radical direction.  In his right hand is his iPod shuffle, the left is a MacBook.  Holding both up, Jobs announces, “We have created the most powerful notebook ever and the most compact device for delivering music.  Moving forward, Apple will operate like this iPod to achieve the grandeur of this MacBook.” The crowd erupts into a frenzy, kicking over chairs as Jobs stands holding the nano up with a knowing grin.

What makes this improbable is that 1) Jobs would never do this and 2) people would not care.  Number two is more important of the two reasons.  People would not care because they want Apple to produce sleek, cutting edge products that work well and travel easily.  The final product is what matters most.  As long as the price is not to absurd (although they are somehow able to sell a ton of iPhones on the inferior AT&T network), people will buy an Apple product.  Branding has to be recognized here, but it would not have gotten this far if the products were of poor quality.

If the hypothetical announcement took place, the first question would be: How will Apple continue to be such an innovative force?  With less money being spent on research, development, testing and so on, could Apple continue to compete with the fast rising Google?  Yankees fans do not care how much the team spends as long as they win.  It is as simple as that.  Apple investors are the same way.

If we expect for profit organizations to do what it takes to achieve positive results (aka profits) why does the standard not apply to non for profits?  Getting the non-for-profit status means that the focus will be on program outcomes, not on financial.  Donors will give money with the intention of support specific programs that they assume need financial support to succeed.

As is the case with Wall Street, we cry out when executives are compensated with large pay when losing money for the company.  When things are going well (or that period before September ‘08), investors at Goldman Sachs had no problem with executives taking home large sums when they were also seeing significant returns on their stock and investments.

Overhead should not be ignored, but results should carry much more weight.  A well run organization will require some overhead.  What matters is the ROI.  If a program guaranteed that they will spend 70 cents on the dollar and eradicate malaria in Kenya (with proof that unquestionably shows their claim to be true).  Would you donate?  How about to a program that says 99 cents on the dollar will go to AIDS eradication and make no mention of outcomes.  Would you donate to them?  In the context (I hope) the answers will be yes and no respectively.  However, organizations use the fallacy low overhead costs to trick donors into thinking that that makes them effective.

Dan Pallotta will sum up my entire piece in three paragraphs:
What if the two objectives of keeping overhead costs low and serving the needs of the community are at odds with one another?
What if an executive's board is constantly telling her to find ways to lower overhead but she knows that doing so will stymie the organization's ability to achieve any meaningful scale and jeopardize the quality of services? Then the executive has a conflict of interest.
What if the board feels pressure from the media and watchdog agencies to reduce overhead, but it too knows that doing so will inhibit the organization's progress and ultimately undermine donor intent? Then the board of directors has a conflict of interest.
Further summary comes from Philanthropy Action:
There are plenty of reasons that overhead ratios are meaningless as a measure of effective charities:
• It tells you nothing about the impact the charity has on people it’s trying to help
• The rules for determining overhead costs are vague and every charity interprets them differently
• Accounting experts estimate that 75% of charities calculate their overhead ratio incorrectly
• It discourages charities from investing in tools and expertise that would make them more effective
As always, do the research and practice smart aid.  Even Charity Navigator has fallen into (and is beginning to come out of) the overhead trap. 

Update: Alanna Shaikh writes at the aid watchers blog asking if impact measurement is a dead end:
It’s a standard trope of this blog to point out that there’s no panacea in global development. That’s true of impact evaluation, too. It’s a tool for identifying worthwhile development efforts, but it is not the only tool.  We can’t go back to assuming that good intentions lead to good results, but there must be room for judgment and experience in with the quantifiable data.
So, even measuring impacts alone is not enough.  I will still argue that they should matter more than just overhead, but Alanna points out they can not be a measurement that stifles innovation and dynamic growth of NGOs.

Update 2:  Michael Keizer over at A Humorless Lot, wrote a post on overheads shortly after the financial crisis saying:
[D]efining how much we want spend on organisation (shall we just stop using those disparaging words ‘overhead’ and ‘HQ’?) in terms of total expenditure, or even as an absolute number, really is utter nonsense. No self-respecting company would say at the start of the fiscal year, “let’s spend so-and-so much on our corporate organisation – doesn’t matter on what, you can just spend this amount”

Additional sources consulted in writing this:
Give Well Blog at large – Just search around, they have a ton of great pieces and resources

With thanks to:
Saundra S