Sean Stannard-Stockton picked up my post Why overhead ratios are meaningless for Kiva and Acumen Fund in his Tactical Philanthropy Blog, and in reading his summary of my post I realized that I wasn’t as clear as I could have been in the original post.
I was trying to make two separate points, and I think I mixed them together:
- For any nonprofit whose main activity is NOT grantmaking, “operational efficiency” ratios (“how much do you spend on overhead?”) don’t mean much.
Here’s the math: “Nonprofit Grantmaker” has a $10 annual budget. It spends $1 on “administration,” $1 on raising money, $2 on paying its “program staff”, and $6 on grants. According to nonprofit math, this organization spends 20% on overhead and 80% on programs.
But what if “Nonprofit That Invests Instead” spends the same amount on administration, raising money and program staff, but instead of $6 in grants it makes $6 in loans? Nonprofit That Invests is spending 50% of its budget on “overhead” (Its annual budget is now $4, not $10. The $6 stays on its balance sheet as an asset and is not part of the operational budget).
So even without getting into any discussions about whether loans are more or less effective ways of deploying philanthropic capital, we can agree that there’s no substantive difference between the “efficiency” of these two nonprofits, despite what the ratios say.
The solution? The onus is on the Kivas and Acumens of the world to reframe this. And unfortunately this probably requires some heavy lifting because until 990 tax forms explain this clearly, it will continue to feel like fancy footwork explaining “why we’re different.”
2. The second point is not limited to Kiva or Acumen Fund, though I do think our business models shine a brighter light on this question: what is the “core” work of an organization like Kiva or Acumen Fund, and what is “overhead?”
The question Matt Flannery posed on the Kiva blog was whether it makes sense that the engineer who writes the code for Kiva’s website – which in turn connects people to the issue of poverty in the developing world and motivates them to put their capital to work for microfinance customers – is “overhead” (read: bad, inefficient, should be minimized) vs. the person who interacts directly with the microfinance organizations that Kiva works with? I for one think it makes no sense at all.
And my broader point is that you cannot successfully answer this question without grappling with your own theory of change.
This is why I gave the Grameen vs. BRAC example, and argued that large-scale, paradigm-shifting change happens as the result of lots of influencing activities which, according to traditional nonprofit math, are “overhead” and, therefore, inefficient and to be avoided. The whole thing seems pretty a**-backwards to me.
I wonder if pulling in some more concepts from business accounting could be helpful here? It sounds like there are some organizational models that aren’t just pure service groups. For instance, some of the Kiva activity (like a software engineer building tools), some of the Grameen activity (like Yunus attending world leadership meetings), and some of the Acumen activity could be considered “capital investment” – essentially activities that generate value beyond the lifetime of the cost. In that case, they get accounted for differently – typically businesses amortize the costs of “capital expenditures” over periods of 3-5 years, not annually.
I know it’s pushing the boundaries of regulatory organizations like the IRS, but if you want to create lasting change, you have to go beyond day-to-day activity. As an organization, your objectives and measurement should reflect that focus.
Matt, I love this idea. Having had the chance to interact with our auditors, I’m quite sure we couldn’t do this now but these are exactly the kinds of questions we need to ask as a sector and where we need to push the boundaries.
Sasha,
That’s a really good point! Auditors are supposed to be risk-averse (for good reason); that often makes them change-averse too (not necessarily bad, just makes it more difficult in this case). Is it a goal that begins as an organizational metric and goal (one that the auditors don’t track), then becomes an external evaluation tool? After that, it may become widely-enough understood and accepted that the conversation can be broached with auditors…
This is a great topic – can’t wait to read more on it!
great discussion. this is what i have been doing for a living for the last 13 years or so. it has been my job to give the accurate information (financial and otherwise) to potential donors (on behalf of the donors). i have become an expert at reading both israel and usa financial forms. (who knew?).
and, so, yes, until it is simplified and more understandable to the general public, this will remain a crucial piece of information on how to give tzedakah that just isn’t clear.
oh well.
arnie draiman
http://www.draimanconsulting.com