Starving Infrastructure Damages Effectiveness & Sustainability

Part 3 in the Indirect Costs Series
By Kay Sohl of Kay Sohl Consulting

How much is too much for a nonprofit to spend on administration/overhead/indirect costs? Perhaps a better question would be how much is too little for a nonprofit to invest in infrastructure? Unfortunately, it’s a much less common question with some very disturbing answers.

Oddly, there’s a growing agreement between high-powered academics, the U.S. Government Accountability Office (GAO), and down-to-earth nonprofit leaders that underinvestment in infrastructure poses a serious threat to the effectiveness of nonprofit organizations.

GAO says it bluntly in its May, 2010 report on the difficulty nonprofits have in getting the resources they need to invest in administrative and indirect costs: “A vicious cycle is leaving nonprofits so hungry for decent infrastructure that they can barely function as organizations—let alone serve their beneficiaries.” The full report is available here.

The Indiana University Center on Nonprofits and Philanthropy chimes in: “Nonprofits that spend too little on infrastructure have more limited effectiveness than those that spend more reasonably, in its report Getting What We Pay For: Low Overhead Limits Nonprofit Effectiveness. The full report is available here.

The infrastructure starvation cycle involves three inter-related realities:

• Charity watchdogs, the media, and governmental funders have long equated spending on administration and fundraising with waste and abuse, imposed arbitrary limitations, and encouraged donors to support nonprofits with the lowest administrative, fundraising, or overhead costs.
• Among nonprofits, governmental and foundation funders, and the IRS, total confusion surrounds the definition of these dreaded overhead costs.
• Nonprofit reporting of overhead costs is wildly distorted by both honest confusion and willful understatement, motivated by a desire to appeal to donors and conform to funder limits.

The result? Funder rejection of overhead costs—combined with nonprofits’ desire to meet an unrealistic standard for minimizing investment in them—damages both effectiveness and sustainability.

Here in Oregon

So what does “underinvestment in infrastructure” really look like and what harm does it actually cause? Some Oregon nonprofit examples:

• The small nonprofit that avoids spending for accounting, technology, or communications by rolling them all into the duties of the Executive Director—devouring time and energy needed for program development and fundraising, and creating a recipe for burnout.
• The mid-sized nonprofit required to track services and outcomes that finally finds money to buy a new database product but cannot “afford” the consulting help needed to get the new system up and running efficiently.
• The growing nonprofit that regularly loses its strongest program managers to better offers from their local government funders.
• The larger nonprofit that has long prided itself on keeping administrative costs below 10% faces a $1.2 million federal audit finding—the result of inadequate service tracking, accounting, reporting, staff training, and internal audit functions.

Are You Starving?

Are you starving your infrastructure? Here’s a quick quiz to jumpstart a more thoughtful examination in your nonprofit:

• Do you know what you’re really spending on administration, fundraising, technology, client tracking, board support, and other key infrastructure functions? Or have you made these hard-to-fund costs disappear by not tracking the time all staff spend dealing with these systems, including downtime when systems fail?
• If your nonprofit is small, how much time does your highest paid staff person spend on paying bills and keeping the books, fixing your technology, entering and retrieving data, and answering the phone?
• If your nonprofit is larger, do your top managers have both expertise and time to plan effectively; integrate financial, program, evaluation, and fund development systems; and provide the supportive supervision all staff need to work effectively?
• Do you a have (and can you retain) a fund development director with sufficient time and expertise to design a comprehensive development plan, identify and track key progress markers, manage donor retention, and cultivate new donors?
• Do you have an exhausted Executive Director undertaking a never-ending quest for “work-life balance”?

Ready to break out of this defeating starvation cycle? Three steps will be essential: 1) understanding what you are actually investing in administrative, fundraising, and other overhead costs; 2) identifying the infrastructure investments you most need to build a sustainable organization; and 3) devising new strategies to fund your most significant infrastructure upgrades.

The Nonprofit Association of Oregon can help with each step. Take a fresh look at your nonprofit’s actual overhead costs with a step-by-step guide in our next eNews. Work with our consultants to assess your current infrastructure and identify key capacity building strategies. Learn how to fund your most important infrastructure improvements at the Nonprofit Fiscal Managers Association session “Funding Indirect and Overhead Costs” on May 26.

For right now, take a deep breath and thank yourself and each staff and Board member that keep your organization moving forward despite that gnawing hunger from your underfed infrastructure. And then get ready to break out of the starvation cycle!