[Foundation-l] Charity Navigator rates WMF

[Erik Moeller]

2009/10/8 Michael Snow <wikipedia at verizon.net>:
> We do pay attention to the efficiency of operations and how funds are
> spent, not merely for the sake of appearances but as something valuable
> in its own right. With that in mind, it's more useful to look directly
> at ways of achieving greater efficiency than to debate how important it
> is for us to meet arbitrary standards.

Indeed. Overhead ratios actually say almost nothing about wastefulness
or impact. It is possible to be utterly wasteful in spending on
program services, and it's possible to have zero impact with very
little overhead. It's possible to make a dramatic "overhead"
investment that's going to have an equally dramatic impact on your
ability to do your work, and it's possible to make no overhead
investments and thereby endanger your ability to function.

Think about some examples of large and small "overhead", and then
think about whether they are wasteful or not, and you will find
quickly how limited this entire conceptual model is.

Because donors pressure non-profits to reduce "overhead" without a
rational basis, and non-profits respond sometimes in ways that damage
their mission, and sometimes in ways that are unethical (deliberately
mislabeling costs), the use of overhead ratios is highly controversial
among those who study, understand, and advise the non-profit sector.
See, for example, this article in the Stanford Social Innovation
Review:

"A vicious cycle is leaving nonprofits so hungry for decent
infrastructure that they can barely function as organizations—let
alone serve their beneficiaries. The cycle starts with funders’
unrealistic expectations about how much running a nonprofit costs, and
results in nonprofits’ misrepresenting their costs while skimping on
vital systems—acts that feed funders’ skewed beliefs."
http://www.ssireview.org/images/articles/2009FA_feature_Gregory_Howard.pdf

See also this article along similar lines:
http://www.bridgespan.org/nonprofit-overhead-costs-2008.aspx

And for some serious empirical data, the non-profit overhead study is
one of the largest attempts to study the use of efficiency ratios in
the non-profit sector, and it found many "glaring functional expense
reporting errors" in non-profit's 990 statements, which is a response
to the pressure to show high "efficiency" ratios. This goes to the
extreme point of organizations reporting their entire fundraising
costs as program expenses, in contradiction with their own audited
financial statements:
http://nccsdataweb.urban.org/FAQ/index.php?category=51
http://nccsdataweb.urban.org/kbfiles/520/brief%204.pdf

Because misreporting (and sometimes overreporting) of overhead costs
is so common as the above document shows, it's very hard to make any
accurate comparisons of different non-profits on that basis, even if
you assume that the overhead percentage has value to begin with. The
Stanford article also shows the dramatic difference in overhead costs
in different business sectors -- what's appropriate "overhead" depends
in large part on what you're doing. If you're hiring a lot of
high-skill workers, then your HR department better be sophisticated
enough to surface the best candidates, etc.

The idea of spidering 990s to create some automatic assessment number
may sound useful in theory, but its practical value is low, especially
without understanding the above context. If you're a sophisticated
donor and you understand the implications of a) different sectors
having different needs and different efficiencies, b) reporting
standards and accuracy varying wildly across different organizations,
you might be able to derive some value from it. But the only way to
find out whether a non-profit is doing good work is to study its
impact, and understand how it's using its money.
-- 
Erik Möller
Deputy Director, Wikimedia Foundation

Support Free Knowledge: http://wikimediafoundation.org/wiki/Donate