Five years ago my friends and Bridgespan Group colleagues Ann Goggins-Gregory and Don Howard coined a memorable phrase and plumbed a troublesome phenomenon in their essay, “The Nonprofit Starvation Cycle.” It laid bare the challenge of supporting the organizational infrastructure that nonprofits need to function effectively. Yes, Goggins-Gregory and Howard were talking without shame about the “o” word, as in overhead. They noted that that the starvation 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.” They went on to note that if the cycle is ever going to be broken, “funders must take the lead.”
My brief time as a grantmaker has only served to validate the extent of this problem and the reinforcing dynamics of the starvation cycle. I have been struck by the number of peers at other foundations who have told me without batting an eye that they don’t fund overhead, or that they only do so using (arbitrary and undoubtedly low) cut-off points, like five or ten percent. Ironically, it is often the foundations endowed by very successful business people (who presumably should know better) that are most insistent on paying no or low overhead. If you sense some frustration on my part, it is because these funders are in effect free-riding on those of us prepared to underwrite our mutual grantees’ essential infrastructure.
But I have also been struck by how otherwise thoughtful and bold grantee leaders are inclined to dissemble on the issue of overhead. When I asked one recently what his overhead rate was—truly wanting to know so we could budget accordingly—he replied “In my experience our overhead rate is whatever a funder tells us it is.” Time and again I have seen low-balled and suspiciously round overhead rates of ten percent that, after further probing, turn out to be more like eighteen or twenty-three percent.
Thus both grantees and funders are implicated in the starvation cycle. If I were to take any issue with the argument Goggins-Gregory and Howard made in their highly original assessment, it is that both parties—not just funders—need to take the initiative to break the cycle.
At the Madison Initiative we are trying to do our part by providing general support whenever possible so that our grantees can incur costs and allocate resources to cover them as they best see fit. Two-thirds of the $11 million we have granted so far this year has been for general support. When circumstances require a more focused project grant geared to specific outcomes, we encourage our grantees to identify their actual overhead costs, not those that they speculate we would be willing to support.
To end this cycle, we will need our grantees to do their part. They should start by identifying their true costs. It is always surprising and a little disheartening to learn how many organizations don’t know these essential numbers. As a nonprofit CFO once told me in a lament that was at once sad and funny, “in this organization, the past is more uncertain than the future!” (Bridgespan, by the way, has a very helpful and freely accessible online tool kit to help you sort all this cost data out.)
Once nonprofit leaders have assessed their cost structure, what they really need to do is to be candid with funders in their moment of truth. Tell us what your costs to deliver really are, and ask us to fund them fully. If, as is often the case, your funder has a fixed amount to devote to a project grant, revisit your investment in the deliverables and work products with them to see if you can identify an alternative plan in which there is enough left over to amply support your infrastructure.
I’m not suggesting that such candor is easy to muster. But effective leaders need to be willing to take the risk of saying something that a funder might not want to hear when their organization’s long run effectiveness is at stake. If they are not, then shame on them. Funders, for our part, should fund the full cost of the work we are asking our grantees to undertake in a way that leaves their overall organization and its finances whole; if we don’t, then shame on us!