Senior Analyst Madeleine Alegria’s take on how to use nonprofit data to make smarter giving decisions was recently published on The Engage Blog from Blackbaud. See an excerpt below.
For years, donors and nonprofit evaluators alike have relied on a seemingly straightforward number to guide their charitable giving: the overhead ratio. This metric, which measures how much a nonprofit spends on administration (such as rent, salaries, software licensing, etc.) compared to direct services and programming, has oversimplified nonprofit effectiveness and impact.
If you are a donor who wants to give with passion and impact, it’s time to move beyond reductive and harmful evaluation practices and embrace a more nuanced and informed approach. Here’s how you can use nonprofit data to make a bigger impact.
The Overhead Myth: Why it Falls Short
Many donors approach giving with the intention of making the biggest impact with their dollar. At Giving Compass, we’re often asked how to find nonprofits that “give the largest percentage of their donation to the cause.” While donors are well meaning in their intentions, the hyperfocus on directing where dollars go gets in the way of the donors’ intention to maximize impact. This is because investments in nonprofit infrastructure are critical to supporting nonprofit programming.
A study from the Center on Nonprofits and Philanthropy at the Urban Institute and Indiana University found that inadequate infrastructure significantly compromises organizational effectiveness. Nonfunctioning equipment, lack of staff training, and software that couldn’t manage the organization’s caseload were prevalent among nonprofits trying to maximize “efficiency” with as few resources as possible. Nonprofits were captured in this starvation cycle, with donors and funders placing unrealistic expectations on nonprofit expenditures and nonprofits struggling to scale their impact without meaningful investments.
This has meaningful impacts on staff retention and service quality, with 45% of nonprofit staff indicating that they will leave the sector within five years. Without the dedicated staff administering the programs, nonprofits are stifled in the amount of impact they can make. The data consistently shows that high-performing nonprofits need to increase their spending on evaluation, fundraising, strategic planning, and other infrastructure to scale their operations and ultimately serve more of the community.