The Nonprofit Starvation Cycle
Continuing with our recent theme of philanthropy, an article from the Stanford Social Innovation Review argues that unrealistic expectations from funders create a “starvation cycle” for nonprofits. The article calls on funders to take the lead and break the cycle by understanding that nonprofits need to spend money on overhead and infrastructure. Without these investments, organizations risk long-term decline and the inability to serve their constituents.
Continuing with our recent theme of philanthropy, an article from the Stanford Social Innovation Review argues that unrealistic expectations from funders create a “starvation cycle” for nonprofits. The article calls on funders to take the lead and break the cycle by understanding that nonprofits need to spend money on overhead and infrastructure. Without these investments, organizations risk long-term decline and the inability to serve their constituents.
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The SSIR article draws on research findings showing that investments in overhead are critical:
| … underfunding overhead can have disastrous effects, finds the Nonprofit Overhead Cost Study, a five year research project conducted by the Urban Institute’s National Center for Charitable Statistics and the Center on Philanthropy at Indiana University. The researchers examined more than 220,000 IRS Form 990s and conducted 1,500 in-depth surveys of organizations with revenues of more than $100,000. Among their many dismaying findings: nonfunctioning computers, staff members who lacked the training needed for their positions, and, in one instance, furniture so old and beaten down that the movers refused to move it. The effects of such limited overhead investment are felt far beyond the office: nonfunctioning computers cannot track program outcomes and show what is working and what is not; poorly trained staff cannot deliver quality services to beneficiaries. |
According to the SSIR article’s authors, this lack of investment in overhead is driven by the “nonprofit starvation cycle” that begins with funders’ unrealistic expectations:
| Our research reveals that a vicious cycle fuels the persistent underfunding of overhead. The first step in the cycle is funders’ unrealistic expectations about how much it costs to run a nonprofit. At the second step, nonprofits feel pressure to conform to funders’ unrealistic expectations. At the third step, nonprofits respond to this pressure in two ways: They spend too little on overhead, and they underreport their expenditures on tax forms and in fundraising materials. This underspending and underreporting in turn perpetuates funders’ unrealistic expectations. Over time, funders expect grantees to do more and more with less and less—a cycle that slowly starves nonprofits. |
The article relates the starvation of nonprofits often impacts the most critical elements of an organization’s work, including impact measurement. Evaluation funds are considered “overhead” by many funders, when in fact they should be considered an integral part of any project or program. This is one reason that animal protection groups do not have accurate data on which to base their decisions. It is also a reason that many nonprofits feel the need to understate how much they are spending on overhead and, in some cases, overstate their impact.
| In the absence of clear, accurate data, funders must rely on the numbers their grantees report. But as we will later discuss, these data are riddled with errors. As a result, funders routinely require nonprofits to spend unhealthily small amounts on overhead. For instance, all four of the youth service organizations that we studied were managing government contracts from local, state, and federal sources, and none of the contracts allowed grantees to use more than 15 percent of the grant for indirect expenses (which include operations, finances, human resources, and fundraising). [Later] Meanwhile, without strong tracking systems, nonprofits have a hard time diagnosing which actions truly drive their desired outcomes. “The catch-22 is that, while organizations need capacity-building funding in order to invest in solid performance tracking, many funders want to see strong program outcome data before they will provide such general operating support,” says Jamie McAuliffe, a portfolio manager at the New York-based Edna McConnell Clark Foundation. |
Finally, the SSIR article prescribes some specific steps that funders can take to help break the nonprofit starvation cycle. In addition to these steps (see below), the article also notes that grantees have to meet funders halfway by being honest, asking difficult questions, and underscoring to donors the importance of infrastructure investments. I strongly recommend reading the entire article and sharing it with both your funders and your organizational managers.
| The first step that funders should take is to shift their focus from costs to outcomes. In the nonprofit world, organizations are so diverse that they do not share a common indicator of program effectiveness. In the absence of this indicator, many funders try to understand an organization’s efficiency by monitoring overhead and other easily obtained yet faulty indicators. Funders need to refocus their attention on impact by asking “What are we trying to achieve?” and “What would define success?” In so doing, they will signal to their grantees that impact matters more than anything else. |
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