After two executives from the Wounded Warrior Project were fired, several questions have been raised about financial efficiency in nonprofit organizations. Reports have surfaced that Wounded Warrior Project spends nearly 50 percent on overhead expenses. In contrast, other charities that serve the veteran community spend between 10 and 15 percent. The debate around overhead expenses is not new. A few years ago, several organizations, including the Better Business Bureau and Charity Navigator, published a letter about the Overhead Myth which advocated that donors should not pay attention to a specific overhead ratio when making donation decisions. Certain organizations necessarily have higher administrative costs than others. Nonprofits which provide medical treatment and services require more resources to manage government regulations for example. Instead, the Overhead Myth proponents advocate data transparency and a focus on results.
The notion to focus on impact and results is sound. What good does it do to give to an organization with little or no overhead if it doesn't actually accomplish its mission? The writers of The Overhead Myth encourage nonprofits to emphasize the impact that they are making in the community. How many lives were affected? How did a recipient's quality of life improve? All of these answers need to be known when analyzing a nonprofit. An organization which reaches many people however may use more resources than necessary. In the case of Wounded Warrior Project, donors became rightly concerned when overhead expenses seemed to be much larger than similar types of organizations.
We can become complacent by focusing too much on either extreme. It is important to take a balanced approach to analyzing a nonprofit's performance. Instead of looking at just the costs or just the benefits, we should combine them together and look at the return on investment (ROI) by conducting a benefit-cost analysis. A couple of years ago, I worked with an organization called Cincinnati Works to calculate its ROI. This organization provides job training and assistance to the chronically unemployed. Many organizations just look at the economic impact of their services by examining increased participant earnings or the reduction in taxpayer funded services. We went one step further and also examined the impact on the reduction in criminal activity and subsequent costs of criminalization. Just looking at the criminalization costs (see Table below) showed that the benefits of the program can be up to 85% of the total costs if the program were to scale. Note that these numbers do not include the increased earnings or reduction in government savings.
For nonprofit organizations, it is the ROI that counts - not just the overhead alone, and not just the impact alone.
