August 21, 2014
I was in a room full of international development professionals at the InsideNGO Annual Conference, and the excitement was palpable. Why? We had all just raised our hands and pledged to fully disclose the true costs of our nonprofit operations to anyone who wanted to see them.
This is a breakthrough for our sector, and affirms that we are willing to transparently and consistently report our costs. What's more, the pledge is based on the understanding that the overhead debate actually undermines nonprofits' ability to deliver transformational results. We are convinced that overhead transparency will lead to more open dialogue, real collaboration with funders, and a greater focus on outcomes and results.
Within the core concept of transparency, however, there are two recommendations we are focusing on right now:
Eliminate functional allocation. This IRS requirement allows organizations to allocate costs rather indiscriminately to programs, fundraising, and general administration categories. While the goal is to shed light on organizational efficiency across the nonprofit sector, the relaxed guidelines allow organizations to manipulate their expenses across categories, often inflating their program costs to appear more efficient. Organizational efficiency is never cut-and-dried, however, and more importantly, the guidelines don't take into account organizational effectiveness.
Eliminate direct and indirect costing on grants. Each funder has its own guidelines around direct and indirect program costs. When funders cap the amount they are willing to pay toward indirect costs, organizations are incentivized to manipulate their numbers in order to recover as much as of their costs as possible, or worse, they cut investments in organizational capacity that can result in them having greater impact.
Failure to eliminate these provisions will only serve to:
- Starve nonprofit organizations from making key organizational investments that boost their impact and increase their efficiency.
- Create division within organizations between program staff (perceived as "wanted" costs) and operation staff ("unwanted" costs).
- Limit consistency and distort real benchmarking across the sector.
- Increase administrative costs (necessitated by having to manage expense reporting in multiple ways to meet a variety of funder needs).
- Reduce transparency.
- Place the focus on administrative costs instead of impact and obscure questions around the real cost of social change.
So that day in D.C., we all raised our hands and pledged to clearly and honestly disclose the full costs of our operations, accompanied by explanations about why our investments were essential to achieving our respective missions.