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Private Clients team

Charities Aid Foundation

Busting the overhead myth: Exploring trust and power in philanthropy

We often see donors restricting their donations directly toward an organisation’s programmes and/or projects, rather than providing general support to help a charity achieve their mission. Indeed, this is a dominant trend across philanthropy and civil society that commentators and researchers in the sector have been discussing for years. It remains today quite a loaded topic.  

We were joined by Clare Woodcraft (Executive Director of the Centre for Strategic Philanthropy at Cambridge Judge Business School), and Mary Rose Gunn (Founder and CEO of the Fore) to delve into the need for and importance of overhead costs to an organisation, and some of the contributing factors behind why donors use overhead costs and restricted donations as proxies for impact. We also advanced an alternative rubric for how donors and charities may wish to view their partnership that we hope could be more productive and fulfilling than the status quo.

What are overhead costs and why are they important?

When it comes to defining overhead costs, one of the issues is the lack of standardisation of meaning and terminology across the sector. Overhead costs can be described as core costs, operational costs, or running costs. When we asked Clare Woodcraft, she described overhead costs simply as ‘people’ and the ability to invest in high quality staff to run organisations effectively.

In addition to failing to attract top-quality talent, trying to maintain low overhead costs means that organisations can struggle to cover their rent, acquire effective HR and accounting systems, monitor and evaluate their programmes, or build a decent IT infrastructure. Clare highlighted that the focus on overheads often has detrimental effects on impact; you need to be able to invest in your core, systems, and processes if you want to build an organisation that can create change.

To give you a clearer picture, it is estimated that around 20% of philanthropic funding is dedicated to core costs, which may even be lower due to the lack of data or standardisation around what this figure includes. Restricting donations may encourage organisations to not be transparent when it comes to their learnings, what may have not gone according to plan, and what needs to be improved. Instead, organisations are concerned that by having such honest conversations with their donors, they risk losing funding. This may cause organisations to create an environment of mission dilution, moving away from its initial intent, and instead develop initiatives that donors are interested in funding. In other cases, it may cause organisations to ‘create’ discreet projects that don’t exist to fundraise to cover their core costs. And ultimately, this takes the attention away from their intended beneficiaries and impact that they are trying to create.

Why Do Donors restrict their donations?

Most of the time, donors restrict their funding because they are worried that their donation will be spent ineffectively. Another part of this is that often donors lack trust in the organisation and so do not want to provide general support. For example, a big concern that we hear time and time again is donors not wanting to contribute toward ‘overpaid charity CEOs’. However, Clare advanced the alternative point of view that charities are tackling complex socio-economic issues that have been around for decades. To do so effectively requires tremendous skill and talent, and effective non-profit leaders should therefore be compensated accordingly.

Another common misconception is that organisations with large reserves do not need core funding as they are considered to be more resilient. However, this is not necessarily the case and donors must be careful not to penalise organisations for building their reserves or being successful. In fact, this trend has been exacerbated by the pandemic where for many organisations, reserves have not been enough to weather the storm. If organisations don’t have institutional resilience, or sufficient financial security, then they are likely to close when difficulties arise. This can mainly be attributed to the lack of funding through core costs. For example, of the total philanthropic funding deployed in the US toward the COVID-19 response, only 9% was actually dedicated toward covering core costs.

What can donors do to change their thinking and behaviour?

Donors often restrict donations as a way to secure assurance that their donation will be used effectively. Unfortunately, as we outlined above, restricting donations can in fact hinder a charity’s work.

Mary Rose emphasised that the most important thing to do as you identify charities to support is to build your trust in the organisation and their work so that you don’t feel the need to restrict your donations. You can do this by looking through their website, researching their track record, contacting the charity to obtain any reporting on their impact, or even calling the organisation to get to know them on a more personal level and ask specific questions. Approaching organisations this way does not mean that you have to support them however, you may want to consider sending a small donation as a ‘thank you’ for their time, particularly for smaller organisations as time spent speaking to you means time spent away from their beneficiaries.

Another helpful rubric that Mary Rose advanced is that of a consumer or an investor. In the former frame of mind, donors may be inclined to restrict their donations as they view their role as ‘buying’ outcomes from a charity and therefore restrict donations only to what outcome they hope to have. In the latter frame of mind, donors may be more willing to make unrestricted gifts as they wish to support the entirety of the charity’s operations, from their back office to their programme delivery, and are happy to take on the risk and uncertainty that that entails. As investors, donors believe in the charity itself and the change that they can make, and are supporting them for the long-run.

Take home message

The current pandemic has brought a unique opportunity for organisations to become more open with their donors in terms of what they actually need, rather than what donors think organisations need. As a donor, this gives you the opportunity to help charities think about their broader mission, what their aim is, and what they hope to achieve in the next three to five years. Asking questions like this could help steer organisations to look at their own impact as a whole, and the best way to get there, rather than focus on specific programmes.

It is important to build your trust in the organisations that you want to support and enable a safe space where they feel able to have honest and transparent conversations with you, including what may not have gone according to plan. To facilitate this, it may be useful to try and think of your philanthropy through an investor lens, and also consider what else you can or want to offer.

If you have any questions from this event, please follow up with your client manager, and we would be delighted to connect you to Mary Rose Gunn, and/or Clare Woodcraft. Our private client team is always on hand and we can arrange a call with you to run through your philanthropic strategy. 

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