If you haven’t seen it yet, I encourage you to check out In, what to me was, a surprising alliance between GuideStar, Charity Navigator and BBB Wise Giving Alliance, the new site is dedicated to exploding the myth that measuring the effectiveness of a charity by its overhead ratio is a valid measure of quality. The site’s centerpiece is a letter, signed by all three organizations’ CEOs, proclaiming that “Instead of focusing on the percentage of charity’s expenses that go to administrative and fundraising costs – commonly referred to as “overhead” – we need to focus on what really matters: impact.” Hear! Hear! As someone who has advised organizations for over a quarter of a century, I could not agree more.

While out-of-control administrative costs are a sign that the organization is being poorly, if not fraudulently, run, my experience is that we generally have the opposite problem. Not enough charities are investing what they need to in order to build an infrastructure that can support good decision making, protection of the organization’s assets and the public trust.  Often they do not even have the ability to accurately track and report financial information – including the amount of overhead actually incurred! As page two of the letter points out, there are statistics to support that what many of us know anecdotally – that a large percentage of organizations do not report their overhead expenses correctly, many by a long shot!

Not only is the information not reliable, it is irrelevant. As the letter points out “focusing on overhead without considering other critical dimensions of a charity’s financial and organizational performance can do more damage than good.” “When we focus solely or predominately on overhead…we starve charities of the freedom they need to best serve the people and communities they are trying to serve.”  In real life, I have seen time and again, organizations skimping on compensation, training, safe working conditions, antiquated computer systems and, yes, quality knowledgeable auditors – who are a key component to protecting the organization’s reputation and the public’s financial investment – only to see that same organization limp along and eventually close its doors, ultimately losing the ability to have any impact at all.

As donors, we all want to do good. Smart, effective philanthropy, is difficult. It takes a level of thought, research and understanding that demands more than a 2 second look at a single ratio. If you are not convinced, I urge you to take a look at the site and consider their case. If you are already a believer, I urge you to go to the site and learn how you can spread the word.

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