The Wounded Warrior Project (WWP), once considered the leading veterans group in the United States, has recently come under scrutiny for spending excessively on itself, including business class flights, $500/night hotel rooms and lavish dinners. Not to mention the spending on PR and lobbying campaigns to deflect criticism of these expenses. Approximately 40% of WWP’s budget is spent on overhead, which is significantly higher than most mission-driven organizations. While there are many reasons to criticize their allocation of financial resources, having higher overhead isn’t necessarily one of them.
A mentor once told me that if you’d be embarrassed to tell a donor how much you spent on a dinner or transportation, it’s probably not a good idea to spend it. That seems like a reasonable rule of thumb. But as Stanford Social Innovation Review points out, funders often have unrealistic expectations of what it actually costs to run a successful nonprofit.
To do their best work, purpose-driven organizations need to hire smart, talented professionals and compensate them competitively. To keep top talent, they also need to provide professional development opportunities and invest in technology to effectively manage their financial and human resources. In other words, there are a whole host of expenses associated with overhead that are critical for nonprofits to function well.
But many organizations lack the resources to invest in their infrastructure. Most often, funders award grants for specific initiatives with a cap on how much, or rather how little, can be spent on indirect costs. Additionally, the methods used to evaluate these initiatives equate indirect costs as a sign of inefficiency. What these tools neglect to capture are any gains in effectiveness that organizations see when they invest in their staff and/or technology. Rather than promoting greater accountability and effectiveness, this dearth in unrestricted funding, and the lack of tools to measure its benefits, can stifle a nonprofit’s growth and impact.
Thankfully, GuideStar, BBB Wise Giving Alliance and Charity Navigator recognize this challenge and have been working on an “overhead solution” since 2013, emphasizing that “overhead is not a primary measure of a charity’s performance and that results matter more.” As part of this effort, they’ve developed tools and resources to help organizations prove their worth based on impact rather than a false financial ratio. Some forward-thinking investors are also starting to realize the power of unrestricted funding in fostering sorely needed innovation in the space. These developments are critical and promising, but the philanthropic community still has a long way to go.
To be clear, a $500/night hotel stay obviously does not pass the donor test of a reasonable expense. However, the backlash we’re seeing in response to WWP’s inappropriate spending reinforces the assumption that higher overhead costs are always bad—a misperception that hurts the entire nonprofit field. If we as a society want to achieve social good of any kind, it’s time that we give hard-working organizations the flexibility and support that they need to do so effectively.