Urban Affairs Coalition is Building Web App to Help Nonprofits Understand Overhead Costs

The Urban Affairs Coalition (UAC), an organization that provides professional services to nonprofits based in the Philadelphia area, is working on a project it calls the Nonprofit Overhead Analyzer, which would allow nonprofits to see data representations of how much they spend on overhead compared to similar organizations based on size and type.

Overhead is the combination of administrative costs, such as legal, accounting, insurance and employee compensation, which make up the infrastructure of a nonprofit.

Hack4Impact, a group of University of Pennsylvania students that do pro bono programming for nonprofits, is building the website and tool.

Unlike other services that collect nonprofit data, such as GuideStar and Charity Navigator, which cater to donors and watchdog groups, this web application would be aimed at nonprofits themselves, according to UAC Vice President Arun Prabhakaran.

Providing an easily accessible way to access overhead data is helpful, Prabhakaran said, because nonprofits are often not equipped to understand the business side of their own operations.

“Most people don’t go into the nonprofit business to do HR, bookkeeping, accounting or IT,” Prabhakaran said. “They go into it to help people.”

He added that the Nonprofit Overhead Analyzer could help spark a more productive conversation around overhead, which, in recent years, has been the source of a major rift in the nonprofit and philanthropic sectors.

Over the last 30 years, donors have increasingly translated low overhead as meaning an organization is more efficient and accountable, and nonprofits have responded by lowering costs. While this could be interpreted as a good thing — more money is ostensibly going towards services — nonprofits are now cutting their overhead to the point where it’s weakening their capacity.

This effect was dubbed the “Nonprofit Starvation Cycle” in a 2012 report from Georgia State University.

According to the report: “This phenomenon occurs when an organization reduces (in reality or through creative accounting) the amount of money spent on overhead expenditures in order to gain a competitive edge in donor markets; over time, however, the constant erosion of infrastructure starves the organization of productive capacity.”

The report also stated that the demand for nonprofit services has increased even as their average overhead costs have declined 2.5 percent since 1985.

Prabhakaran said that UAC has kept a close eye on the debate around overhead and has noticed in recent years that the tide may be changing. In particular, he pointed to Dan Pallotta’s now famous TED Talk “The Way We Think About Charity is Dead Wrong,” as an inspiration for the project. The talk was a high profile example of a nonprofit executive making the case that nonprofits needed to spend more on overhead, not less.

UAC hopes that the Nonprofit Overhead Analyzer will help “break up some of the preoccupations that exist in the industry around keeping overhead low,” Prabhakaren said.

The analyzer will cull data from 990 forms, which nonprofits are required to file to the IRS. 990 forms are publicly available and contain a range of information, including executive compensation, staff wages and benefits costs. There are a total of 1.5 million forms from nonprofits across the county, all of which will be accessible through the tool, according to UAC.

Data with context

One concern UAC has is that the data will be taken out of context, feeding the existing problem of nonprofits and donors misinterpreting what their overhead costs mean.

“I don’t think anyone should take the information and make an assertion about how they’re doing,” Prabhakaran said.

In a feedback session on the project, Beverly Woods, director of UAC’s economic opportunity division, said that different types of services require different levels of overhead, which should be considered when looking at the numbers.

“Some products cost more,” she said. “So there’s the danger of comparing apples and oranges.”

For example, doing street outreach and handing out condoms costs a lot more than psychotherapy provided on a pro bono basis, in terms of overhead, Prabhakaran said.

On the site, context will be provided by placing the nonprofits into one of 130 buckets, based on financial tiers and organization types (for example, education, environment, health). UAC plans to work with local nonprofits directly to help them understand the data and what it means for them.

“This tool will help groups educate their funders as to where they fit in their peer groups, so to the extent that that dispels any unrealistic notion about low overhead percentages, that may help,” said Lee Haung, senior vice president of Philadelphia-based the research firm Econsult Solutions, who is providing feedback on the project.

For Prabhakaran, dispelling these unrealistic notions comes down to asking the right questions.

“What’s an effective overhead, what’s a healthy overhead, what’s an overhead that helps you be sustainable and grow your organization over time? Those are the questions that really matter,” he said.