For years, donors have pressured nonprofits onto a starvation diet. Many make it clear they only want to give to charities with the highest program spending percentages. They push charities to spend almost all their money on direct programs and cut their “overhead” — things like rent, computers, and staff training, and fundraising — to the absolute bone. The logic is that the less spent on overhead, the more spent on programs, so more good is produced.
But the reality is, we cannot make charities starve and still expect them to deliver the strong, life-changing results we want to see.
The Nonprofit Starvation Cycle
When researchers at Stanford University studied this problem they named it the “nonprofit starvation cycle” (Stanford Social Innovation Review, Fall 2009). They told us that it’s a dangerous, unhealthy loop that damages the charity world:
- Unrealistic Expectations: Donors expect charities to run on almost no administrative budget, forcing them to chronically undereat.
- Pressure to Conform and Underspend: Charities feel intense pressure to produce impossibly lean numbers so they do not lose their funding – and they underinvest in technology, staffing, skills training, etc.
- Underreporting: To look good on the scale, charities feel the need to hide their real expenses.
The cycle: charities cave to the pressure, underspend, and underreport, so they reinforce donors’ unrealistic expectations and pressure.
To put this in perspective, think about regular for-profit businesses. Overhead rates across for-profit industries vary, with the average rate falling around 25 percent of total expenses. And among service industries — a closer comparison to nonprofits — none report average overhead rates below 20 percent.
Broken Tools and Low Pay Can Impede Good Work
A charity simply cannot do heavy lifting or deliver strong results when it has to work with broken tools. To save administrative dollars, an organization might keep using ancient software like MS Office 2013. This forces staff to waste precious hours fighting glitches, redoing lost work, and struggling to open files sent by modern donors. Meanwhile, other workers waste time unjamming a 15-year-old copier. The frustration drains their energy, keeping them from focusing on the mission we want to support.
A charity’s ultimate success relies heavily on its human capital — the passionate people doing the work. Perhaps the most painful impact of starving a nonprofit is that it forces them into a “low pay” culture. They hire workers who lack the necessary experience for the job. Then, once those employees gain experience, they understandably leave for better-paying jobs elsewhere. This leaves the charity trapped in a revolving door of constantly hiring new inexperienced people. And when a charity is forced to minimize spending on training, the organization cannot build the strong leadership it needs for the future.
Beware the High Program Spending Percentage
At CharityNine.org, we warn donors to look closer if a charity claims it spends more than 80% of its budget directly on programs. While some groups are genuinely efficient because of dedicated volunteers or long-established donor relationships, a number higher than 80% is a warning sign.
Perhaps those with high program spending percentages are making their overhead costs look low by:
- Having an outside source pay for their administrative costs.
- Under-spending on vital parts of their daily operations, which weakens their foundation and hurts their results.
- Mis-categorizing fundraising or office costs as “program” costs to look better on paper.
A healthy, well-run organization must consume meaningful resources for administration and fundraising to stay strong. Instead of demanding a 90% or 95% program spending rate, we urge donors to embrace program spending in the 60% to 80% range. This lets the charity feed its mission while also keeping its own engine running so it can deliver strong results.
The Bottom Line: Don’t Make Charities Starve Themselves
We need to stop judging charities just by how skinny their overhead is. Instead:
- Focus on causes you care about: Pick the issues that matter most to your heart and find charities doing that work.
- Look for reasonable spending decisions: Welcome charities with program spending in the 60% to 80% range. Accept that real work requires real fuel.
- Get to know the organization: Dig deeper. Ask the charity directly how it runs its operations and keeps its costs manageable.
If you’re supporting a charity with program spending greater than 80%, get to know them better. See how they’re actually doing. Find out how they keep their administrative and fundraising costs low, and whether that’s reducing their impact. A healthy, well-managed charity should be able to give you clear, confident answers.
Find and get to know the charities doing the work you love, even though they’re spending “only” 60% to 80% on programs. You can help end the starvation cycle and start helping more charities thrive.
If you know someone who focuses their giving on charities with high program spending percentages — this post is worth passing along. You can copy the link: https://charitynine.org/charities-starve/