The focus on non-profit organizations' overhead expenses as a top benchmark for performance has hindered capacity-building efforts and limited the entrance and retention of talent in the sector.
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The chief constraint on social impact is people.

The focus on non-profit organizations' overhead expenses as a top benchmark for performance has hindered capacity-building efforts and limited the entrance and retention of talent in the sector.

Paul Vandeventer, the President & CEO of Los Angles' social enterprise incubator Community Partners, noted this week: "Overhead in business is simply a given. But in the non-profit world? It's simply a dirty word."

Spending money on employee training to complement program expenditures can bring valuable skills to often chronically-understaffed non-profit organizations, increasing future productivity.

Vandeventer points out that, ironically, too little overhead undermines sustainability rather than underscoring integrity:

Organizations that are unrealistically lean have zero financial breathing room.... Conscious that our mere existence means we've promised the people we serve that we will always be there, my board of directors requires me as CEO to maintain a constant six-month operating cushion. I can't keep that cushion -- and the implicit promise of uninterrupted service -- without building in sufficient overhead to make sure it's there.

Like Community Partners, the lauded Challenged Athletes Foundation began its endowment and rainy-day fund in its very first year to build long-term success.

Moreover, the country's three leading charity watchdog groups -- GuideStar, Charity Navigator, and BBB Wise Giving Alliance -- recently wrote an open letter to the philanthropic foundations, corporations and individual donors of America denouncing the overhead-to-service ratio as an effective indicator of non-profit performance.

Social return on investment is paramount, not overhead costs.

If Company A offers a financial return on investment of 7 percent and Company B only offers a return of 4 percent with equal risk, I am going to invest my money in Company A. Do I care if Company A has higher overhead costs than Company B? No: I care about my ROI.

Similarly, if Charity A can provide one child with access to school and safe drinking water for one year for $200, while Charity B requires $300 to do this, I'm going to invest my donation in Charity A because I will earn a greater social return on investment there.

Perhaps Charity A spends twice as much of its annual budget on fundraising as Charity B, which has allowed Charity A to scale more effectively and thus improve its program's efficiency: does this higher overhead mean Charity A is performing poorly? Absolutely not.

As flawed as the overhead-to-service ratio can be when comparing the performances of charities with similar missions (such as two homeless agencies), it is even more problematic when applied to charities in different industries, such as comparing an after-school program to an environmental perseveration group.

Just as for-profits have different capital structures, non-profits have different overhead requirements for achieving their varied missions.

Investment in overhead, when done right, is investment in the growing future of an organization and its stakeholders.

During a panel at USC EdMonth, Teach For America Founder Wendy Kopp said "the biggest problem" is "finding great talent, because great talent solves all the other problems." Recruitment and training are crucial -- and TFA has succeeded by investing in these priorities much like a Fortune 500 company.

Funding programs and people without investing in their support systems is shortsighted and ineffective: indeed, that is exactly why TFA offers "results-oriented philanthropists" with the opportunity to invest $5,000 to "recruit, select, train, and support a teacher who will help his or her students succeed at the highest levels."

And that is why Engineers Without Borders Canada launched its "Sponsor An African Spreadsheet" campaign to scale a technology system that can identify where new wells should be drilled and where existing wells need simple repairs, eliminating the problems that 15 percent of new wells were redundantly sited and 30 percent of wells break down within 7 years.

Supporting non-profits' investments in capacity-building will also make them less likely to skew expenses as program-related in an attempt to appease donors, thus providing us with a clearer picture of their priorities.

Donors must consider many factors so as not to shackle the very social impact in which they are investing.

"The highest use of capital," stated Henry Ford, "is not to make more money but to make money do more for the betterment of life." In order to make our money, time, and effort do more for the betterment of life, we cannot separate the glamorous from the tedious; the training from the teacher; the spreadsheet from the well.

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