Study Adds Fuel to Debate Over Operating Costs

The Theory

Nonprofit leaders often blast the “overhead myth” — the idea that charities that spend a lot on administration and fundraising are not effective or efficient.

North Carolina State University researchers Jason Coupet and Jessica Haynie took a closer look at the relationship between overhead and results by examining the work of a national nonprofit that provides housing for the poor.

The Test

Analyzing data from 2013, Coupet and Haynie ranked 792 Habitat for Humanity affiliates by “efficiency scores” using measures that analyzed their total spending and the number of houses they built or made available for low- income people. They also ranked the affiliates by overhead spending alone, then compared the sets of rankings.

The Results

The researchers conducted several analyses, but in general they found that affiliates with lower overhead were not necessarily more efficient at producing houses.

In fact, the affiliate with the lowest overhead made only two homes available in 2013 — far fewer than many chapters with higher overhead.

Rankings of efficiency based solely on overhead, in fact, were “negatively correlated” with analyses of efficiency that accounted for how many houses affiliates offered.

Dig Deeper

Nonprofit leaders who complain about the emphasis on overhead now have more ammunition.

But what does the study mean for evaluating charities in general? After using multiple measures to assess the affiliates of one charity, do the researchers think it is possible to find one way to gauge effectiveness for all sorts of organizations? “Probably not,” says Coupet. Still, there should be further research into ways to compare charities that are similar, he says.

Overhead ratios should not be the sole basis of any rankings of efficiency, he says, because they don’t account for what charities do with their money.

Find It

“Toward a Valid Approach to Nonprofit Efficiency Measurement,” by Jason Coupet and Jessica L. Haynie, Nonprofit Management and Leadership, Vol. 29, No. 1, Fall 2018.