ASU Lodestar Center Blog

Illustration by Yuxin Qin

Most in the nonprofit sector have heard the question, “How much of my donation will go toward programs?” This may be a triggering question, but with good reason. There are many implications that this question brings, but when it is asked by major funders it causes a ripple effect within the nonprofit sector.

Nonprofits depend on sustainable revenue sources to ensure their mission is fulfilled. Therefore, when a funder requests administrative costs lower than what is needed, or state they will not fund administrative costs, organizations make it work. The Overhead Project speaks to the difficulties that organizations can face when they do this: “Community nonprofits typically have overhead that is much too low. They often underspend on essential, basic costs such as rent and insurance. They can't afford adequate accounting staff, good technology, or human resources management. They often try to compensate for under-funding of programs and systems by having too few staff or paying staff poorly. The consequences of under-investing in overhead are financial weakness and inefficiencies at the nonprofit, and as a result, fewer services or lower quality services.”

Illustration by Yuxin Qin

Ask yourself: Has there ever been a time when you sought the services of a nonprofit organization but something just didn’t feel right? Unfortunately, this is a common dilemma for minority groups and various ethnic populations.

For example, consider you’re a Spanish-speaking customer from a neighborhood that as of recently is facing a housing crisis due to COVID-impacted job losses. You find a local nonprofit in your community that you think might be able to help you find and utilize resources relating to rental assistance. You are hesitant to enter the organization because of the lack of Spanish-translated flyers, information posted outside, and because the individuals pictured do not represent you or those from your community.

Upon entering, you are greeted by an individual who does not speak Spanish. You kindly ask for assistance in Spanish, but are told they do not have anyone who speaks your language; you are worried and in need of assistance, but are just not comfortable speaking in English. With an attempt nonetheless, you begin to explain in English your needs and the struggles that your community is facing with the hopes of receiving useful support. The employee is unaware of the issues you face, and is unsure on how to help. You are disappointed that the nonprofit was unprepared to serve your community, and lacked the resources and information to genuinely help.

Illustration by Yuxin Qin

The 2018 State of the Sector Survey from the Nonprofit Finance Fund found that 86% of nonprofits saw increasing demands for services and 57% would not be able to meet those demands. Investments in capacity building infrastructure can ensure that nonprofits can meet this demand while growing sustainably.

The Council of Nonprofits defines capacity building as “whatever is needed to bring a nonprofit to the next level of operational, programmatic, financial or organizational maturity, so it may more effectively and efficiently advance its mission into the future.” Nonprofits can build capacity through investments in infrastructure. Infrastructure has three main components: administrative (technology, systems, and software), human capital (people, paid and volunteer, and their knowledge and experience), and financial capital (money for short- and long-term operations).

From the funder’s perspective, the components not directly related to program delivery are many times labeled “overhead.” The problem of overhead funding has been a decades long issue within nonprofits. Gregory and Howard conceived the cycle of nonprofit starvation. The cycle begins with funders that can have unrealistic expectations about what nonprofits should be spending on overhead. On average, funders allow 10-15% of funds to go towards overhead, but most nonprofits need to spend at least 20% for effective program delivery, according to the Bridgespan Group (PDF).

Illustration by Yuxin Qin

The reason that we begin with the question – How can nonprofits strategically implement digital tools to achieve impact? – is because our society has shifted from being a “civil society” and into a “digital civil society,” according to a report from the Stanford Center on Philanthropy and Civil Society. Technology and connecting digitally are no longer optional, and rather have become essential disciplines for every industry and nearly every person. If nonprofit organizations are going to thrive while accomplishing their missions, then transforming their systems and using ever-evolving digital tools is required in today’s world.

According to an article from the Public Administration Review, to “improve organizational performance,” nonprofit leaders should dedicate adequate money and resources to information technology .This means that each nonprofit must be technologically educated, have the needed digital infrastructure, budget for future needs, staff appropriately, and use digital analytics for highest impact. These disciplines are not what we have seen in much of the American nonprofit world, as 72% did not have a digital strategy before the coronavirus pandemic. Not surprisingly, those that did have a digital strategy have done far better. “Larger, contextual shifts” (e.g. pandemics, climate change, economic variations, and donation ups and downs) should be assumed as inevitable future dynamics.