The Issue Of Organizational Overhead
ServiceSpace
--Nipun Mehta
8 minute read
Jul 13, 2009

 

In eight years since 1994, Pallota Teamworks raised $585 million via AIDS Rides and Breast Cancer 3-Day events.  But in 2002, they went out of business, because of a public out-cry about the $180 million they spent along the way; that is to say, it cost them 47 cents to raise a dollar for breast cancer research.  Following a huge public out-cry, the company shut down in 2002.

If you donate ten bucks to feed a child in Africa, it's reasonable to want middle-men to take up as little as possible.  That middle-man percentage is technically known as the organizational overhead.  Traditionally, well-rated nonprofits hover around 18-22% overhead.

charity:water took the opposite approach.  Last time I was in NY, Scott Harrison told me a neat little trick they use -- they fundraise separately for their overhead, so all the small donors feel that their money will go directly to digging wells in developing countries.  They still have overhead, but the donors feels that 100% of their donation goes to the nonprofit.  It feels like a  trick, but charity:water is thriving and raising millions of dollars.

Of course, for unstaffed groups like ServiceSpace, that overhead actually is zero -- which means that when a donor donates $10 for Smile Cards, for instance, every single penny goes towards that purpose.  Prior to the Internet, nobody thought it was possible to scale such efforts but now that everyone is connected and has access to collaboration tools, it's easy to share, cooperate and engage in collective action.  From national protests to Twitter-led fundraising to crowd-sourcing encylopedias, we are now seeing tons of examples of this kind of organizing.

The issue of overhead, though, is worth a deeper look because it has culturally become a bit of a bottom-line for the nonprofit world.

 

In his provocative book, Uncharitable, Dan Pallota (founder of Pallota Teamworks) passionately battles this stigma of organizational overhead.  According to Dan, America's nonprofit idealogy dates back to the Puritans, for whom charity was a means to assuage their guilt about their self-serving capitalist pursuits.  Since then, we've maintained double-standards for businesses and nonprofits instead of leveling the playing field from advertising to high-salaried recruitment.  Dan poses this question: if cigarette manufacturers are spending $6 billion on advertising, why should the American Cancer Society just spend $1 million on anti-tobacco legislation? 

The crux of his argument is that the $295 billion nonprofit sector shouldn't be judged by overhead, but by effectiveness.  That is to say, so long as the AIDS-Ride raised more money for cancer, who cares about its 47% overhead?   We don't go to a movie theatre and wonder about its organizational overhead.  If an entrepreneur could solve the homeless problem in a city, but wants to roll around in a Ferrari and live in a mansion, so be it.  Needless to say, Dan's thoughts have generated much discusssion.

My difficulty with Dan's rationale is that it's very outcome oriented, which is often short-sighted.  As we've seen the global-warming crisis, bottom-line driven businesses simply out-sourced the problem to someone else, only to realize a few decades later that that someone else was us.  That's the inevitable conclusion of all outcomes that don't factor in the process.  So if someone wants to profit personally from solving the social crisis, I would argue that the self-interest creates the field for a design flaw whose price will be paid by the future.  Of course, for some immediate-term and short-term problems, such methods are required, but as an entire sector working on long-term and sometime generation-term solutions, it creates more problems than it solves and is simply ineffective.

To upgrade the nonprofit sector to capitalism, as Dan wants, sounds like a good short-term idea, but as one of the finest capitalist amongst us -- Bill Gates -- has discovered, it doesn't fully work.  Still, I would agree with Dan that that our obsession with "organizational overhead" is misplaced.

Back in the 70s, public concern about "questionable use of funds" yielded laws limiting nonprofits from spending too much on themselves.  Watchdogs like Better Business Bureau started saying that at least 65% of a well-run nonprofit's total expenses should go towards its program activities.  Charity Navigator and other agencies rated nonprofits based on this percentage.  It's an easy, quantifiable question to ask, and donors got conditioned to equate effectiveness with organizational overhead.

ServiceSpace, by nonprofit sector's definition, has zero overhead.  In many ways, though, we outsource our overhead to others.  Several corporations have given us hundreds of thousands of dollars in in-kind services; for ServiceSpace to operate at our current scale, those services are very much part of our offering, but that overhead doesn't show up on our ledgers.  In fact, IRS doesn't even know how to process organizations like ServiceSpace, since they place a restriction on the amount of in-kind contributions you can claim -- as a percentage of your financial budget.  An organization with few thousand dollars in budget can only list a few hundred dollars of in-kind contributions.  IRS simply gets confused in trying to figure out non-financial incentives, let alone a full-on gift-economy operation, and hence, there's no place to report our overhead.

The problem goes even further than reporting, though.  We don't even know how to calculate our overhead!  As volunteers, of course, everyone knows that we outsource our basic sustenance to other entities.  Isn't that our overhead too?  Like that, if you start breaking it down, every negative intention, in every single part of every single organization, creates some amount of overhead.  To be brutally honest, there is an overhead to every breath -- living entities have to die for us to walk a single step.

Nothing happens for free, and we don't really know how to figure out the price of anything.

That's a humbling realization.  One approach is to shift organizational overhead from simplistic metrics to more inter-woven metrics, but history has shown that we're terrible at figuring things out.  As Nicholas Taleb points out in Black Swan, we have failed to predict practically every single major crisis that humanity has faced.  Now that rate of change is increasing so dramatically, those failures (like our banking crisis) of our arrogance are becoming glaringly obvious in practically every sector.

Gift economy mindset offers another strategy, perhaps an indigenous solution.

Many years ago, when I was visiting a Native American shaman, he offered some nourishment and prayer to a plant before plucking its fruit.  It's so simple, yet deeply profound.  That whole cycle is one based on contribution, not consumption.  It accepts our lack of knowing, reveres the gifts we consume, and implores us to pay-it-forward with gratitude.

The gift economy heart turns the overhead question onto itself: why do you want to know the overhead?  It's the wrong question.  It's way too late in the supply-chain process of donor's intention to give, manifesting that gift, and producing an expected outcome. 

People who care about overhead are usually stuck in the tail end of that cycle and hopelessly miss the Black Swan.  They invest in mirrors of themselves, and don't really tap into the true value of giving.  When we give only because something is effective, we implicitly propagate our own idea of effectiveness in the world -- which could be a complete delusion, even if we run SuperBowl ads and hypnotize a few million people into seeing the same way.  One of the biggest blocks in giving with trust and humility is that people have often hyped up the value of their offering; money is scarce, we fought hard to get it, and when we are giving it away, we feel compelled to use our reductionist intelligence to maneuver its outcome.  Sure, if we have managed to acquire a lot of money, we probably do know a lot about how it can be leveraged; but what's also true is that if we're stuck to that money, we will only be able to work in the limited domain of financially-motivated social change.  Instead if we let go, even if those millions are used ineffectively, we start to tap into the multi-dimensional value of transformation within oneself -- value that could easily supersede all the social change money could've bought.

On several occasions, ultra-affluent folks have asked us this question: what does ServiceSpace need?  It's the wrong question.  I typically tend to respond with, "I don't know.  But perhaps you'd like to volunteer."  (Some actually do end up volunteering. :))  On the other hand, there are the dozens and dozens of people who have sent us a dollar or two of five, simply because they received their anonymous package of Smile Cards and couldn't hold back their gratitude.  It's a pure, unsolicited gift.  And it's not just small amounts.  I first learned that lesson from an old man who stuffed few hundred dollars in my pocket, when we were just starting ServiceSpace.  We've seen that happen again and again with ServiceSpace.  That's how we survive.  Just recently, a successful entrepreneur emptied his wallet of $195.  We've randomly received five-figure checks like that too.  All of these folks give just for the sake of it, to shed layers of their own egos and make room for an interconnected experience of life.  And ServiceSpace makes itself available for people to practice this form of deep generosity.

When we receive such offerings, we go through that same indigenous cycle.  We don't really know all the causes that moved a person to make such the gift, so we humbly accept our lack of knowing; since we didn't seek the gift, we naturally hold reverance for all that is contributed; and with gratitude, we are mindful to pay-it-forward with the utmost integrity.  Such gifts beget more gifts.  Metrics of overhead and short-term effectiveness are still there, but they're of limited benefit in this multi-dimensional cycle of value.

When everything has overhead, and we don't really know how to figure it out, the gift-economy proposes this challenge:  the question of how-are-my-gifts-used only comes up when we have forgotten the value of how-my-gifts-are-given.

 

Posted by Nipun Mehta on Jul 13, 2009


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