It’s Time to Get Rid of the Concept of Overhead in Nonprofit Organizations
The management framework that the nonprofit sector predominately uses, New Public Management, is a bad fit. What’s needed is a framework that recognizes the strategic work of nonprofits.
So, why is New Public Management a bad fit? New Public Management (NPM) is a management framework that was first adopted by public administration professionals as a response to the pressure be more business-like in their approach to public management and public services. In theory, there is nothing objectionable about public resources (i.e. money and assets) being managed with with more diligence, transparency, and attention to costs and return on investment. For the most part, NPM serves public administration well on managing costs. What it doesn’t address is stakeholder (i.e. taxpayer) voice and it can lead to trading long-term investment for the public good for short-term cost savings. For an example of this, look to your local paper and find any article discussing infrastructure repair costs.
What does this have to do with nonprofits? Government is the largest funder of nonprofits through fee-for-services and the contracting out of public service provision. Rather than run their own shelters for unhoused individuals, for example, local governments contract with nonprofits to provide a variety of services to help shelter unhoused individuals and families through grants and contracts. Since public administrators use a NPM framework to evaluate their own performance that same framework has been superimposed on the reporting requirements of nonprofits who accept government grants and contracts so that public administrators can report on the accountability, uses, and impacts of those public dollars. (It’s important to note that not all of those dollars are local tax dollars, some of the resources distributed in this fashion are state and federal dollars that are administered by local administrators.)
Not all nonprofits participate in government contracting or receive government funding. But, it didn’t take long for the NPM framework to gain traction with other funders and stakeholders, such as boards of directors, which are often populated with senior leadership and management from industry and public management professionals, to adopt this more organized approach to objective measurement and balance-sheet-oriented decision making. The problems with this leap amplify the issues of incorporating and honoring stakeholder voice, responding and adapting to community need, and most importantly, solving the social problem that the nonprofit intends to solve.
I want to scrap New Public Management as the default management framework for the nonprofit sector. NPM’s devotion to financial reports, metrics, and efficiency ratios are not inherently bad things. But, NPM is born out of analyzing production firms — those that make and sell widgets. You can reduce the tactics of a addressing a social problem to being like making and selling widgets, but the strategy of a solving a social problem is nothing like making and selling widgets.
The strategy of a nonprofit that is trying to address a social problem looks more like a knowledge firm. Knowledge firms are thinking-based professions. They provided discrete services, like preparing a tax return, but the work that goes into being able to prepare unique returns for each client is based in the knowledge accrued by the people who work in the firm and the processes they create to share and leverage knowledge, tactics, and practices that lead to a thriving tax practice. Not unlike the specific knowledge needed to address the unique circumstances a social worker would encounter when working with an unhoused individual seeking shelter or other services.
From experience I know it can be difficult to pull back far enough to see this. It’s easier to see the short-term outcomes as the work of the nonprofit rather than the long-term goal and staff for outcomes, collect data for outcomes, and report on outcomes. We, and as a manager I was guilty of this, too, focus on the measurable because that’s what most funders want to know and because the need never ends we don’t have a moment to look up. We rarely take enough time to think through the problems and how we can address them robustly and collectively. We don’t have enough time to manage relationships and develop trust at multiple layers within and between our organizations.
I think a new framework and new decision-making tools can help us reframe the way we look at the work, not just the outputs, of nonprofit organizations. To do that, we have to let go of the “best practices” we’ve gathered around overhead vs. programs and service expenses. In a knowledge firm those expenses are much more intertwined because most “overhead” in knowledge firms exists to generate or create value for the client. In our example, the finance department of the agency providing shelter for unhoused individuals can be as integral to the value of the shelter service as the social worker.