W9 Social Innovation

 Stanford: Our research reveals that a vicious cycle fuels the persistent underfunding of overhead.¹ The first step in the cycle is funders’ unrealistic expectations about how much it costs to run a nonprofit. At the second step, nonprofits feel pressure to conform to funders’ unrealistic expectations. At the third step, nonprofits respond to this pressure in two ways: They spend too little on overhead, and they underreport their expenditures on tax forms and in fundraising materials. This underspending and underreporting in turn perpetuates funders’ unrealistic expectations. Over time, funders expect grantees to do more and more with less and less—a cycle that slowly starves nonprofits.

Although several factors drive the cycle of nonprofit starvation, our research suggests that taking action at the first stage—funders’ unrealistic expectations—could be the best way to slow or even stop the cycle. Changing funders’ expectations, however, will require a coordinated, sector-wide effort. 

One of our peer organizations allocates 70 percent of its finance director’s time to programs.

Funders need to refocus their attention on impact by asking “What are we trying to achieve?” and “What would define success?” In so doing, they will signal to their grantees that impact matters more than anything else.