Overhead: Money to cause trouble
It has been a busy summer. We are setting up new projects, wrapping up older ones, and ramping up large-scale expansion at HQ and in the field. As a result I am falling very far behind on several fronts. Luckily, however, this morning’s rain on the East Coast predictably led to ground-delays at La Guardia, which means I have an unexpected extra 30 minutes before jumping in a cab.
So, instead of using that time to actually do some badly overdue paperwork, I’d like to jump in on a very interesting blog post made by Tom Murphy (aka A View From The Cave) several weeks ago. In it, he argues against the practice of judging NGOs and aid projects by their overhead rates and repeats previous suggestions that donors should be more concerned about the Return on Investment. Tom uses a brilliant metaphor which I have since shamelessly stolen and used repeatedly. To paraphrase: Investors and consumers don’t buy Apple stock and Apple iPods because Steve Jobs spends very little on rent and salaries. They do so because Steve Jobs produces the best mp3 players on the market. Likewise, donors should not be sending their money to a specific NGO because they have the lowest overhead. They should be supporting the NGOs that produce the best projects, save the most lives, help the most children, create the most jobs.
I didn’t always think this. When I founded PDT, in the very first meeting of the Board of Directors, I laid out a goal to keep our overhead below 5%. My thinking was that since PDT had set a mission to make aid and peacekeeping more efficient and effective, we should lead by example. I realized quickly that 5% was largely impossible and over the following five years we settled on a more reasonable 10-12% target.
But then a year ago we won the Skoll Prize for Social Entrepreneurship. This came with a very large infusion of unrestricted funding. The Skoll folks encouraged us to use that money on our overhead expenses and we did. We hired new staff, upgraded our systems, and more importantly, we were able to pull some of our brightest and hardest working people back from their projects so we could all sit down together and “think big thoughts”. The result has been spectacular. Within the course of 12 months, PDT has transformed. The extra overhead money allowed us to refocus our goals, to establish new metrics to measure success, to identify and fix problems in our projects, and to dream up some amazing new ideas. Right now we are in the midst of turning these ideas into reality, and our clients, donors, and partners will start to see some dramatic changes in the months ahead.
In my acceptance speech at Oxford, I said that this award and this money “is giving us the resources to cause a little bit of trouble”. What I meant was we now had more overhead money to do some unpopular things like shed light on the inefficiencies of the aid industry and to make donors uncomfortable with some of the practices they’ve allowed to take place.
Overhead allows NGOs to find new ideas, improve old ones, increase quality, and ultimately increase impact. Paradoxically, a higher overhead rate can mean a better Return on Investment for donors. Of course, there is the possibility that the NGO could spend most of the donor’s money on Grey Goose vodka (a flippant example I recently used in one exchange). But if they did, it’s unlikely that very many schools would get built, so the effects on the project’s impact would be pretty obvious. That’s why we measure impact at PDT and we encourage donors to provide transparency on results. Overhead is secondary, if that.
I’ve made a similar point recently in the mini-controversy between us and Bill Easterly’s AidWatchers site over budget transparency. In those exchanges I argued that overhead is a meaningless measure, I don’t care how much an NGO spends on bricks, but I do want to know how many schools they built with those bricks. Likewise, I no longer care if PDT’s overhead is 5% or 12%. What I care about is what we do with it and how much trouble we cause. And I can assure you, we are planning to cause a great deal of trouble in the year ahead. And I’m hoping that the people at the Skoll Foundation will see this as a pretty good ROI.