Stirring the Pot a Little

General Operating Support and Indirect Costs

Paul Shoemaker

When Kathy Freshley (The Meyer Foundation), Marian Godfrey (The Pew Charitable Trusts), and Janet Sarbaugh (Heinz Endowments) planned a roundtable discussion, "General Operating Support: Making It Strategic," for GIA's 2006 annual conference in Boston they imagined that they would greet a small, if passionate, group of familiar GIA members that Wednesday at 8 a.m. Instead, the session turned out to be one of the conference's true dark-horse surprises. Over fifty people showed up! The discussion, much too large for a single breakfast table, was lively with many expressions of hope that it would continue.

Paul Shoemaker's article was originally written as a reply in an email exchange among members of Grantmakers for Effective Organizations (GEO). The discussion began with a query about foundation policies on paying indirect costs. Shoemaker's response might strike a note with participants in the Wednesday morning roundtable.

Tuesday, January 9, 2007

This first post of the new year got me thinking, and I'd like to offer another perspective. Before I say anything let me emphasize a few points right up front — SVP and I have made “mistakes,” I don't purport to know 100 percent of the issues surrounding indirect costs, and this is sent in the spirit of dialogue and open exchange. My comments are made as the director of SVP Seattle (Social Venture Partners) and a GEO member. Knowing that I may ruffle some feathers here, responses AND criticisms are not only welcome, but requested.

In short, I would suggest that overhead percentages are a false issue to focus on. For starters, it is a shell game to calculate them. Is staff “overhead”? What gets allocated into “program” vs. “operational” costs? our on-the-street experiences suggest that a “savvy” nonprofit, when confronted with this indirect cost parameter, has many incentives to play loose with the numbers in how it allocates its spending. Even if there were some accurate way to calculate indirect costs, the “appropriate” amount of such overhead spending by different nonprofits — advocacy vs. direct service vs. arts vs. human services, etc. — varies widely.

What I suspect is often a key reason for an indirect cost policy is a desire by trustees for direct accountability. Asking a nonprofit to be accountable for its outcomes is 100 percent appropriate (and something GEO funders should be willing to invest in). Holding a grantee to a largely inaccurate, widely-varying indirect cost percentage does little or nothing to achieve that goal. It is a false sense of accountability. At SVP Seattle, we decided a number of years ago that all of our grants would be unrestricted, general operating grants. Our mutual accountability is vital and is delivered through annual plans that identify specific capacity-building and pro-gram-service goals.

I am reminded that Microsoft, one of the most profitable companies in U.S. history, typically runs general & administrative expenses at over 10 percent of revenues, which is analogous to overhead. They also spend over 20 percent on “sales and marketing,” analogous to fundraising expenses. I am positive that they do not consider their people to be some “operational cost.” An investor would never, nor would the SEC allow it to, tell MSFT what it could spend on this or that category. Its management is responsible for deciding how to best deploy its re-sources and is very accountable to investors to deliver earnings, i.e. outcomes. (Yes, the nonprofit sector is different than the for-profit sector in many ways.)

I also asked Kathleen Enright (executive director, GEO) and Jillaine Smith (manager of programs, GEO) for some perspective and information from GEO staff's experience. One of the first things they pointed out was that via both its research and its conversations with both grantmakers and nonprofits, GEO has identified a number of grantmaking practices that can immediately increase nonprofit performance, including:

• improve and simplify application and reporting systems,

• fund grantee evaluation,

• invest in nonprofit leadership,

• reward candid grantee feedback, and

• provide long-term and unrestricted funding.

There it is, last but hardly least on the list. Providing unrestricted operating support is critical to achieving organizational effectiveness. Benefits of doing so include freeing up nonprofits' time normally spent on fundraising and reporting, and allowing them to focus on running strong and effective programs. It also helps shift the balance in an otherwise highly-charged power relationship between grantmakers and grantees, which is perhaps the root cause of many of the barriers that both grantmakers and nonprofits have told us impede organizational effectiveness.

What do you think?

Paul Shoemaker is executive director,
Social Venture Partners Seattle, This article is published with his permission.


Grantmakers for Effective Organizations

GEO writes about and compiles examples of grantmakers who have chosen to abandon the limits discussed in the email exchange about indirect costs. Examples include a story about the Philadelphia Foundation's re-cent change to providing operating support — why they did it, how they did it, and what they're learning. A collection of resources that make the case for operating support can be found on GEO's web site , search for “operating sup-port.” Also, watch GEO's site for a report on the email exchange about indirect costs and operating support.

Grantmakers in the Arts

Many GIA members have a long-standing commitment to general operating support, supported by findings from the first Foundation Center study of foundation arts funding, commissioned by GIA in 1993; a survey that was part of that early study found that general operating support to
be a high priority of arts organizations. In 1999, in cooperation with
the Cleveland Foundation, GIA published General Operataing Support: A View from the Field, by Gita Gulati and Kathleen Cer-veny that includes nine case studies. Information about this publication and others on operating support can be found on GIA's web site, choose “library,” and search for “operating support.”