Wednesday, November 15, 2006

Overhead: let's make it plain

One of the interesting sessions at the recent Grantmakers in the Arts conference, of direct relevance to folks working in all non-profits, was led by Elizabeth Keating of the Kennedy School at Harvard. She argues persuasively that the ways funders and grantees interact regarding overhead expenses is irrational for all concerned, and that more transparency would enable mutual improvement.

[All which follows is my version of Keating's ideas, any transmission errors are mine.]

If you're a program manager or artistic director who's ever had to debate with your own finance staffer about which grant can pay for which costs, she means you. Or perhaps, as in my case, you've been that grants administrator! For several years at a large complex organization in the 90s I was that spreadsheet geek trying to rationalize a dozen grants with differing rules and reporting requirements, and I'm sure our hard-working program staff didn't enjoy the process any more than I did. (If Laurel, Dave, Steve, Michael or Diane read this they will right now be either laughing or wincing.) Of course now I'm on the funder side of the conversation, to which role I bring direct knowledge of how the bodies get buried so to speak...

Which is not to say that I think the process was entirely time wasted -- actually it forced us as a staff team to deal with important decisions including programmatic choices. But it sure was awkward and messy and arbitrary, and some of the incentives were perverse: the honest answer to a funder's question "What are the overhead costs?" would be "It depends, what are your overhead rules?" Yecch. Many perfectly well-intentioned staff teams have had that experience, and many funders have felt misled.

That last is actually what Keating means by her slightly-unfortunate presentation title "Is There Enough Overhead in This Grant?" She's not particularly arguing that funders should be magically made to only issue unrestricted grants. (Which is good cause they ain't about to, and there are good reasons why not.) Rather she argues that the core of the problem is that there is no consistent definition of "overhead" in detail or even in principle, and that the two parties in the funder-fundee relationship aren't honest enough with each other about the subject.

Keating proposes that non-profits adopt the sort of transparency that is standard for corporations about their finances, and she's working on some promising tools (software, and report formats) for that. She proposes mandatory non-profit openness on this subject once they get big enough to accept project grants: "Once a non-profit has to figure out an overhead allocation for any one grant, they must make that data public as part of financial reporting or annual audits." In return, foundations would agree (locally or nationally) to standard definitions of what is overhead and how much of it is reasonable. We could as a sector have sensible conversation about how much is or is not too much, and have no more jerry-rigged 90-page spreadsheets which arbitrarily assign the copier lease to this grant and the office assistant's salary to that one. Works for me, and the sooner the better.

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