NONPROFIT OVERHEAD: Making the Case for a Sustaining Tooth-to-Tail Ratio
Tooth-to-Tail Ratio (T3R) is a military term used to measure the strategic efficiency of a fighting force. T3R is the ratio of combat forces (the teeth) to the number of support personnel (the tail) required to place one trained, supplied, and strategically-integrated foot soldier onto the battlefield at the right place and time with the tactical support to succeed in his mission.
The American Civil War was the first truly modern war. Each succeeding world conflict involving the United States radically increased in technological complexity—and thus a radically decreasing tooth-to-tail ratio (i.e., fewer but more lethal teeth with a much more extensive tail). The Confederacy in the Civil War, the Germany of WWI, and the Axis powers of WWII all began as vastly superior fighting forces. Their eventual defeat was partly because of bad strategy but primarily due to losing the battle of logistics and supplies. In other words, their fighting forces became ineffective because they were unable to maintain a healthy tooth-to-tail ratio.
The financial Tooth-to-Tail Ratio for a nonprofit organization is reported annually on Form 990 in terms of percentages spent on administration, fundraising, and programs.
THE TAKEAWAY: There is never-ending debate among military strategists about the proper Tooth-to-Tail Ratio. The overall effectiveness of a fighting force is the result of finding and maintaining the strategic sweet spot—the proper ratio of resources allocated of supplies and logistics compared to resources allocated to the fighting force itself. That’s true whether the mission is to preserve our freedom, find a cure for cancer, or make our communities a better place to live.
THE NONPROFIT STARVATION CYCLE
The financial Tooth-to-Tail Ratio for a nonprofit organization is reported annually on Form 990 in terms of percentages spent on administration, fundraising, and programs. No small debate there either. It’s a topic of conversation everywhere I go.
Several years ago the Stanford Social Innovation Review published an article by Ann Coggins Gregory & Don Howard entitled, “The Nonprofit Starvation Cycle” (Fall 2009). The gist of the article was as follows:
Stage 1: There are unrealistic expectations among organizational leaders (both rookies and veterans) about the real costs of running a nonprofit. The Spartan existence at many nonprofits makes it very difficult to attract and retain experienced and high quality leadership. Underfunding of administrative expenses forces fundraisers into all kinds of non-fundraising responsibilities.
When there is a fundamental disconnect between donor expectations and organizational realities, you’re heading for trouble if you allow it to continue without addressing it.
State 2. Nonprofits feel pressure to conform to unrealistic expectations among donors regarding overhead. A recent analysis of a Thompson & Associates client showed 22,000 donors had given in the previous three years to their organization. Current staff had the capacity to visit only about 600 each year. Hiring additional fundraising staff would eventually turn into a significant net funding increase. However, the leadership wouldn’t make the investment because they were so afraid of what a few donors would say about the short-term increase in reported fundraising percentage.
Stage 3: In order to meet those donors expectations, nonprofits under-report the true overhead costs. The Center on Philanthropy at Indiana University’s Nonprofit Overhead Cost Study (2004) examined the Form 990s of 220,000 nonprofits and found that one-third reported no fundraising costs and that over three-fourths of those same organizations incorrectly reported costs associated with grants.
Stage 4: This under-reporting perpetuates donors’ unrealistic expectations. A Better Business Bureau’s Wise Giving Alliance Survey (2001) found that donors ranked overhead ratio and financial transparency more important than program success in determining their willingness to give. That’s an old study, but I doubt things have changed very much.
Stage 5: Under-reporting is so common and often so extreme that donors lose confidence in the data provided by nonprofits. When there is a fundamental disconnect between donor expectations and organizational realities, you’re heading for trouble if you allow it to continue without addressing it.
So how do organizational representatives speak to the issue and make the case for a more robust investment in administration and fundraising—that is, a lower Tooth-to-Tail Ratio.
FOUR POTENTIAL APPROACHES
1. Be blatantly deceptive, justifying the misreporting in the name of a good cause. That’s not a good option. There’s an old saying, “Your sins will find you out.” Reporting inconsistencies will eventually find their way to the surface. Major donors, particularly business leaders, try to be highly efficient decision-makers. They’re reluctant to revisit a decision already made. And so, once they consider a fundraiser to be less than straightforward, it’s very hard to undo that impression.
2. Be illusive. With this approach organizational reporting is not technically false; it just doesn’t provide important details. When a salesperson or fundraiser seems to be talking around the whole truth, I’ll ping them with a few questions, providing an open door to be a little more straightforward. If they continue to equivocate, I may form an opinion that’s not easily revisited or reversed.
You need to be straightforward, credible, and ready to make the case for a lower Tooth-to-Tail Ratio.
3. Be straightforward. That doesn’t mean telling all the good and bad to every donor on every visit or in every publication. But when donors (particularly strategic donors) begin to ask probing questions about percentages, you need to be straightforward, credible, and ready to make the case for an appropriate Tooth-to-Tail Ratio.
4. Focus on outcomes. The Form 990 data (if reported accurately) can tell you a bit about an organization’s EFFICIENCY but nothing about its EFFECTIVENESS. Feeling the pressure to minimize admin and fundraising expenses (actual or reported), many nonprofits lose sight of the most important thing—accomplishing their mission.
In the final analysis, nothing matters but mission effectiveness.
Strategic donors focus on outcomes, almost never on percentages. They understand the difference between efficiency and effectiveness metrics. And as I said earlier, a key to long-term mission effectiveness is finding that sweet spot in the nonprofit Tooth-to-Tail Ratio.
There’s a continuing-education component to donor relations. Every visit is an opportunity to increase donor awareness, involvement, and understanding of how a nonprofit works most effectively. If, however, the organization is under-invested in admin and fundraising, those visits never take place.
So, focus less on Form 990 percentages as a key motivator and make organizational outcomes your primary focus with donors. In the final analysis, nothing matters but mission effectiveness.
Eddie Thompson, Ed.D.
Copyright 2015, R. Edward Thompson