It's common practice for nonprofits to trumpet their low overhead ("95% of all donations go directly to needy children!") as a badge of honor. In principle, foundations understand that overhead is necessary -- ambitious goals need a long-term home. But in practice it seems that foundations are often reluctant to fund the "core costs" of a nonprofit, even when they are more than willing to fund particular projects.

On the SSIR blog, Paul Shoemaker, executive director of Social Venture Partners Seattle, thinks through the dangers of skimping on core costs:

Funding is a significant influence on the behavior and priorities of nonprofits. By putting such a priority on overhead as a criterion for success, we are telling grantees to focus on the means, not the ends. If we told them that social outcomes were the priority, they would focus more on that.

There has to be accountability, but to what? By using overhead expense to measure effectiveness, we are not connecting funding to social goals or impact! Program spending is trackable (in theory), but it tells us little about impact.

A thoughtful comment from Kate Cochran follows Shoemaker's blog post:

In the very real and valid pursuit of giving money where it will do the most good, funders are afraid of general support. Whether they mean to or not, this implies a distrust in the management of the organization. I think it’s more expensive--from an impact perspective—to run an organization on a shoestring and to not be able to invest in productivity-enhancing technology and talent. Ironically, this often translates into the organization’s inability to really track their impact as well--which are the outcome measures donors should be looking at. It’s natural to gravitate toward the most track-able data, like overhead expense, but what does it matter if an organization can run things very lean but not make a dent in the problem they’re addressing?

There are differences, but I found myself wondering what investor would want to invest in a business that prides itself on trying to sell the most services or products without worrying about R&D or talent? I admire foundations and nonprofits that try to work themselves out of business. (The Gates Foundation plans to spend its entire endowment down within 50 years of the death of its founders.) But as long as you're in business, it makes more sense to run a robust, fully-fledged organization rather than an anemic one.