Graphic by the Bridgespan Group

Last week, I had a fascinating lunch with Dan Pallotta. Dan is the author of the book “Uncharitable: How Restraints on Nonprofits Undermine Their Potential.” He also has a weekly blog post at the Harvard Business Review (http://blogs.hbr.org/pallotta/) and is an outspoken and articulate thought-leader on the subject of nonprofits having access to capital in order to grow.

I agree with a lot of what Dan has to say. Others, like Tom Tierney, Chairman and Co-Founder of Bridgespan, have also expounded passionately on this very topic and have produced compelling data to back up their point. (http://www.bridgespan.org/nonprofit-overhead-costs-2008.aspx)

Many view nonprofit overhead costs as one of the most essential key performance indicators with a “the lower the overhead the better” prevailing mindset.  Aside from the fact that the way that those costs are compared is generally inconsistent and often arbitrary, there is deep confusion between “good” overhead and “high” overhead. High overhead, like opulent office space on Park Avenue is, of course, deserving of criticism and donors should be mindful of things like this when making investment decisions.  However, a strong investment in your organization’s leadership team will also boost your good — and arguably  invaluable — overhead costs.

Nonprofits will stagnate and remain small and struggling if they are unwilling to invest in strategic areas of growth.  Certainly, this isn’t a new insight. But we need to be more vocal with our boards and the general public if we are going to change our cultural mindset that investing in operations is not worthy of our support.