image One issue has been sticking in my craw for several weeks now. I’ve recently participated in a handful of conversations, listservs, and conferences that discussed project-specific support vs. general operating support. I admit to my relative inexperience in the field (nine years), but I just don’t get it.

How and why did this project-specific, restricted, limits-on-overhead approach get so entrenched and widespread in the first place? It has been standard practice now for decades. I know that in part, funders are looking for accountability and results from grantees. Accountability (in both directions) is a valid principle in a grantor-grantee relationship. But this seems like a classic case of the right question with the wrong answer.

For starters, I challenge anyone to consistently and accurately define what precisely constitutes “operating expenses” or “overhead” or “administration” or whatever you call it. There are no FASB or IRS standards. The way various nonprofits define and report them is widely disparate. If you can’t define or measure it, how can you base your whole funding strategy on it?

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.

No one, including Social Venture Partners, can claim piety regarding funding practices. The points above don’t even address the positives of unrestricted funding for nonprofits–more flexibility, improved responsiveness to changing community conditions, less accounting work, more priority on outcomes and impact, etc…. In our need to have an answer to the question of accountability, funders are focusing on the wrong things and in turn, focusing our grantees on the wrong things.

Do you agree? What am I missing?

imagePaul Shoemaker is executive director of Social Venture Partners Seattle and founding president of SVP International. Previous to these positions, he acted as the group manager for worldwide operations at Microsoft Corp. and as a product manager at Nestlé USA.