Overhead is a term used by people who are overhead. No one wants overhead. No one wants to be overhead. No one wants to pay for overhead. But we’re all basically overhead.
Pity the Poor, Ignoble Overhead
Overhead refers to the costs a company incurs for expenses that are not directly related to whatever is being produced. Typically, these are “fixed” costs, costs that don’t change regardless of how many hamburgers are flipped or customer calls are handled. Examples might include everything from the CEO’s salary to the desks to the fees for Internet connectivity.
Most people, when they think about paying for a product, focus on only the product itself. I should only have to pay for the sandwich. How can it cost so much to make a pill? They think of a product as only the sum of the ingredients, rather than factoring in the distribution, packaging, design, testing, communication (advertising), inventory, or any number of other costs that have to exist in order for them to have the ability to buy that thing at that time at their convenience.
I did cost studies for a number of years, and it was always eye-popping to present to management how little money was spent on the actual business of helping customers. Typically around 25% or less. For some divisions it was 10%, and others larger, but never more than about 40%.
Even when workers are producing a lot of volume in an assembly line, where there might be a lot of volume-driven variable cost, you still need the building. Employee breaks, vending machines, training manuals, computers (and people to fix the computers). Janitors are overhead. Would you care to tell a company that you don’t want to pay for their janitors? Should they not have janitors? Of course, they should have janitors! Consider the alternative. See how quickly you capitulate on the necessity of overhead?
Nonprofits and Overhead
It seems timely, since yesterday’s discussion concerned nonprofits, to mention that there was a huge outcry a few year’s back about overhead in that sector. One well-publicized study found that donors were very much (62%) against paying for nonprofit overhead.
Part of the problem was that Executive Directors for the giant national nonprofits, like United Way, were paid unconscionably huge salaries. I can understand the attitude that giving someone $2.1 million to run the American Cancer Society doesn’t feel like it’s helping find a cure for cancer. The underlying problem here is that executives in general are paid too f*@#$&ing much compared to all of the peons. Nonprofit CEOs can rightly claim that they’re underpaid–in comparison to the head of Exxon–while being overpaid–in comparison to us.
Without wading into that swampy debate about the lopsided pay scale in the U.S., let’s forget the executive salaries for a minute. Should nonprofits be ranked or judged only based on the comparison of their administrative expenses–their overhead–compared to their direct program expenses? Which is better, a food bank that distributes $10,000 in food, with a $3,000 expense base, or one which distributes $1,000,000 in food with a $400,000 expense base?
As a 2013 TED Talk put it, “Which would the hungry prefer?Dan Pallota March 2013
The Overhead Myth
The anti-overhead crusade prompted a wave of discussion which labeled this the “Overhead Myth” for nonprofits. Many organizations end up starving themselves of infrastructure simply to keep their costs low. They rely entirely on volunteers or only focus on program expenses. What can happen?
Volunteers are great–I am a volunteer, and I’m great! But good programs need professional staff to make sure all the volunteer time is used effectively. Boring tasks like assigning work, providing schedules, communicating, and training fall by the wayside. Volunteers end up frustrated because there aren’t enough people to handle the stampede of needy clients or they sit around with nothing to do. I appreciate those who set up our schedules, tell us when to show up, and train us to do what the clients need. Overhead helps use volunteers effectively.
Or consider “advertising.” People don’t like it, but they sure use it. If a program can’t tell the community that it will be doing this work in this building at these hours, then no one will show up to be helped by the volunteers.
Overhead is not “fluff” or useless expenses. It ought to be subject to scrutiny like anything else, and unnecessary expenses should be eliminated. But all the website-building, marketing, package-designing, drug-testing, and accounting — yes keeping track of how much — is very necessary.
Even if it is overhead.