Overhead, HQ, and the global financial crisis
How much should we spend on non-project costs, a.k.a. ‘overhead’ or ‘HQ’? Ten percent? Twenty? More? Or less? Please think about this for a couple of minutes before you read on, and define for yourself what would be a reasonable percentage in the organisation that you work for.
So now I am going to tell you that whatever percentage you came up with is wrong.
Nasty, huh?
My point here is that we should really stop thinking in percentages. Sure, it sounds nice that we can tell people that we spend only 15% on ‘overhead’, but it is totally meaningless.
First of all, we have these people called accountants, who are very good at defining ‘accounting principles’ in whatever way is needed to present the best picture.[1] When we say that we spend 15% on overhead, we actually say, “15% of our expenditure is attributed to overhead, but that could be any odd (or even) number under different accounting and presentation principles”.
Furthermore, defining how much we want spend on organisation (shall we just stop using those disparaging words ‘overhead’ and ‘HQ’?) in terms of total expenditure, or even as an absolute number, really is utter nonsense. No self-respecting company would say at the start of the fiscal year, “let’s spend so-and-so much on our corporate organisation – doesn’t matter on what, you can just spend this amount”[2]. Instead, they look at what support and control activities are needed from corporate, and then make first an activity budget, and subsequently base a financial budget on that. Similarly, we should define what level and manner of support and control we need from our central departments, and then try to cost it. In the end, the only thing that matters here is how the people we try to aid get most bang for the buck – and if that is more by spending it on support, because that will increase our efficiency in the field by so much, than that is where we need to spend it.
Over at humanitarian.info, Paul Currion makes the very astute observation that the current global financial crisis might actually help us to look at these issues in a more rational way. In short, he contends that the resulting squeeze on our budgets might force us to look more at efficiency, and do that in a less mechanical and more rational way than just at expenditure in the field versus at HQ. He might be right – I definitely hope so.
(Image: Ritratto di Frà Luca Pacioli (1495). Luca Pacioli (1445 – 1517) was, amongst many other things, the inventor of double-entry bookkeeping, a system we still use today. He was also the first to realise that profit and loss were no absolutes but depended on how you accounted for them.)
Footnote
[1] I have been an accountant and an auditor. Believe me, I know.
[2] Show me a company that does, and I show you a bankrupt in the making.
If you enjoyed this post, make sure you subscribe to my RSS feed!
Lawrence Haddad of IDS called for “creative destruction”
http://idsbetacms.ids.ac.uk/go/news/070109
Ah, yes, “Schumpeter’s gale”. I hadn’t thought of it in those terms (the last time I thought seriously about Schumpeter was in ‘Advanced Economics 2′, about 15 years ago), but it is a good one.
Although: wasn’t Schumpeter’s creative destruction basically a form of economic Darwinism, supposed to be caused by innovation and progress from nimbler organisations — leaving the behemoths crippled behind, unable to cope with their colleagues’ progress? Hmmm… back to my study books.
BTW: the moment I see the words ‘paradigm shift’ in the title of an article, is the moment I need to struggle mightily not to switch off. That must be the most abused piece of misunderstood jargon around. Kuhn must be spinning in his grave.