Nonprofits need a new measure
Nonprofits must present more sophisticated measures of success to attract the diversity and sustained support necessary to succeed. We can’t effectively mobilize supporters and take on a broadening palette of critical societal issues with a simplistic focus on percent of budget spent on program. The established reliance on budget analysis provides supporters with falsely comforting but opaque views into organizations. This metric exists disconnected from the most important metric of all: impact on the mission. This article highlights two types of nonprofits hurt by this system after a brief look at how we currently measure nonprofits.
To date, nonprofit watchdogs heavily rely on the mix of budget spend for nonprofits to assign a grade. The budget categories break down into Program, Management, Fundraising and the watchdogs like to see high percentages allocated to Program. Give Well and others supplement this analysis with some mission and impact analysis, but even then it comes as a secondary and diminished factor. This makes superficial sense, since Program captures expenditure focused on accomplishing the mission. However, it does not account for the strategy behind that spend or attempt to measure the outcome/impact of the spend. In other words, I could have a program that spends 90% of my budget on a highly ineffective and misconceived program strategy. So why hasn’t this gap between the measure/metric of evaluation and the effectiveness of an organization been resolved?
It isn’t for a lack of trying. In his article Using Outcomes to Measure Nonprofit Success for NonProfit Quarterly, Richard Larkin analyzed three options for measuring a nonprofit: Inputs, Outputs, Outcomes. He succinctly captured the flaw with using Inputs but also captured the challenges with opting for Outputs or Outcomes. The latter two do not fit into easily quantified measures, an issue that Larkin finds insurmountable. I agree that they elude efforts to try and snapshot them in an annual report. We don’t want each and every nonprofit diverting funds from mission to fund statistically sound outcome studies. The resource drain from furthering the mission greatly outweighs the benefit of additional transparency. Combine the resource drain with the fact that most supporters wouldn’t spend the requisite time to read and weigh the reports from the competing nonprofits within the same mission space, and the folly of this approach becomes obvious. Before proposing alternative measures that break the reliance on % of spend on Program and provide improved guidance to supporters, I want to illustrate the importance of this issue.
An emphasis on program spend freezes out whole classes of nonprofits, arguably from the group containing the most dynamic and innovative. It actually disproportionately favors less dynamic groups already established in a given issue or geography. Here are some simple examples of nonprofit organizations that cannot reach their maximum impact on improving society while adhering to current evaluation criteria.
ACME.org has existed for 2.25 years. In that time, it closely followed the standard accounting mix, focusing spend on program as it proved out its revolutionary approach to serving homeless adults. Working in its local market in Green Bay, WI, it’s innovative program effectively helped homeless adults move off the streets, get plugged back into jobs and/or education tracks and avoid a return back to the streets. In addition, in the past 6 months, they’ve started a similar program in Milwaukee, WI and seen trends that mirror the first 6 months of success in Green Bay. At this point, any for profit start up would get funding to … market and sell the program nationally. But our existing focus on % spend on program means a heavy marketing expenditure skews away from the standard budget mix for nonprofits. This means logical areas for growth such as Chicago, Minneapolis, and Detroit get delayed introductions to ACME.org’s revolutionary program, if at all. Going into new geographic locations requires a promotional budget to raise awareness, especially if other organizations already have presence in those markets.
Resegmenting a market
Following on the ACME.org example, why does Chicago need another organization if others already exist and serve that community, say Globex.org? First off, I’m not aware of many nonprofit missions that are “solved” in a given community. Second, what if ACME.org proves more accessible to a wider population of homeless adults and works better for them? Wouldn’t we all want more money going to ACME.org and not GLOBEX.org which spends 85% on programs but only 50% as effective per dollar spent? ACME.org will need to out promote GLOBEX.org when entering their market to raise awareness, but that will make ACME.org look worse than GLOBEX.org in the watchdog grades. Supporters interested in fighting homelessness find GLOBEX.org looking better after reviewing the watchdog groups, undermining ACME.org’s marketing spend and hurting the homeless population in Chicago. This simplistic example demonstrates how the current system favors the incumbent organizations not spending on growth and stifles the expanding organizations.
In my next post, I’ll discuss additional metrics nonprofits should adopt to provide supporters with a fuller picture of an organization. No reason exists why a supporter of a nonprofit shouldn’t have an easily digestible set of metrics, akin to investment measures for a stock purchase. Without this type of information, nonprofits will fail to get the full spectrum of their support and society suffers from poorly appropriated funds.
Using Outcomes to Measure Nonprofit Success, Richard Larkin, Nonprofit Quarterly, July 2013
How Can Non Profits Measure Success And Impact, April Anthony, Armstrong McGuire, February 2015