The Wall Street Journal on how NOT to be stupid with your donor dollars

Last week, there was an interesting Wall Street Journal article on giving, in time for the holidays, with the fun name Tis the season to be stupid .  Of the ten “financial mistakes” that the author, Shelly Banjo, details people often make but can avoid, the one that piqued my interest most was #7 – Fixating on Charity Ratings: 

Over the years, a number of websites, such asCharityNavigator.org and GuideStar.org, have sprung up to help donors evaluate a charity's administrative, program and fund-raising expenses. While it's important to look at the ratings, nonprofits have become experts in gaming the rating system. For instance, groups have been known to disguise fund-raising mailings as educational materials and pass fund-raising costs along as program expenses.

“Gaming the system?”  Nice phrase.  I’d bet they prefer to call it “creative accounting.”  To be fair, some nonprofit accountants are more creative than others, depending on their clients and, of course, the quality of the accountants themselves.

But what’s really going on that we're being warned about?  Is the "gaming" for some nefarious purpose, such as stealing donor funds?  Or is it to deal with a “reporting/grading” system that’s broken?  Having worked with many nonprofits for year I believe that – in most cases – it’s the latter, not the former. 

Shelly seems to understand this, too.  For example, she sees the reporting/grading system has its problems, quoting a nonprofit advisor:

"Just like in any business, donors can't ignore the necessary administrative costs nonprofits have to efficiently and effectively deliver services," says Chris Page, senior vice president of Rockefeller Philanthropy Advisors.

And she tips her hat to the executive salary issue:  

“Don't avoid giving to a charity only because a CEO makes over $100,000,” she cautions. “The median CEO salary for charities with total expenses between $3.5 million and $13.5 million is nearly $160,000, according to Charity Navigator.”

In the end, her best advice is to be thoughtful and ask questions.  I agree.  Ask and become educated.  Don’t be hung up on percentages and numbers that make no sense.  Donate wisely this holiday season!

HBS on The Hard Work of Measuring Social Impact

Professor Alnoor Ebrahim, at Harvard Business School, is teaching Performance Measurement for Effective Management of Nonprofit Organizations in June 2011.  A summary of his thoughts in two working papers has been published in The Hard Work of Measuring Social Impact, a Harvard publication.

As one might imagine, his approach is rather academic, but he does have some interesting conclusions with respect to the practicality of using metrics.  “Not everyone needs to measure (social) impact,” he says, “what you should measure is contingent on what you’re trying to achieve.” 

To start, an organization that has a more limited scope or mission can has what he calls a more “linear” approach.  “If an organization has a focused, or linear, theory of change and a tightly focused operational strategy, measuring results is much easier.”  Defining a “focused” theory of change is “one where the relationship between their actions and their impacts on society are linear and can be observed.”  The delivery of basic services, “such as food and shelter for homeless people,” for example, is linear.  “You can count the number of people being fed, sheltered, and clothed.”

Yet the more complex the problems or issues a nonprofit is taking on – or the more ambitious their “theory of change” – the harder it is to measure impact.  He illustrates by adding the goal of helping the same organization above (i.e. delivering food) reaching higher, to try to also help people to escape poverty.  This would require, as he points out, “greater access to education, health care, and employment resources,” for example.  Measuring results here are more problematic.  The bottom line?  “As you widen your scope to deal with a major social problem, the harder it becomes to measure your impact because it is tougher to isolate cause and effect.” 

The article ends on a positive note.  “Despite the ambiguity surrounding social impact metrics, nonprofits can nonetheless establish their own internal benchmarks to assess performance and determine whether they are achieving their mission.”  Ebrahim is currently working with a number of nonprofit and public organizations, such as the Acumen Fund, the Robin Hood organization, and others, to help create these metrics. 

“’It turns out that highly intelligent thoughtful people end up developing some very different approaches to measuring social performance,’ he says, ‘That suggests we might not see agreement on a common set of metrics in the social sector for a while’…”

Cool.  But what do we do in the meantime? 

We wait for news of what intelligent, thoughtful people suggest…   

Gold Medal charities

Givewell.org has new ratings, with its mission “to find outstanding charities and publish the full details of our analysis to help donors decide where to give.”  As of December 2010, they’ve identified two “Gold Medal” and eight “Silver Medal” nonprofits.  Their rating are defined as follows:

We have confidence that a Gold Medal charity is having significant and cost-effective impact on the issues it works to address.  A Gold Medal charity provides compelling answers on most of the issues we consider, for the bulk of its programming.

What characteristics do they look for?  They provide a list!

• Basic transparency: including an “on the record conversation” with staff and public disclosure of any “failed” programs
• Full transparency: with regard to fiscal issues, by country and program
• Monitoring: ongoing and systematic
• Evaluation: “rigorous” including public assessment
• Success: as defined by their evaluation process
• Promising approach: being both cost-effective and “low burden of proof”
• Funding gap: if an organization needs more funding it has made this need clear

One may choose to agree with Givewell’s approach – or not. What is impressive is the degree of thought that has gone into it.  Their “Criteria for evaluating programs” goes on for three pages (single spaced) when printed covering the above in detail, with another two pages of their cited sources.

They’ve also been clear about staking their territory and their priorities.  “Priority” programs are “for international aid: proven health interventions.”  “All of the programs we have identified as priority program (sic) are in the area of health.”  My hat is off to them for deciding health is the world’s #1 issue.  We can all argue for or against now as we like.  Do you think health is the world’s #1 issue?  

Charity Navigator's new evaluations

On Monday, November 29, 2010, the NY Times printed To Help Donors Choose, Web Site Alters How It Sizes Up Charities.   The article discusses how Charity Navigator “recently embarked on an overhaul to offer a wider, more nuanced array of information to donors who are deciding which organizations they might help.”

Charity Navigator’s site will track approx. 3 million unique visits in 2010, according to their statistics.  They, along with sites like Guidestar, are one of the largest online sites for evaluating nonprofits. 

The article states:

“there is a trend toward new ways to measure a charity’s effectiveness in delivering services or results. Over the next three years, Charity Navigator plans to add evaluations of a nonprofit’s accountability and transparency to its ratings, as well as research on its impact and research by other organizations.”

What I want to know is, how is it going to measure “accountability” and “transparency?”  And what about “impact?”  How will that be measured? 

I’d like an example, such as for an NGO that provides food relief.  Will they count how many people received the food? And what kind of quality was the food?  How it distributed?  And was there any violence in that distribution setting or was it peaceful and fair? Was there any waste in the distribution?  Is there corruption?  Or is that just the “price of doing business”? I could go on – you get the point. 

More hope, it appears, is emerging from the nonprofits themselves.  Take, for example, the Children’s Tumor Foundation:

“Some individual charities have begun offering up more of their own information in public formats, to help benefactors make these assessments. For instance, the Children’s Tumor Foundation has begun reporting on its finances using the same format as the 10-K, the annual report that public companies must file with the Securities and Exchange Commission, in the belief that it is an easier and more comprehensive way for donors to see how it operates.”

The 10K is more revealing of its operations as opposed to the newly revised 990, which nonprofits are required to file.  How revealing!

The number of articles about this topic is heating up.

McKinsey's voice nine years ago

McKinsey & Co., the consulting group, published a paper on nonprofit measurement back in 2001.  Working closely with the Nature Conservancy for five years, as well as closely observing 20 other large nonprofits, they wrote “Measuring what matters in nonprofits.”  (Numbering was added by me): 

Every organization, no matter what its mission or scope, needs three kinds of performance metrics—

1) to measure its success in mobilizing its resources,

2) its staff’s effectiveness on the job, and

3) its progress in fulfilling its mission.

The specific metrics that each nonprofit group adopts to assess its performance in these categories will differ; an environmental organization might rate the performance of its staff by whether clean-air or -water legislation was adopted, a museum by counting how many people visited an exhibition. But any comprehensive performance-management system must include all three types of metrics.  Financial metrics, such as the percentage of revenue spent on overhead and administration, are also important management tools, but since the law requires organizations to report them, they are excluded from this framework.

These metrics are far too vague to be useful.  The examples they give do provide some illumination: examples of the first measurement “could include fund-raising performance, membership growth, and market share.”  That is, measurements of how an organization does its job within a community – both generating revenue and in outreach (members served, market share, etc.). 

Examples of metrics for “staff performance” are “the number of people served by a particular program and the number of projects that an organization completes.”  That is, how well does the staff perform within the constraints of its defined purpose, be it within a program, the number of programs, etc.? 

The third metric, they note, is the most difficult to measure and, perhaps, the most important.  The metric of fulfilling its mission has to do with how narrowly the mission is defined.  The examples they give are Goodwill, which tried to raise people out of poverty through work: "A hand up, not a hand out." “Goodwill can therefore measure its success simply by counting the number of people participating in its training programs and then placed in jobs. Its affiliates offer many programs besides those for job training, but all are linked to the core purpose of providing the poor with employment.”

They cite various other cases, from the very broad goals of the Girl Scouts and the American Cancer Society to the more narrowly defined missions of the Chesapeake Bay Foundation and Jump$tart Coalition.  In each case, they show how impact can be measured.   

These suggestions are wonderful and appear quite useful and valid.  Why, nine years later, are we still hearing about the percentage of overhead being spent on the dollars?  Or worrying about the dollars spent on fundraising?  Why, if this has been thought out in such detail, has the paradigm not shifted?  Not much has changed, though the article asserts it has:

 “ Many nonprofit organizations, such as the Chesapeake Bay Foundation and the American Cancer Society, have successfully used well-publicized performance targets to influence public opinion and the policy agenda of government.” 

If so much has changed, why did the IRS revise the 990s two years ago that nonprofits have to fill out? There is even more emphasis now on the financial metrics they briefly mentioned (overhead, administration) – rather than these other metrics.   When will these performance measures be something that the government wants reported for maintaining and achieving nonprofit status? 

Not much has changed in nine years, despite many good ideas.

Investing in Social Change

There is little more gratifying than reading about the formation of the Acumen Fund in the autobiography of Jacqueline Novogratz, The Blue Sweater: Bridging the Gap Between Rich and Poor in an Interconnected World. 

When Novogratz launched the Acumen Fund in 2001, her vision was as follows:

“We would raise charitable funds, then invest equity, loans, and grants – whatever was needed – in organizations led by visionary entrepreneurs who were delivering low-income communities services such as safe water, health care, housing, and alternative energy sources.  In addition, we would provide them with wide-ranging support on everything from basic business planning, to hiring managers, to helping them connect to markets.  We would measure the results of our investment not only in the capital flowing back to the fund, but also – and more importantly – in the investment’s social impact.  Any money returned would then be reinvested into other enterprises that served the poor.” (p.192)

Bravo! 

The question is this: how to measure social impact?  Certainly she’s abandoned the “standard” measurement of “percentage of each dollar spent on programs.”  I applaud this.  I’d like to know if the Acumen Fund has answered this question broadly – universally - or if it reviews each investment individually, “starting from scratch” when it comes to metrics?

In her November 2010 Quarterly Update Letter (www.acumenfund.org), Novogratz writes “our most critical metrics are around the number of people we serve on an ongoing basis, the sustainability of the companies we help build and the transformative industries we help create – asking questions such as are they growing?  Enduring?  Bringing quality services with integrity?”

Will Acumen share its years of experience on measuring results with the nonprofit world?  Can it shed any light on some universal metrics?

I leave you with this thought from her book:

I … took issue with the practice of donors typically funding only programs instead of institutions.  ‘I want to be certain that all of the money goes directly to the people who need it most,’ prospective donors would tell me.  That is a fine strategy for providing alms or direct charity.  At the same time, no one would invest in a company and not expect it to pay for hiring great people, paying the rent, and keeping the lights on.  We needed philanthropists to build powerful institutions in the social sector, too. 

We committed ourselves to changing the traditional donor-grantee relationship.  Our donors would be called investors.  They were still giving us charitable gifts, of course, but we wanted them to think of themselves as investing in change, of taking seriously how their money was spent.” ( p.193-4)

Why is this philosophy appropriate only for Acumen’s ideal social sector organization, expected to be both responsible and successful?  Shouldn’t all donors feel this towards the organizations to which they give? 

The plight of nonprofits is a result of the short-sighted "donor" thinking that exists today.  Lack of investment in infrastructure, in long-term planning, and in the people of any institution will spell its doom.  Charity or not. 

 

Learning about accountability from the Acumen Fund

I’m reading The Blue Sweater: Bridging the Gap Between Rich and Poor in an Interconnected World, by Jacqueline Novogratz, the creator and vision behind the Acumen fund.  It’s as fascinating autobiography of how she felt compelled to “change the world” – from the perspective of providing women empowerment and making them part of their economic system (in Africa) rather than through grants or assistance. 

Novogratz came at the problems she saw with the head of a banker and the heart of a philanthropist.  Yet she turned the idea of aid on its head through microfinancing - by “microloaning” to women, expecting them to pay back their small loans - with interest. 

“Sustainability” of programs is key for her – and for her success.  The women who are most successful are those whose endeavors continue on after they are set up, without outside funding.  They are taught to fish so they don’t need to be given fish anymore, as the analogy goes. 

It’s interesting that one of Novogratz's ongoing themes is accountability.  Watching and being a part of privately and publicly funded programs over the years, she has seen that if there is no accountability on the part of either the funder or the loan recipient then the arrangement does not work.  There is no “respect” on either side; neither takes the other seriously.  Promises are not kept; loans are not repaid. 

The success that Novogratz has created should be enlightening to the nonprofit world.  Like Novogratz, we can learn by listening to what is needed and what will work.  Programs should be funded that can make a difference not from the funder’s perspective, but from the recipient's.  And accountability on everyone’s part is key.  

Where to begin?

Three years ago I met with the head of the National Council of Nonprofits in D.C.  When we’d finished “business,” we had an honest conversation about the state of nonprofits in the U.S.   I shared my experiences, having been the Executive Director of two nonprofits, and we discussed both the economic challenges and the structural challenges, working within the framework of a 501c3. 

It was a wonderful exchange of ideas and information and she recommended I “do something” with my thoughts.  I was flattered she liked my ideas but shrugged off the suggestion as I already had a “full-time” job. 

But I’ve been thinking about that conversation ever since.  Here I am, blogging, as a result.

One of the questions I asked that day is this: why are we so obsessed with nonprofit “overhead”?  That is, why do we praise nonprofits for the amount they spend on “programs,” as if what they spend on “general and administrative” costs, or fundraising, is somehow not worthy? 

That’s not how for-profits work.  If you told any for-profit institution that they couldn’t put more than 10% of their revenues into people (salaries), infrastructure (building, phones, internet!), or marketing, let alone future investments, they’d tell you that you were insane - that they couldn’t operate – let alone successfully create, make, or deliver their products or services.  They’d need to plan for the future, innovate, be prepared to meet competition, economic conditions, etc.   

So the standard we hold nonprofits to just doesn’t make sense.  It’s not “sustainable.”  Many reports by economists and academics point this out (I’ll cite some in the future).  For now, it’s enough to just consider the obvious: without phones, without internet, without fundraising, without people – there is no nonprofit.  So why do we only want to pay for the “program?”  Doesn’t make logical sense. 

Why do we do it?
Why do we care about the “% of each dollar that goes to programs?”

Habit.  Pure and simple.

It’s how “everyone does it.”

You know what my mother used to ask?  “If everyone jumped off the Brooklyn Bridge, would you?”

Let’s start breaking bad habits just because “it’s what everyone else does” and think outside the box about what really makes sense.