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.