Tuesday, January 5, 2010

Measuring impact and efficiency

by Rich Cowles, Executive Director

The joint news release last month by Charity Navigator, Guidestar and others discouraging donors from using financial ratios to evaluate charities was welcome news. As an organization that has long tried to move donors away from preoccupation with the Program Expense ratio, the Charities Review Council applauds the release. We also fully agree with the assertion that nonprofits’ impact should be the primary criterion for giving decisions. Our newly updated standards that will be implemented 2nd quarter 2010 include a Community Impact standard and Monitoring Mission and Strategy standards.

The news release has triggered a flurry of posts in the nonprofit blogosphere affirming the importance of Impact, with some disparaging ratios as utterly useless. These comments have included the assertion that donors shouldn’t be concerned with how much it costs nonprofits to achieve their impact. If there were a limitless supply of donations, I would agree. But given donors’ legitimate desire to get the most bang for their contributed buck, they have a right to know about an organization’s efficiency in achieving its impact.

Highly flawed as it is, the Program expense ratio has been a widespread attempt to measure such efficiency. At best, it’s a surrogate until a better efficiency measure can be determined. Ultimately, “Impact per Dollar” is what we want to get to.

The sector is a long way from determining how to measure Impact per Dollar. But there’s an urgency to finding it; it should be an integral part of determining an accepted means of measuring impact. Donors do and should care about nonprofit efficiency. And nonprofits should too. We’re long past the day when nonprofits can expect donors to go for “just trust us.” And that’s a good thing.


Mazarine said...

Impact needs to be measured over time. Donors and funders should not expect instant results.

This is hard in our system where we have to justify every penny spent on "operational" funding.

We need to remember that amazon.com operated at a loss the first 4 years it was in business, as they invested in their people and built their infastructure. And then they posted a profit of $5M in the 5th year. We need to start investing in charities this way. If charities can make the investment in people and structure, which will create efficiency, then we can start to measure impact.



Rich Cowles said...

Thanks for your insightful comments, Mazarine. You are right -- it takes time to truly measure impact, and donors and funders should take a long view.

That said, I think it’s also important for us nonprofits to evaluate ur work as we go --sharing with donors and funders our accomplishments as well as what we’re learning from our challenges. Such ends-oriented transparency allows us to build relationships and engage our supporters more deeply in pursuing our missions. They deserve both short and long term reports on the value of their social investment with us.