2013 saw a growing and widespread call for a fundamental change in the way we evaluate nonprofit effectiveness.  For far too long, nonprofits have been rated based on overhead ratios, and 2013 saw a long-overdue call for sanity in the sector.  Overhead ratios have a place in nonprofit management, but unfortunately in the nonprofit sector, over reliance on this one metric to the exclusion of all others has led us down the dangerous path to “The Starvation Cycle,” wherein nonprofit funders use low expenditures on overhead as a criteria to grant funding and nonprofits squeeze overhead at the expense of important management and infrastructure investments, and at times even misrepresent spending, in order to gain funding.  Low expenditures by some cause an increase in competition, and the entire sector becomes a victim of the starvation cycle. 

While this problem hasn’t been fixed, concerns about it have opened a welcome dialogue regarding the best ways to evaluate effectiveness.  In our opinion, effectiveness can be viewed from three distinct vantages:

  1. Management measures:  Management measures such as overhead ratios and return on investment (ROI) have an important place in nonprofit governance.  As with business, nonprofits must measure their fiscal health, compare metrics against goals, make adjustments as needed, and report results to stakeholders, including their governing boards and the public.  In a recent WealthEngine Institute survey, almost 80% of respondents indicated that ROI was somewhat important or very important for their organization to measure, and the people who are interested in ROI include board members, donors, volunteers and organization executives.  Management measures should be applied to all aspects of nonprofit management including infrastructure, programs, technology, marketing, fundraising, and analytics.  That’s the only way we’ll know if a nonprofit (or a for-profit, for that matter) is being honestly and efficiently managed. 
  2. Outcome measures: Many nonprofits are struggling to find quantitative ways to demonstrate their effectiveness in terms of impact.  This is arguably a difficult task.  Impact is well served through stories; a child gets a life-changing operation, a hungry family is fed, a community finds a place to heal after a tragedy.  But to measure this?  Put a value on it?  Impossible. Even if my nonprofit feeds 10 hungry people, while yours serves 100, does that mean yours is 10 times more valuable than mine?  Of course not, because circumstances, communities, and programs differ and outcomes are as unique as missions.  What can be measured then?  Every nonprofit should have a theory of change – that is, a roadmap that shows how it will achieve change, however that is defined.  This roadmap provides markers, or benchmarks, to allow the nonprofit to measure progress and make course corrections as needed.  For advice on creating a theory of change for your organization, see The Center for Theory of Change for free guidance and tools.
  3. Innovation: Without innovation, the nonprofit sector will never achieve its goals.  The problems are too big, the resources remain limited.  Innovation is the key to making the kinds of break through and incremental change that will spur both impact and outcomes.  What drives innovation? Collaboration, access to ideas, critical thinking, yes.  But we would argue that one of the biggest drivers of innovation today is data.  Information and knowledge are spurred by the tremendous opportunity presented by Big Data – structured and unstructured, consumer, constituent, social, and behavioral.  Whatever you call it, access to new and better sources of data along with the improvements in the technologies we need to access and make use of it, is what is fuelling and will continue to fuel innovation and nonprofit effectiveness.  The growth in data analysis, scoring models, data-based decision making and predictive modeling is driving innovation and progress in our sector and is a direct result of the availability and accessibility of data.

The effective nonprofits of 2014 and beyond will move past the starvation cycle and into a future that invests in what is working, measures what is important, operates with clarity and transparency, pushes the envelope through innovation and experimentation and understands and leverages the value of data and information.

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