Early in December, Charity Navigator and Guidestar issued a joint press release saying that “overhead ratios and executive salaries are useless for evaluating a nonprofit’s impact.” They were joined in the press release by the Hewlett Foundation and four other agencies dedicated to assessing and rating nonprofits.
This is a remarkable statement in the current context where conventional wisdom says the savvy donor asks, “How much of my gift goes to program and how much goes to administrative and fundraising costs?” Its doubly remarkable, however, because the press release comes, in part, from Charity Navigator – the organization that for a decade has been the leading, national proponent of overhead ratios as a reliable guide for effective philanthropy.
What’s the alternative then? Evaluate charities based on their effectiveness, they say.
As Dan Pallotta notes in Uncharitable and in a series on his blog, efficiency measures (overhead ratios) are entirely irrelevant when they are not accompanied by impact measures. Charity Navigator and the others agree with Pallotta and are promising more emphasis on what a nonprofit achieves rather than how it structures its budget.
While largely positive, the announcement merits a bit of skepticism. Most of the rating agencies listed still embrace the goal that motivated Charity Navigator’s original model: a simple rating system that is a reliable measure of any nonprofit in any context for the purpose of directing donor dollars to high performing nonprofits. There are, however, roughly 700,000 active charitable organizations in the U.S. All of the national rating agencies have small staffs and relatively small budgets (< $1M). In short, their capacity is not adequate to the scale and scope of their intent. Also, the alternate models proposed by some of the agencies – e.g., user reviews, expert consensus – seem as flimsy as the efficiency model they are abandoning.
For the most part, though, this is good news. This influential group is redirecting attention to outcome, not input. They are also fostering a recognition that assessing the quality of a nonprofit is a complex task that requires a careful look at multiple, interrelated factors.
If they succeed in changing conventional wisdom, however, this may pose new challenges for your organization. Your donors and stakeholders may begin to ask about your real impact in your community. You may no longer spend so much time parsing your budget into administrative and program categories, but you might need to focus more attention on evaluation, baselines and measurements.
Do not wait for Charity Navigator to define impact and effectiveness for you. This is a great time to take control of how your organization defines its impact. Spend time developing clear measurements of outcome. Develop program plans and budgets that create straight-line paths to those outcomes and educate your stakeholders on the value they create when they invest their charitable dollars with you.