Evaluate nonprofits by starting with the goal

This recent memo from the president of Guidestar.org moved way beyond the typical self-congratulatory non-news and sales announcements and started off with a bang:

start with these two simple and profound questions: what is your organization’s mission and how are you trying to accomplish it? It’s amazing how many organizations can’t answer this.

I read a recent article in Forbes that expressed the other part of this quote that I left out: that administrative expense/overhead ratios are not as big a deal as donors make them out to be. (NB: I’ll find the link and add it later.)

The problem, as always, is that it’s sort of true and sort of not. The examples the author uses seemed to me to demolish her point rather than support it: Apple’s SG&A is in the 60-80% range (look it up if you care; it doesn’t matter here). She uses this to “prove” that overhead doesn’t matter because we think of Apple as “good” and theirs is this high. But Apple doesn’t get measured on that: it gets measured, millions of times a day by thousands of people, against every competing investment. Apple’s ROIC is what matters, and the implications for the future of that number are the real driver of the stock price. From the market’s perspective, capital used is capital used: it doesn’t matter if you’re selling high-priced stuff because there’s a lot of gold in it or because it took smart people to put it together.

For the nonprofit board member or executive director, the problem is that there are few real benchmarks for organizations that measure effectiveness. (Heck, even in the stock market we’ve all learned that we can’t really trust GAAP “net income” numbers either and have to look at the cash flow statement.)

What you can do as a nonprofit is start with the advice in the quote above: figure out what you’re going to do and how you’re going to do it, an objective and a strategy. Here’s my homelessness example: there are probably at least a dozen strategically distinct ways to fight homelessness:

  1. provide meals
  2. provide shelter generally
  3. provide support for public benefits filings
  4. connect veterans with VA services
  5. connect the mentally ill with programs
  6. provide shelters for victims of domestic violence
  7. provide jobs
  8. provide job training
  9. lobby legislatures and executive officials (think police) for changes in law and policy
  10. build more houses
  11. litigate on behalf of the homeless when rights are violated
  12. ???

I can’t say with any certainty which of these is the best way to end homelessness. I can say that it’s very hard to compare nonprofit efficiency (which is effectiveness using the same resources) of Habitat for Humanity (strategy #10) with a soup kitchen. I can say that it’s easier to compare one soup kitchen to another.

That type of comparison, which segregates data about overhead ratios from apples and oranges, nevertheless helps organizations and donors find a path to improvement. And that’s good for everyone.