Chasing the “Elusive Butterfly” of Nonprofit Impact

holygrailEver since the CEOs of the nation’s three largest charity watchdog agencies published a historic letter in June, 2013, encouraging donors to look beyond convenient economic metrics to find a nonprofit’s true impact, there has been a simmering national conversation about how donors should view a charitable organization’s overall performance and effectiveness.

Eric Fraint, President and Founder of Your Part-Time Controller, weighed in on this debate with a recent blog in which he argued that searching for a single metric to measure how effectively a nonprofit delivers on its mission is as fruitless as searching for the Holy Grail. Even when objective, quantifiable data are available to demonstrate outcomes, their interpretation is based upon the donor’s subjective perceptions.

Fraint’s blog caught the attention of a premier publication for the independent sector. The Nonprofit Quarterly featured Your Part-Time Controller in its Aug. 5 edition in an article about the challenge of measuring nonprofit effectiveness.

“As an accountant who makes a living helping nonprofit organizations, I believe in the power of timely, accurate financial and non-financial information, once analyzed and interpreted, to help power an organization toward superior results,” Fraint wrote.

But dilemmas arise when donors and charity watchdogs place more emphasis on an organization’s efficiency than its effectiveness. As an example, Fraint cited an argument raised by Princeton University bioethicist Peter Singer on whether $40,000 might be used more wisely to cure 400 to 2,000 people in Africa of the infectious eye disease trachoma or to train a guide dog to help one sight-impaired person.

Such comparison is flawed, Fraint wrote, as it poses a binary set of either/or options and compares apples to oranges. “I just do not believe there is any single metric, or set of metrics, that will somehow make it possible to rate or compare nonprofits to each other in terms of their effectiveness.”

This long-standing issue became especially relevant in the wake of the “Overhead Myth” letter issued by GuideStar, Charity Navigator, and the BBB Wise Giving Alliance to encourage donors to no longer rely exclusively on overhead percentages but rather to focus on such broader performance indicators as a nonprofit’s transparency, governance, leadership, and results. Although overhead — the ratio of administrative and fundraising expenses to all functional expenses — can be a valid data point for rooting out fraud and financial mismanagement, it has long been criticized by nonprofit leaders as being an inaccurate measure of performance and effectiveness, as there are numerous inherent flaws in how it is calculated and interpreted.

The three charity watchdogs suggested that many charities should spend more on overhead. “The people and communities served by charities don’t need low overhead; they need high performance,” they concluded.

The Nonprofit Quarterly article observed that “the bright, elusive butterfly of impact” is even trickier to pin down in some types of nonprofits, such as arts organizations, where the economic impact of a stage production has no relevance to its aesthetic benefits. There are no simple answers, the magazine wrote, but we must keep asking the questions.

“Everyone agrees that organizational effectiveness, accountability and transparency are good and that there is a need for outside, objective ratings of nonprofits. But there are an incredible number of significant problems with the way some of these numbers are computed and interpreted. It will take time to change donors’ culture regarding how they evaluate charities, and we encourage nonprofit leaders to be aware of these changes to help prepare their organizations for the new donor-education landscape awaiting them,” Fraint said. “We’re very pleased to be a part of this discussion.”

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