We need a new way to evaluate charities – Part 2

Previous post discussed explained that is a major point by Mr. Dan Pallotta in two articles he wrote:

His main point is the excessive focus we as a society have evaluating organizations based on their “overhead” ratios and our intolerance for NPOs paying market salaries.  The unintended consequence is that we are restricting organizations from getting the money to have the full impact they could realize.

Action plan

In the Chronicle of Philanthropy article, Mr. Pallotta says:

When nonprofit leaders are asked what frustrates them most, they often say it’s the fact that donors demand such low overhead costs that they can’t hire the talent or invest in the resources they need to maintain the status quo, let alone actually solve the vexing social problems that confront them.

But what all of us involved in charitable works fail to acknowledge is that donors believe low overhead costs are good because we have never challenged this misperception.

He then introduces an action plan, which includes these steps:

    • Build an anti-defamation mechanism
    • Start a legal-defense fund
    • Create a sweeping national civil-rights act for charity and social enterprise and persuade Congress to pass it
    • Advertise to the public

Check out the article for more details. *IF* we ever get to the point of actually having a robust discussion of those ideas, we can have a delightful and wonderful debate about the details in the civil-rights bill and which fights the legal-defense fund wants to pick. I would love to have that debate. Until then, let’s focus on refocusing the perspectives of donors and grant agencies.

What replaces the ‘overhead’ ratio?

The first step is educating donors to look beyond the overhead ratio as the primary criteria to evaluate whether an organization is worth supporting.

How would we assess charities if not by how little they spend on overhead? With three simple questions: What are their goals? What progress are they making toward them? And how do they know?

I really like that. Let’s look at it again:

“What are their goals?” – What is the organization trying to do? How are they trying to do that mission?  What techniques or strategies are they using? What creative or innovative or out-of-the-box things are they doing?

“What progress are they making toward them?” – This is where an organization could explain they are in the middle of developing or implementing a program and it will take more time to see results.  This is where we could see outcome measures explained.  The real question donors want discussed is how is the world changing because of this organization?

“How do they know?” – It’s wonderful to hear you developed some incredible program and have reduced that horrible metric by 10%. But how do you know?  Was it a back-of-the-envelope calculation?  Was it a guess?

Or was there a rigorous, statistically valid analysis performed by someone who is specially trained to measure outcomes? This requires the use of statistical, econometric, and sociological skill sets by people who are trained to measure program outcomes. Believe it or not, those people actually exist.

One of my clients has retained someone with those skill sets to quantify their outcomes. By the way, the quantifiable, objective results indicate the organization was under claiming its results.

Those questions, especially what progress has made and how do you know, are very difficult to address. The results, when you can do the very hard work, will communicate far better what organizations to support. Might also identify that your favorite charity is wasting your money.

Mr. Pallotta has a new book out, released 9-4-12. It is Charity Case: How the Nonprofit Community Can Stand Up For Itself and Really Change the World.  His previous book is Uncharitable: How Restraints on Nonprofits Undermine Their Potential.

(Full disclosure: I do not get any fee for click-throughs to the linked books.)

I have both books on my Kindle. Started reading Uncharitable last night.  Great stuff.  He’s talking about things I’ve been seeing for 20 years.  Check it out.

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