We contribute to organizations close to our hearts, but we also want to make sure that our time and money have the maximum impact. Understanding nonprofit effectiveness goes beyond the financial indicators. The best approach is to think holistically, taking into account all of the dimensions that influence an organization's impact; it requires taking a deeper look beyond financials and moving beyond the myth of the overhead ratio.

Some of the questions for donors to consider before giving include:

  • Can the organization tell you why the work it is doing will lead to impact? Is the work itself based on evidence?
  • If the organization is focused on helping people, does the leadership of the organization (including the board) include people from the communities it aspires to help?  Does the organization have a track record of reaching and engaging those it aspires to serve?
  • Does the organization have a "learning mindset?" Not every organization can or should invest in data collection and measurement strategies that can be very expensive. But at the very least, every organization should collect basic "customer satisfaction" feedback from its constituents (using low-cost option such as the Listen4Good tool developed by the Fund for Shared Insight).
  • Is the organization well-managed? Does it set annual goals for itself and its employees? Does it share regular updates with key stakeholders, including its donors?

If you aren't able to get answers to the above, or are not sure where to give, you also can choose to invest in an issue fund or intermediary which can do the due diligence on your behalf and get your dollars to a set of strong organizations aligned with your interests.

The Overhead Myth and Nonprofit Effectiveness

To assess the success of business, we rely on profit and other performance metrics that are widely accepted and readily available. In the social sector, data on performance is challenging to find, and often does not exist in specific organizations.

Many donors look at the proportion of overall budget an organization spends on management and administration as an indicator of effectiveness. This ratio is easy to calculate but, unfortunately, does not help to assess what we most need to know.

Numbers for overhead are unreliable and inconsistently reported. They can vary dramatically depending on the work an organization does. For example, an organization that engages people in remote parts of Africa in developing businesses, able to support their families, might spend significantly more to find and serve those people compared to organizations providing mosquito nets to prevent malaria.

Most importantly, the impact for each of these organizations will also be different. Some work is life-changing and profound and other is light-touch, yet effective. Because spending on measurement, research, and performance management is counted as overhead, there may be, in some cases, an inverse relationship between the overhead ratio and effectiveness. Be an impact-driven giver and pay for performance.

Additional resources to evaluate nonprofit effectiveness:

These resources from Guidestar, Charity Navigator, The Better Business Bureau, Bridgespan and Stanford Social Innovation Review can help you learn more and give you guidance and tools.