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How to Judge Nonprofit Effectiveness

Giving Compass Jun 14, 2017
This is a Giving Compass SelectionThis article is deemed a must-read by one or more of our expert collaborators.
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Nonprofit effectiveness giving compass
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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.

There is no one formula for assessing impact or nonprofit effectiveness, but most experts agree that there are six dimensions we must consider when looking at the effectiveness of a nonprofit organization. You also can choose to invest in an issue fund or intermediary which rigorously analyzes nonprofit organizations that receive their grants.

The six dimensions to explore when looking at nonprofit effectiveness:

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 have grabbed onto the overhead ratio, defined as the proportion of overall budget an organization spends on management and administration. 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.

  • THE OVERHEAD MYTH – by BBB, Charity Navigator, Guidestar
  • THE NONPROFIT STARVATION CYCLE – by Stanford Social Innovation Review
  • HOW TO RESEARCH A NONPROFIT – by Bridgespan Group
  • PAY WHAT IT TAKES PHILANTHROPY – by Stanford Social Innovation Review
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Interested in learning more about Impact Philanthropy? Other readers at Giving Compass found the following articles helpful for impact giving related to Impact Philanthropy.

  • This article is deemed a must-read by one or more of our expert collaborators.
    Click here for more.
    Armando Castellano Q&A: Listening and Power Sharing as a Donor

    Armando Castellano is a professional musician and teaching artist. He plays the French Horn and founded Quinteto Latino, an ensemble to uplift classical works of cultural significance. Building community while advocating for classical musicians of color is very close to Armando’s heart. He’s also a trustee on his family foundation’s board, along with his two sisters Carmela and Maria. His family came into money when they won the California Lottery in 2001. Donors of Color Network: What’s new Armando? AC: I was practicing right before you called, I have been trying to get this passage just right and I finally got it right before I got on the call with you, yay! In thinking about how I practice, a lot of the music I play I don’t really need to practice, I usually end up just needing to practice the most difficult of passages, like this one. Donors of Color Network: I’m also hearing you say that what you really have to work on is what’s difficult, and taking new actions is always that. This sounds like it could be relevant for practicing philanthropy. Can you elaborate? AC: Music is the ultimate metaphor. You’re trying to get a pitch, a note to represent an emotion or a feeling or a story. It’s very abstract, and it’s the process, a fine art – very refined. We just keep practicing that one note within the context. Playing at a very high level, incremental change is very tiny. So it’s a very refined, slow process of getting better. That’s what philanthropy and social change is like. A very slow incremental step to change philanthropy as a whole. It takes a lot of hard work – weeks on that one note – for the change to happen. It’s yin and yang, music and philanthropy. What’s really on my mind is this initiative I started via my family’s foundation – Blueprint for Change. We did convenings and asked questions of our grantees about what they need. What can make it better for Latinx serving nonprofit organizations? They picked five things – 1) more support for general operations 2) leadership development 3) staff wellness 4) access to philanthropy, and 5) innovation. There’s a big move towards innovation here (Santa Clara/San Jose/San Francisco Bay Area) but foundations won’t fund it. Nonprofits need trust and flexibility and funding to innovate. Read the full interview with Armando Castellano at Donors of Color Network.


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