Evaluating Nonprofit Performance: 3 Questions before you start

Before you evaluate nonprofit performance, stop and ask 3 questions about the charity:

1. Is the charity trying to create a long-term solution to a problem?
2. Does the charity want to grow bigger and bigger every year?
3. Has the charity identified Key Performance Indicators?

These 3 questions are all related to OUTCOMES.  Outcome measurement and outcome-based evaluations have taken center stage in the contemporary debate about nonprofit performance.  I, for one, am a voice and supporter of this trend.  However, we can’t let the trend rewrite each organization’s goals.  Some charity’s just don’t exist to produce the savory long-term, ever-increasing, measurable outcomes that have become all the rage.  So if we are going to determine how well an organization is performing, we must first figure out what standards we can and cannot use to evaluate performance.  Answers to the 3 questions above quickly tell us if the standardized evaluation process I’m going to introduce in the next 6 blog posts can be applied fully to an organization.

Short-Term or Long-Term Solutions

It’s easy to critique an organization for reporting annual outputs instead of long-term outcomes.  I’ve written before about my concern when a rescue mission reports 16,000 more hot meals served this year versus last year.  That increased output is reported as a success, but I interpret it as a failure to make any real progress on solving the problem.  I want to know how many people are independently feeding themselves this year that were dependent on the local soup kitchen last year.  Although I critique nonprofits for measuring this annual activity rather than progress in providing solutions, that critique may be unfair.  

If an organization has no intention of solving a problem, you can’t measure their progress toward a solution.  Some nonprofits, e.g., some soup kitchens and disaster relief services, don’t intend to make a long-term sustainable difference.  They only intend to meet emergency needs.  They let someone else be responsible for moving the beneficiaries back toward self-sufficiency while they provide a safety net.  Judging organizations negatively for only meeting short-term symptomatic needs is disengenuous when that is all they have set out to do.  That’s why the first question to ask before you evaluate a charity’s performance is: Does the organization intend to provide a short-term and/or long-term solution?

Limited or Unlimited Growth Plans

A classic conundrum in capitalistic markets is the demand for growth.  Every company is supposed to grow every quarter by ever-increasing percentages.  In reality, companies operate in limited markets.  At some point, they run out of customers for particular products in particular places.  For example, even if every interested gamer in the world has purchased the latest video game from a developer, that company is still expected to raise prices or release 2 games or find an unknown city in Japan that will buy 2 copies for each citizen.  They are expected to grow.  The one move that is not allowed for a public company is limiting its market and then consistently serving its customers well in that market. Targeting the same 1 million customers with a product or service that is incrementally upgraded every year is pure nonsense to the capitalistic mind demanding boundless growth.

Nonprofits often experience the same pressure to grow in size and services every year.  Growth gets equated with health and becomes a requirement for all.  However, some nonprofits have a limited scope to their mission.  Some only plan to serve a limited geographic region or offer one particular product that they can do exceptionally well.  In those cases, judging organizational performance on year-over-year growth is unfair.  It is as unfair as demanding a musician’s service company grow beyond serving the 3,000 musicians it set out to serve in a city in the first place.  Although most of us would expect that an organization with best-in-class programs would want to serve more and more people, we must leave room for nonprofits with limited growth plans.  And those nonprofits who do not wish to be judged for their growth in people served, long-term results, and annual revenue need to make it clear how big their ultimate vision is.  In my experience, most nonprofits have a big hairy audacious goal that goes far beyond where they are at presently, but it is appropriate to ask up front: Do you have limited or unlimited growth plans?

Key Performance Indicators

The last of the first 3 questions to ask before evaluating a charity is simple.  Has the nonprofit identified 3-5 indicators of success for its program(s)?  You can’t figure out how well an organization is doing if they don’t even know what success looks like.  That is why we at Excellence in Giving always ask nonprofit leaders: what does it look like a year from now if you are successful?  Nonprofit leaders should be tracking key performance indicators on a regular basis.  Whether they have an official “Scorecard” or include their data in annual reports is less important at this stage.  But a charity must have clear measurements for effectiveness.  If the leadership has not identified key performance indicators, then any performance evaluation has to dial down the specifics of its analysis.  It forces the evaluation toward a more generic review of the organization’s implementation of nonprofit operational best practices.

After the First 3 Questions are Answered

If a nonprofit does want (1) to create a long-term solution to a problem, (2) grow bigger and bigger every year, and (3) measure its progress with Key Performance Indicators, then I have developed a standardized 6-step process for evaluating its performance.  We think its the most comprehensive and concise process available to the public.  The 6 steps involve 30 standards for nonprofit performance arranged in the following categories: (1) Governance, (2) Financial Management, (3) Sustainability, (4) Leverage, (5) Strategy, and (6) Impact.  If a nonprofit only addresses short-term needs with a limited scope and/or has no clear performance measurements established, then a few of the standards in step 6 are inapplicable.  I will indicate which standards don’t apply when I get to the final blog post on evaluating (6) Impact.

The next blog post will explore the standards we recommend for evaluating Governance that apply to all nonprofits.  Now the very idea that standards could be used to measure local, national, and international charities of every kind and creed can seem over-ambitious.  How can one size really fit all?  That question has forced me to limit the standards to only 30 due to program and operational differences.  But I refuse to believe we have learned nothing that is generally applicable to all nonprofits in the last 100 years of active American philanthropy.  At Excellence in Giving, we have read and practiced, tried and evaluated, listened and learned for the last 10 years.  We stand on the shoulders of foundations and consultants, nonprofits and public officials, program officers and investigative journalists.  Much has been learned about finding and funding high-performing nonprofits.  And that is what we want to share and popularize.  Our goal is to boil down the best practices that have been identified and produce a streamlined, standardized approach to evaluating charities.  We hope the result empower donors of all sizes and sophistication to get informed quickly and give more wisely.