Social sector organizations are complex. It is difficult and highly irresponsible to try and determine the effectiveness of a government or nonprofit organization with a single measure. Yet, over the years, donors have been trained to use a single measure, administrative overhead, to determine the effectiveness of a charity. Every year this common but flawed social sector practice of using administrative overhead as criteria for determining nonprofit and government effectiveness is reinforced through organizations such as Charity Navigator, Charity Watch, and many other programs.
For example, as a state employee, I participated in the State of Ohio’s Combined Charitable Campaign. State employees were asked to donate a portion of their income to charities they selected. To support informed giving, employees were given a resources guide, which listed five pieces of information to be used in the decision-making process: the name of the charity, the address, a brief description of activities, a description of who the charity served, and the percentage of funds going to administrative costs. Any organization with administrative costs greater than 25% received an asterisk by its name to indicate that they were working on a plan to reduce their administrative expenses.
Considering this measure alone, without carefully examining other measures, penalizes organizations that invest in the technology or high-quality staff needed to support impact and excellence. When viewed without the rich context of other outcome measures, the measure of administrative costs says nothing about how effective the organization is at achieving its stated mission. It is altogether possible that one organization could reach a greater impact with only 30% of their funding going straight to programs while another organization would show 95% of funds invested directly into programs.
More importantly than examining overall revenues and the allocation of resources within the organization, it is important to gain a clear understanding of what results organizations are accomplishing with these resources. I believe that a variety of measures are required. At a minimum, I recommend organizations track data regarding participant demographics, activities and services received, cost and revenues, participant and stakeholder feedback and key outcomes. Below are three alternative measures to administrative overhead. Using these measures in addition to administrative overhead will lead to more sound conclusions of charity or government effectiveness.
- Increase in market share: Organizations should be tracking their performance in terms of increasing services to their target population. This can be stated in terms of percentage of total market share served. Let’s say that there are 1,000 children on free and reduced lunch in a community served by an after-school program. This particular program has a goal of reaching low-income elementary students with their after-school education enrichment program. If the program is serving 50 of those 1,000 students, then they are currently serving 5% of the target population.
A measure of increased success would be demonstrated by data that indicated the program’s ability to provide services to more students within the target population. A goal might be to increase the market share by two percent each year. This performance measure tells the organization’s story of reach and impact much more effectively than a measure of how many students were served.
- Cost per successful participant: Funders do not want to pay for unsuccessful participants. Cost per successful participant clearly communicates the cost to achieve success. It is calculated by taking the program total costs divided by only the number of successful participants. This particular measure is a great way to assess program effectiveness and efficiency and demonstrate success to potential funders. As the organization provides better outcomes and finds a way to deliver services in a more efficient manner, the cost-per-participant ratio will decrease.
- Measures related to key program outcomes and impact: Organizations should select two to three outcome measures (see 12 Measures for Success for specific measures) that demonstrate the organization’s unique impact and value. I recommend organizations start with those outcomes that overlap with the outcomes that funders and participants most desire.
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Sheri Chaney Jones, President
Measurement Resources Company