We Did It: Non Profit Rating Agencies to Measure "Effectiveness," Not Just Overhead Ratios

It's about time! In response, I think, to an outpouring of reports and and to many bloggers (including me, in Non Profit Funding Standards Undermine Non profits) who spoke up, the agencies that rate non profits are going to adopt more realistic standards, finally recognizing that non profits, like for-profits, have costs of doing business.

non profit funding, non profit leaders, non profit ratingUp to now, as the Bridgespan Report noted,  both individual donors and many foundations squeezed non profits by demanding that services be provided with only 13 to 20 percent of funds used for overhead ... or even none!

But in a release last month, The Worst (and Best) Ways to Pick a Charity This Year, the major non profit rating organizations announced that from now on their ratings will be based on effectiveness, not just overhead ratios.

Why is this important? Because non profit leaders will be able to:

  • ask for what they really need to accomplish their missions, including funding for electricity, office supplies, rent and all the other overhead businesses face;
  • buy the technology and skills to streamline delivery of services and access the resources of the 21st century, which may well make them more effective;
  • pay their staffs living wages and provide benefits (charity begins at home!), which some have not done as they try to keep down the overhead.

The rating systems used in lieu of cold, hard ratios will be varied:

  • Like the peer reviews offered by Amazon and other consumer websites, GreatNonprofits will offer reviews by those who have direct contact with the non profit: clients, board members, volunteers, and donors.
  • Philanthropedia offers reviews of each organization by non profit professionals. In another twist, Philanthropedia will offer donors the option of giving to the most effective non profits using the equivalent of charitable mutual funds, through which a donation goes to "entire social causes based on expert allocations."
  • GiveWell provides in-depth reports on top charities and the issues they address.
  • Charity Navigator, one of the best-known rating agencies will redesign its ratings to "increase the emphasis on effectiveness and transparency to help donors make better decisions,” according to Ken Berger, President and CEO.
  • Another big name, Guidestar, will also focus on effectiveness rather than ratios. It will include Great Non Profits ratings on its site.

Of course, change won't happen overnight. Non profit leaders, their funders, consultants, and staff will have to work together to develop meaningful measures of effectiveness. And even that effort will have to be funded!

So let's get on it!

How would you measure the effectiveness of non profits? What are the pitfalls you see in this change? What advantages do you see to measuring effectiveness instead of overhead?

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