Effective Usage or Effective Results?

Over the past couple decades there has been increasing scrutiny on the fundraising and especially fund usage of charitable organizations.

The past few years have brought a string of reports of flagrant charity and foundation abuses — officials who waste money on dubious fund-raising ploys or lavish executive perks.

That scrutiny has led to a primary metric for charities: the percent of funds raised that is actually spent on the charity’s mission.  Theoretically that becomes a measure of how efficiently funds are used as they pass through streamlined and controlled administrative processes.  Several online reports are available detailing this metric for most charities, and many of us use that number when deciding which organization can best utilize our hard-earned donation.

Charities are doing exceptionally well, contrary to a lot of prevailing wisdom.

Last year, Americans gave $295 billion to charity, up roughly 65% from a decade ago. This surging bounty reflects our native belief in giving back to society — and a stubborn aversion to paying taxes. It feels good to help others and get a deduction at the same time.

But is funds disbursement efficiency the right metric?  Not really.

Donors can easily find raw financial information about charities — such as revenue and spending figures — as well as the name of whoever runs the operation. But those numbers won’t tell you whether a charity’s programs are working or failing. Consider a charity that raises money to help the blind function independently. Typically, the charity can’t show that the people it helped achieved higher employment rates than they would have without its help.

Which is truly the best use of funds –  a charity that disburses 90% of received funds with 1,000 people helped or one that gives out 75% of received funds but helps 10,000?  What is the effective "help per person" and how is that actually measured?

Donors who want that kind of detailed analysis usually must do it themselves or rely on guesswork. And that makes it difficult — if not impossible — to figure out whether one group’s approach to solving a problem is better than another’s.

Donors are beginning to ask more questions, and that is putting pressure on charities to provide answers.  Some continue to insist that some attributes simply can’t be measured.

Many charities say they support the idea of better measurement but resist reporting results publicly, arguing that their work is tough to judge. Officials often say that the problems they are trying to solve can take many years to address and that progress is, therefore, difficult to measure. Moreover, charities worry that too much candor about their struggles could cause donors to take their money elsewhere.

"I think we get irrational pushback from nonprofits who say, ‘You can’t measure mission-centered work,’ " says Brian Gallagher, chief executive of United Way of America and chairman of Independent Sector, a coalition of charity and philanthropy leaders. "You most certainly can. The question is, ‘Are you committed to do it?’ And then, ‘Are you committed to report on it?’ "

And measuring mission effectiveness can scare some organizations.  It should.

Of course, any proposals for change face big hurdles. Perhaps the biggest: a culture of secrecy that keeps many charities from openly discussing their operations, especially efforts that have failed. In many cases, "they choose not to participate, because they don’t want the donating public to know" that they don’t meet the group’s standards, says Art Taylor, chief executive of Wise Giving Alliance. In other cases, he says, "charities are just getting going and they don’t want to take the time to bother themselves with providing the information because they’re finding out how difficult it is to manage the day-to-day operations of a charity."

However donors have a right to know how effective their funds are being used.

Specifically, charities and foundations should provide detailed information on their Web sites — everything from board members and their bios to an open discussion about problems they’ve encountered while trying to achieve their goals. Charities should also explain to donors how they measure their effectiveness — and stop flouting existing efforts at self-regulation. Finally, more charities should embrace rigorous forms of evaluation and report their findings to the public.

Which might actually increase the amount given to non-profits.

Armed with this knowledge, who knows? Americans might very well dig even deeper into their pockets to help charities in their struggle.  A recent study by the Center on Philanthropy at Indiana University found that high-net-worth Americans — who already contribute two-thirds of household charitable giving — would give more if nonprofits could rein in administrative costs and better demonstrate the impact of donations.

Some charities are taking action.

A small but growing number of nonprofits are starting to measure and report publicly on successes and failures. In October, the American Cancer Society released a 118-page "progress report" aimed at tracking progress toward its goals of reducing cancer rates by 2015. While the report highlighted certain successes, it also spotlighted failures — including the society’s likely inability to reduce the incidence of lung cancer by 45% by 2015. This kind of disclosure "is where I believe the sector is going," says Catherine Mickle, the cancer society’s chief financial officer. As donors begin to think more like investors, "we are trying to hold ourselves to that standard, before it gets applied to us."

It takes guts to report on failures, but that creates confidence.  As charitable giving continues to increase, the level of accountability demanded by donors will increase. Accountability to actual mission results is not the same as accountability to efficient funds disbursement.