Connecting Dollars to Outcomes

How to Measure Outcomes That Deliver Mission Impact in Nonprofits

 

Introduction

When a 7.0 earthquake flattened Haiti in 2010, millions of donors rushed to help, funneling money to a large global humanitarian organization. Contributions climbed to half a billion dollars in one of the most successful online fundraising campaigns ever. But five years later, only six homes had been rebuilt.

Nonprofits, including the American Red Cross, have learned plenty since 2010. Although the organization continued to defend its disaster relief efforts, it didn’t provide a public summary of how its donations had been spent. Nor would it ever. Investigative reports showed that the nonprofit had outsourced Haitian projects to local affiliates and lacked the accounting mechanisms to connect the dollars it raised to outcomes achieved. While it’s possible that the organization had indeed rebuilt entire Haitian villages, it couldn’t prove it, leaving its public reputation in shambles for a few years.

Stories likes these make donors distrust nonprofits and nonprofit executives squirm. Charity leaders know how hard it is to convey a mission’s impact to supporters. Doing so is made more difficult by confusing nonprofit accounting regulations and a philanthropic culture that hamstrings them from fully delivering, much less evaluating their programs.

Peter Orza, the former director of the federal Office of Management and Budget, echoes this common funder sentiment perfectly: “Public funders—and eventually private funders as well—will migrate away from organizations with stirring stories alone toward well-managed organizations that can also demonstrate meaningful, lasting impact.”

 

Chapter 1

HOW DO WE MEASURE IMPACT?

“I have heard people say nonprofits should be run “more like businesses” and be accountable in the same way for-profits are. But for-profits report income, not outcomes. Every nonprofit leader knows exactly how much money he or she raised and spent. That’s easy. Which companies report outcomes? Does Microsoft report how productivity increased with  its software? Does 24 Hour Fitness report on how much healthier its customers are? McKinsey on how much better its clients perform?…But nonprofits have two customers: recipients and funders. Our recipients don’t pay for their services, so demand alone doesn’t prove value creation.”

-Peter Fortenbaugh, ED Boys and Girls Club of Peninsula

Yet how do nonprofits adequately measure impact when they’re attempting to help solve complicated issues—like global climate change—that are influenced by civic, individual and corporate behavior well beyond the control of just one organization? And who determines the criteria of a well-managed nonprofit?

In the last decade, watchdog agencies like Charity Navigator have introduced various metrics of nonprofit effectiveness, including the overhead ratio, which uses low overhead as a benchmark for mission effectiveness. And yet, even Charity Navigator has begun questioning this metric—the agency partnered with BB Giving Alliance and Candid in 2013 to publish The Overhead Myth*, a public mea culpa to sector pushback popularized by charity leader Dan Palatto in his seminal TED talk The Way we Think About Charity is Dead Wrong.

As early as 2009, Stanford University researchers Anne Groggins Gregory and Don Howard published “The Nonprofit Starvation Cycle”*, espousing their findings that organizations that build robust infrastructure are more likely to succeed than those that don’t. While the notion of overhead investment may run counter to traditional philantropic opinions, a growing number of capacity building organizations like the Nonprofit Finance Fund are embracing full-cost funding and partnering with grantmakers to demonstrate that philanthropic support for overhead spending is not only plausable, it’s urgently needed.

To kick off our educational series “Mastering and Measuring Mission Impact,” NetSuite approached 353 nonprofit executives to ask whether and how they evaluate mission effectiveness. We asked if they were familiar with logic models and whether they’re using outcomes measurements to determine the impact of their programs? We wanted to know if they were aware of Charity Navigator metrics and whether they used them? And we wanted to determine whether they correlate programs to financial metrics to create dollars-to-outcome transparency?

To frame our survey participant’s responses, we first explore the following topics:

Outcomes Measurement

Outcomes measurement is an approach to assess the social impact a nonprofit creates. Nonprofit researcher Robert M. Penna says that the charity sector for most of its history has not had to prove its impact on the issue area for which the organization was created. Most nonprofits have focused on what they are doing, not how they have impacted change.

In his book “Braided Threads,” Penna states that nonprofits are unable to measure impact for two primary reasons:

  • Lack of definition. The target problems, actual programmatic interventions, expected outcomes and desired impacts have not been sufficiently defined to be measurable.
  • Lack of clear program results tied to resource expenditure. Expenditure of resources such as time, people and money have not been linked to outcomes.

Logic Models to Build and Measure Change Program delivery for nonprofit organizations is the heart of the sector: Foodbanks deliver canned goods to food-insecure communities; domestic violence shelters provide beds to battered women; environmental organizations advocate for green energy. Without programs, the nonprofit sector has no meaning.

Formal evaluation of program delivery has actually been integral to demonstrating outcomes since the mid-70s when the Kellogg Foundation began to develop methodologies with the United Way to fund, monitor and evaluate its programs. Logic Models and Theories of Change describe two common methodologies used to create programs and measure their impact. Program evaluation staff uses Logic Models, but financial evaluation sits with the finance office. Meanwhile, watchdog agencies have created an entirely different set of criteria for success.

What Does that Cost You? The Accounting Rules that Govern and Constrain Nonprofits Nonprofits are bound by Financial Accounting Standards Board (FASB) regulations to categorize each donation based on donor intent (restriction) and allocate each expense as either an administrative, fundraising or program cost (functional expense). These two simple accounting rules have a fundamental, far-reaching and cascading impact on the nonprofit sector. The inability of the humanitarian organization to articulate its Haitian disaster relief effort boils down to an inadequate accounting of source and use of funds – in other words, restriction and expense allocation.

Compliance as Controversy: Restrictions* and Functional Expense* Allocations Fundraising operation and accounting staff must ensure that they solicit and earmark each contribution as either for general operating costs (without donor restrictions) or with donor restrictions. For example, if a fundraiser creates a giving campaign for Haitian relief, each dollar contributed must be tagged as such and cannot be comingled with general operating funds.

Conversely, every expense must be allocated into fundraising, programmatic and operating buckets. Because many expenses span all three categories (indirect costs), finance staff creates allocation schedules that divide office supplies, human resources and other expenses across functional expense categories—a laborious, time-consuming and inexact process. Data from these expense allocations are reported on nonprofit 990s and used by charity watchdog agencies to calculate program, administrative and fundraising efficiency. Increasingly, finance leaders are critical of the time spent on functional expense allocation and the harsh judgement heaped on nonprofits when money is spent on general operations or infrastructure.

Nonprofit Finance Fund Director, Claire Knowlton states, “The reporting of functional expenses exacerbates the myth that, somehow, nonprofits should be able to operate programs without an administrative structure to manage, measure and execute. It implies that, by some as-yet-unknown magic, nonprofits should be able to achieve their mission without dedicated and systematic fundraising efforts to pay for it. The attempt to segregate interwoven and complementary expenses according to the function they serve is an exercise in futility. The truth is, all resources spent by a nonprofit are spent in order to successfully deliver on programs (with obvious exceptions made in cases of fraud). Certainly, not all spending in a nonprofit is efficient; but functional expenses tell us nothing about efficiency.”

What’s often missing in headlines about nonprofit spending is the complex accounting regulations that constrain nonprofits from spending money where it’s most needed; the reality that functional expense allocations even when prudently applied, are unavoidably subjective; and the negative public opinion of overhead that makes nonprofits hesitate to report on full costs, thus creating a cycle of underfunded and destabilized programs.

 

Chapter 2

SURVEY DEMOGRAPHICS

 

What does it mean to measure change?

NetSuite approached 353 nonprofit executives to ask if and how they evaluate mission impact. Are they using outcomes measurements to determine program e”ectiveness? Do they use Charity Navigator metrics? What works and doesn’t when evaluating impact?

img asset worksheet 012

 

Chapter 3

SOLUTIONS

“It is the difficulty in measuring outcomes that makes it imperative to do so and to work on better and more nuanced metrics of the efficacy and
outreach of programs.”

-Nonprofit Survey Participant

Movers. Shakers. Policy Makers.

A growing number of grant makers, nonprofit executives, watchdog agencies and technology companies are working together to create new technology, measurement tools and funding models to address understanding the infrastructure needs of nonprofits.

The following technology trends will be the hallmark of the next generation of technology.

  1.  Dollars to Outcomes
    Finance, program and fundraising teams are unique functions within a nonprofit with specialized business processes and separate databases. When a funder is approached for a grant, however, all three functions must provide data that the funder uses to assess risk and worthiness. For mission delivery metrics, technology must be able to connect the dots between fundraising, finance and program metrics, which means integration points between the data. Technology companies are responding by collaborating with nonprofits and grant makers to build unified datasets and data models to trace dollars to program results.
  2. Real Needs, Real Impact
    Our survey revealed that the three primary pain points for nonprofit decision makers are financial stability, staff attrition and donor retention. Technology companies and funders can assist by collaborating to donate technology to nonprofits and build mission impact with pro bono services and capacity building resources, such as technology workforce development for underserved communities.
  3. Encourage Transparency for Full Cost for Nonprofits and Funders
    One leading lender and capacity builder, the Nonprofit Finance Fund is on a mission to partner with grant makers, lenders and funders to build transparency and systems to report full costs.. By reinventing the way philanthropic organizations measure the true cost of infrastructure, donors will have full cost accounting, and nonprofits will have the general operating support they need to deliver their missions.
  4. Build a Technology, Funder, Nonprofit, Program Beneficiary Ecosystem
    Smart phones, cloud platforms, digital payment tools, social media and video streaming have upended business-as-usual, and the nonprofit sector is no exception. Together, an ecosystem of funders, program beneficiaries, nonprofits and technology companies can usher in a new era of unprecedented, positive social change.

Hundreds of governments, disaster relief nonprofits and individuals went to Haiti in humanitarian response to the 2010 earthquake, and the Red Cross was among them and was later singled out for its tepid response to catastrophic destruction. In the 9 years since that disaster, the organization has changed: while it can’t wholly correct the errors from 2010, it is now using new methods to demonstrate transparency and impact, and it’s engaging donors in new ways to ensure accountability.

The voices of nonprofit executives we surveyed reflect important viewpoints that can shape how technology can be used to build products and services to help nonprofits master and measure mission impact. As we move toward a world of social collaboration, these survey results show us how to shift the conversation from judging nonprofits for their perceived inadequacies to transforming their operations to achieve results.

 

Our Recommendations

Becoming an outcomes measurement champion within your nonprofit is dependant on your role. Let’s explore that briefly.

Program Managers: Educate Your Organization on Program Evaluation Principle

Because finance staff has generally focused on numbers only, it is likely to be unfamiliar with program logic models–the graphic representations of the linkages between program activities and the changes those activities will produce. Logic models, or “theories of change,” help stakeholders such as funders, boards, program staff and executive directors understand whether there is any “logic” to your programs—whether the connections between what you do and what you hope to achieve make sense. Such models provide greater clarity about your mission and tell the story of your program.

To educate nonprofit teams on current outcomes measurement approaches, consider registering for the online and in-person trainings at Candid-Guidstar and the Nonprofit Quarterly. These teach nonprofit staff how to identify target problems, propose programmatic interventions and define the overarching outcomes and desired impacts of their organizations.

Your organization may also want to explore the documentaries produced by nonprofit outcomes expert Kate Robinson: “Failing Forward – On the Road to Social Impact and Saving Philanthropy

– Resources to Results.” She has led a national advisory board of high-performing, nonprofit organizations and conducted extensive research on evaluation strategies.

Last, if you need cost-effective consulting expertise, consider Capacity Catalyst, an organization that provides Ph.D candidate program evaluators to nonprofits that need assistance in developing program logic models.

Finance Managers: Review and Revise your Financial Transaction Data Structures

To correlate program activities with revenue and expenses, the appropriate data structure needs to be in place. Your accounting system must be set up to tag expense and revenue transactions with the appropriate dimensions at the line level: revenue type (donation, pledge, fee for service); restriction status (with or without donor restrictions); and fund/program.

Nonprofit outcomes KPIs are based on aggregate transactions using the source (revenue type, restriction) and use of funds (fund/program). These dimensions (also called segments or tags) form the basis of modern accounting structure, replacing the long accounting code strings that were used in the past. For nonprofits, this is a critical feature in outcomes measurement, because the aggregation of revenue and expense transaction dimensions are what allows visibility into program sustainability and financial transparency reports.

Executives: What’s on the Horizon

As nonprofits get better at dentifying their programmatic and financial outcomes, the next stage is to correlate program service delivery to financial data. Our survey results show that many nonprofits aspire to do this, but don’t yet have the infrastructure in place to implement it. NTEN, the nonprofit technology membership hub, is a great resource for assistance, because it has resources to help nonprofit IT staff understand the basics of nonprofit data architecture, the key to envisioning a program and financial technology solution.

 

Chapter 4

FINANCIAL EFFICIENCY METRICS

YES, WE MEASURE VS. YES, IT’S IMPORTANT

img asset worksheet 014

img asset worksheet 015

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Chapter 5

WHAT WE’RE HEARING

img asset worksheet 016

img asset worksheet 017

AT A GLANCE: TERMS TO KNOW

img asset worksheet 018 img asset worksheet 019

 

Want to Grow your Business?

To learn more about how NetSuite can help grow your business, send our team a message to discuss the opportunities NetSuite can bring in.