How to Think Differently about Rating Charities

MoneySense magazine has released its annual Charity100 Report. This report ranks Canadian charities on four criteria: charity efficiency, fundraising costs, governance and transparency, and cash reserves. While this report has evolved over the years to account for the complex business of running a charity – every year I wonder why we aren't asking the most important question, “Does the charity have an impact?”

A few years ago I met someone at a party and when they asked what I did for a living, I told them I worked for a charity. Their response was, “How do you make a living by volunteering full-time?”  I was shocked. Where did this assumption come from?    

It largely stems from the fact that the charitable and non-profit sector tends to be evaluated by limiting performance metrics. Most often, these have little to do with the social or environmental change an organization aims to create and everything to do with how they spend and account for donor dollars.

The charitable sector then reinforces this evaluation model by setting targets that will see them fall favorably within the defined metrics, resulting in a high rating and more donations. 

It can be a vicious cycle. And to survive, charities are playing the game while knowing how problematic the cycle is.

Charity evaluators are beginning to realize that in order to run efficient and effective organizations, investment in human resources and administration are necessary. As MoneySense notes in their report, ”Some [charities] even manage millions of dollars, so paying for top talent to get the most out of your donation dollar is a no-brainer...”

However, this permission is often confined by the caution of spending limits;  “…but those costs still have to be reasonable and the lower these costs are, the better.” 

By adding this limitation, evaluators are putting greater value on cheap human resources over top talent. Why would charities feel free to spend adequate resources to retain top talent when in external evaluations they are ranked according to the cost of talent and not the ability to draw, retain and benefit from top talent? 

While I agree governance, operational efficiency, and fiscal responsibility are critical metrics for evaluating charities – we need to expand our criteria for what makes a successful organization. 

Running a successful charity means being efficient with spending while also achieving a high return on social and/or environmental outcomes. This is a difficult task deserving of a more reflective evaluation model that accounts for the complexities of running a successful organization and the diversity between charities in their spending needs to achieve their unique outcomes.

While by no means comprehensive, below are five areas of assessment that could be explored by charities to evaluate their own organizational health as well as evaluators to rank organizations. These questions should be used to guide open discussions, inclusive of the charitable sector, on how we can move beyond the assessment of governance, administration, and financial operations in order to drive innovations that will improve the overall social and environmental health of our communities. 

Does the organization create change?

This to me is the most fundamental question: why are we spending money on charities if we don’t now whether or not they are working? Every organization should be able to articulate and measure the social and/or environmental change they intend to create. This is most often defined as an outcome. Organizations can have both short and long-term outcomes. Long-term outcomes should be directly tied to the mission of the organization. For example, an organization working towards improved child well-being might choose to work with at-risk families by providing education to parents. A short-term outcome would be that parents gain knowledge in childhood development and a long-term outcome would be improved child well-being. One of the indicators of success could be an increase in positive behaviours of children. Indicators and targets should be measured by charities to determine whether or not they are achieving their intended outcomes and to inform program innovation and adaption if they find themselves falling short. 

Assessment: Is the charity meeting the targets set for their long-term outcomes – and if not, how are they are adapting their approach to better achieve their intended outcomes (aka, mission)? 
 

Does the organization have an endgame? 

Most organizations have a 3-5 year strategic plan. While this is a helpful tool in operationalizing the organization’s work year to year, these plans typically do not address a critical question, ‘How do we know we have achieved our goal and where do we go next?’  Many organizations assume they need to scale and increase funding. But is that really what is needed? Without asking this question within the context of creating systems change – the charitable sector runs the risk of creating dependency on their services.  

Defining one’s endgame is to understand the specific role the organization plays in the broader system of social or environmental change and the final stage the organization will play in supporting that change. In an article, What's your Endgame? by Alice Gugelev and Andrew Stern, six potential endgames are identified that range from sustained services to open source. This can be a difficult question for charities to ask themselves but an important one that leads to responsible and ethical long-term thinking.
Assessment: Has the organization defined their endgame and how do they measure their progress in achieving their endgame?

What is the cost per outcome?

There are many valuable financial metrics used to evaluate charities. However, these metrics are often isolated from the organization’s outcomes. Organizations should be able to measure how much it costs to achieve each of their short-term and long-term outcomes. While this accounting takes some effort to track – it can provide a way for organizations to consider how to be leaner in achieving short-term outcomes, spur innovation in service delivery, and provide a way to benchmark charities with similar long-term outcomes.

Assessment: How does the organization calculate the cost per outcome and how does this cost measure against charities with similar outcomes and budgets?      
 

Does the organization have the human capital needed to deliver on their outcomes? 

We can be quite critical of charities and their salary expenses. Having worked in the charitable sector for many years, I can tell you that while there may be some rogue cases of excessive executive salaries, charitable staff are generally undervalued against those working in the private and public sector. Salaries are lower; there are fewer benefits, support and opportunities; and many employees are working short-term contract to short-term contract. This reality inhibits the charitable sector’s ability to draw and retain the talent and expertise the public is beginning to understand as necessary to run efficient and effective organizations. While across charities, the ability to pay competitively against the private sector ranges, there are other benefits the sector could be providing their often burned-out yet dedicated staff. Salary compensation could include the opportunity to work remotely and flextime, increased vacation time, part-time hours, mentorship opportunities, professional development, participation in networking events, publication opportunities, and non-monetary rewards for driving organizational outcomes.  

Assessment: Does the organization have a human resource strategy that will enable them to draw, retain and support the expertise needed to deliver on the organization’s outcomes?     
 

Does the organization have good governance?

The role boards play varies across the charitable sector. While there are working boards that get into the day-to-day business of running the organization, some focus on fundraising for the organization and others focus strictly on governance.  Regardless of their role, it should be transparent to the public whether or not that board is effective in supporting organizational outcomes. Metrics would vary for the different types of boards, but could include; the number of hours spent by board members in directly contributing to the organization’s outputs, percentage of the organization’s revenue raised directly by the board, or board members understanding of and ability to mitigate the operational and programming risks associated with the organization’s work.

Boards also need to be more diverse, representative and inclusive of the communities the organization is serving. This goes beyond measuring how many women, community representatives or youth serve on the board. It means measuring whether or not all members feel their voice is heard and considered within the board’s decision-making. 

Assessment: Does the organization have an internal performance management framework and process in place to evaluate whether or not the board and it’s members are effectively contributing to the outcomes of the organization and inclusive of the communities they serve?