Mining the Metrics that Matter to Nonprofits
Return on Investment (ROI) is a term thrown around in corporate boardrooms almost as often as “synergy” and “core competency.” In the for-profit sector, CEOs know the expectation is not simply to drive more revenue, but to drive revenue profitably. Every new investment ultimately detracts from the company’s bottom-line profit. So in order to get incremental investments approved, for-profit executives must forecast, track, and report how each dollar spent generates a positive return for the company’s investors or shareholders.
For many nonprofit executives, measuring their organization’s ROI is an equally important endeavor, but one that comes with more inherent organizational challenges. While nonprofits are typically adept at delivering value, they are often less equipped to demonstrate the value of their work and report these outcomes in a way that makes sense to donors or other for-profit constituencies. Some lack the internal resources to measure the impact of their organization’s efforts. Others have the resources, but simply do not understand what it is they should measure, or how they would begin to quantify their organization’s impact.
Despite these challenges, nonprofit executives are being held to the same standards of transparency, accountability, and measurable results as their for-profit counterparts. Recently, The Center for Effective Philanthropy surveyed 177 nonprofit leaders from across the country and found that more than 80 percent agree that nonprofits should demonstrate the effectiveness of their work by using performance measures, and most are governed by a board that has made understanding the progress of their organization a top priority.
Source: Room for Improvement, The Center for Effective Philanthropy, 2012.
While the issue of performance measurement has received more attention amongst nonprofits in recent years, the need for ROI-based reporting is hardly a new phenomenon. In 2001, John Sawhill and David Williamson published Measuring what Matters in Nonprofits based on their research on 20 of the largest nonprofits in the U.S. Their McKinley Quarterly piece argues that most nonprofits measure success based on funding levels, membership growth, people impacted, and overhead. While these inputs are vital management tools and critical to evaluating the health of the operation, the “measures that matter” for every nonprofit should be its progress in fulfilling its mission, its success in mobilizing its resources, and its staff's effectiveness on the job. The specific measures will vary based on the type of organization and mission but generally should fall into three broad categories:
Impact measures – Metrics aligned with the long-term focus or mission of the organization
Activity Measures – Metrics aligned with the day-to-day operational effectiveness of the staff
Capacity Measures – Metrics aligned with funding, fund-raising, and resource mobilization
Sawhill and Williamson provide a sample framework based on their work with The Nature Conservancy to demonstrate how these measures can be translated into quantifiable metrics:
Source: Measuring what Matters in Nonprofits, Sawhill and Williamson, McKinsey Quarterly, May 2001.
For most organizations, the last two categories – activity measures and capacity measures – are relatively straightforward and most likely to be tracked today. But the third group – impact measures – is oftentimes the most difficult to define, but essential to securing new funding and ensuring the organization’s long-term viability.
Sawhill and Williamson detail three different approaches to help nonprofits build out their impact measures and demonstrate their progress in achieving their missions:
- Narrowly define the mission so progress can be quantified and measured directly
- Invest in research studies to quantify the impact of programs and services
- Identify “microlevel” goals that, when achieved, suggest the organization is having the same impact on a broader scale
Determining which of these three approaches would be most effective depends on both the specific mission and resources of the organization. Not every nonprofit has a mission that can be tied to quantifiable metrics. And not every nonprofit has the resources to invest in secondary research studies or extrapolate microlevel goals to broad-based impact projections. But in the era of real-time performance measurement and heightened accountability, reporting exclusively on activity and capacity measures simply isn’t good enough. Building the capacity to track quantifiable value and demonstrate an organization’s ROI has become the de facto standard in nonprofit management.
How is your organization approaching the ROI-measurement challenge? Does Sawhill and Williamson’s framework still make sense today? Leave a comment and let us know.