Non-profit performance evaluation: leverage (part 4 of 6)

Paul Penley

Paul Penley

A high-performing non-profit must be constantly finding ways to better leverage its human and financial resources. The same benefits that businesses derive from improved efficiencies apply to charities. You have to learn how to increase output and outcomes faster than you increase overhead. And you have to maintain quality along the way. That is how you leverage non-profit assets in service to its mission.

Finding out how well organizations leverage their resources is step four in our six-step process for evaluating nonprofit performance. As a reminder, the six steps involve measuring charities against 30 standards for non-profit performance arranged in the following categories: (1) Leadership, (2) Financial Management, (3) Financial Sustainability, (4) Leverage, (5) Strategy, and (6) Impact. We explored the first three categories in my last three articles.

How do you measure leverage?

Leverage is all about finding ways to do more with existing human and financial resources. Since money is limited, efficiency is necessary. Leveraged non-profits find ways to reduce or maintain operational costs while increasing their service to people in need. To make that happen, money cannot be wasted, and it can’t be the answer to every challenge. Partners and volunteers have to be employed to meet the mission. With that in mind, we have created performance standards to gauge how leveraged a non-profit is.

To make sure a charity is leveraging its resources, ask these six questions:

•       Do program expenses have a higher three-year growth rate than administrative expenses?

•       Do clients served have a higher three-year growth rate than staff?

•       Do clients served have a higher three-year growth rate than funding?

•       Does the organization leverage a good number of volunteers?

•       Is there collaboration with multiple partner organizations?

•       Are fundraising expenses less than 15 per cent of monetary donations?

The answers to these six questions should be ‘YES’. Here’s why.

Comparing growth rates

Comparing trends rather than totals is essential for non-profit evaluations. Many non-profits are proud to report cumulative totals of all the people they have helped since inception. However, those totals can cover up current declines.

One charity we evaluated had helped 2.5 million people in the past 30 years but declined 30 per cent in the number of people served during the last three years. The totals looked impressive but the declining three-year trends told us they were losing relevance. That same organization with a 30 per cent decline in clients served had maintained a slight increase in funding and staff during that three-year period. Since no increased program quality was reported to account for the higher ‘per person’ cost, donors were actually having to give more to do less. Who wants their donations to do less? That’s why the first three questions above compare growth rates. Leveraged organizations should be finding ways to serve more people without growing the staff and funding at the same rate.

Admittedly the comparison of growth rates is less helpful for small and young organizations. A small charity that transitions from volunteer leadership to paid staff can quickly produce distorted staff growth rates and administrative expense rates. So it is better to use the three growth rate comparison standards for organizations that have exceeded a $500,000 budget or have been around for five years. At either one of those points, I expect the organization to have established a good baseline for what it takes to staff and run the organization. Everything from that point forward should be an improvement that leverages existing resources.

Leveraging partners and volunteers

Non-profits often complain about the difficulty of ‘quality control’ with volunteers. Volunteers often complain about how unprepared non-profits are to utilize them well. We appear to have a disconnect.

When a charity figures out how to maximize volunteer time and talent, it produces some of the most leveraged organizations in the world. Feed My Starving Children (FMSC) is one of those organizations. FMSC created a scalable role for volunteers to play in packing nutritious food for the malnourished. In 2011, Feed My Starving Children mobilized 566,000 volunteers. That’s a volunteer-to-staff ratio of 3,628:1. That’s leverage and that’s why high-performing charities should have more volunteers each year than paid staff.

Leverage is also created through partnership. To get the most out of what you do well, you need to avoid getting bogged down in what you don’t do well. You also need to avoid reinventing the wheel and paying the same tuition cost to learn how to do something that an available partner has mastered. That’s why you should make sure that non-profits you support have multiple partner organizations. For example, why would a community development organization or orphan care group in Kenya attempt to dig its own wells? Living Water International has already mastered the art of well-digging in that context and has the big machinery, local staff and expertise to do it. If you need a well, you just need to develop a partnership.

Final efficiency standard: are fundraising expenses less than 15 per cent of monetary donations?

This is not the normal standard for calculating the percentage of annual expenditures spent on fundraising. It is not fundraising expenses divided by total annual expenses. Why not? The reason for comparing fundraising expenses to monetary donations rather than expenditures is the avoidance of skewed data.

If an organization spends $150,000 on fundraising out of a $1 million budget, it creates an acceptable 15 per cent of expenditures. However, that $1 million budget could include $200,000 of in-kind contributions, $100,000 of donated services, $150,000 of product sales and program fees and $100,000 of investment income. Those other sources of revenue reduce the amount of actual monetary donations to $450,000. A $150,000 fundraising budget in that scenario means that 33 cents of every dollar donated is spent to raise the next dollar. No donor wants to issue a grant or gift stock knowing that only two-thirds will support the organization’s operations. It isn’t a leveraged use of your charitable donations. And our final standard tells you when it’s happening.

Two thirds of the way there

Measuring non-profits against the six simple standards for leverage gets you past step four of the six-step non-profit evaluation process. The next post will explore the generally applicable standards I recommend for evaluating organizational strategy. If you are wondering where to find the data needed to do these cursory evaluations, www.IntelligentPhilanthropy.com provides it to subscribers in two-page non-profit Analytical Overviews that can be acquired for any U.S.-based 501(c)3.

Remember these six steps and 30 standards comprise only a cursory evaluation. It’s not the level of due diligence appropriate for major gifts. But we do hope the simple questions related to publicly available data empower donors of all sizes and sophistication to get informed quickly and give more wisely.

Do you know any other ways to measure leverage? Or do you disagree with the validity of any standard described above?

Paul Penley is director of research at the philanthropic advisory firm Excellence in Giving and creator of IntelligentPhilanthropy.com


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