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Measuring Success in the Social Sector: Depends on Who's Asking

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The biggest and most far-reaching change facing this country isn't in health care, nor is it immigration reform. But it has the potential to influence and help address both problems, as well as virtually every other social issue the United States is trying to fix.

It is the way we think about charity.

The $1.5 trillion non-profit sector represents 5.5 percent of American GDP, according to the National Center for Charitable Statistics. Giving USA estimates more than 64 million Americans volunteered through a charity in 2011.

This enormous sector is in the midst of a revolution unprecedented in our nation's history. Within a few years -- certainly within a generation -- most Americans' views of the success or failure of charities likely will change. The concept of what I call "the business of philanthropy" will become a familiar phrase; and how non-profit organizations are evaluated will be radically different.

At the outset, I need to make an admission and an admonition. My admission is that I am a full-time humanitarian and social entrepreneur. My waking hours are focused on helping social enterprises, including non-profits, accelerate their performance, sustainability and scalability. Read this commentary with that in mind.

My admonition is that I want to launch a debate in this country on why and how we must re-evaluate the social sector.

Those who claim that criteria applied to the for-profit sector must be used in determining the success of non-profits are fooling themselves. Yes, there are some similarities, and when I worked in the financial sector, measuring the success of my employer, Citibank, was easy: How much did I contribute to raising profits and stock values?

But stock values and profit margins don't exist in the non-profit sector.

Moving into philanthropy more than 13 years ago transformed my view of measuring success. I now needed to ask and, more importantly, answer questions like: "How are lives changed? Are children doing better? Is the air cleaner? What does the public care about? Does the public even need to know? What do our donors care about? How satisfied are our employees?"

I suddenly found myself 40-years old and with a successful Wall Street career behind me, now working on Main Street -- in a world of multiple stakeholders, where the definition of success depended on who was asking and who was answering.

Until recently the predominant criterion for evaluating the success of charities could be summed up with one question: What percentage is of the organization's revenue is spent on overhead? Two months ago, the three leading charity watchdog organizations -- GuideStar, the BBB Wise Giving Alliance and Charity Navigator -- announced that calculating overhead is a poor way to measure effectiveness.

For some people, this was an "aha moment." Discerning social entrepreneurs, however, greeted the watchdogs' statement somewhere between outright contempt and mild cynicism: "Well, it's about time!"

Indeed, in a recent TED Talk, author, entrepreneur and humanitarian activist Dan Pallotta called overhead a "demonic label," and noted, "The next time you're looking at a charity don't ask about the rate of their overhead. Ask about the scale of their dreams."

Overhead is an objective criterion for non-profits. The vast diversity of the social sector -- organizations like the American Red Cross with billion dollar budgets and small neighborhood soup kitchens -- led to this evaluation.

Indeed, overhead should not be eliminated as a means to judge charities. But other criteria -- management effectiveness, impact on beneficiaries, donor satisfaction -- are subjective, and there is no agreement on how to measure them.

Quite simply, there is no simple answer.

Non-profit agencies cannot grow, nor be successful if their leaders are constantly looking over their shoulders at the raging beast of overhead. Charities must spend money to build revenue engines to refine and improve their work. And they must focus on the needs of beneficiaries and their abilities to recruit and retain strong and effective staff and board members.

This is probably what the leaders of those three watchdog groups had mind when they wrote in an open letter to donors: "We ask you to pay attention to other factors of nonprofit performance: transparency, governance, leadership, and results... So when you are making your charitable giving decisions, please consider the whole picture. The people and communities served by charities don't need low overhead, they need high performance."

This announcement represents a welcome maturation of the non-profit sector. For many years, some charities shunned or sidestepped questions about their effectiveness. As a colleague says, the attitude that "We're good people doing good things and that's good enough" exemplifies an era when gasoline cost 75 cents a gallon, an era that no longer exists and never will again.

Donor reports proclaiming the number of wells dug in Zambia are all but completely worthless in assessing impact. Such information must be accompanied by the number of people served by those wells, how long those wells are expected to last, and how many community members have access to parts and are trained to fix the wells' pumps when they inevitably break down.

Indeed, watchdog groups, donors, government agencies and the general public are finally waking up to this realization: Independent, third-party analyses are essential to demonstrating the effectiveness of non-profit organizations.

"So not only are most charities unskilled at evaluations -- and we wouldn't want them to be -- but also we wouldn't want most charities to evaluate their own work even if they could," writes Caroline Fiennes, founder and director of Giving Evidence, in the Stanford Social Innovation Review. "Despite their deep understanding of their work, charities are the worst people imaginable to evaluate it because they're the protagonists. They're selling. They're conflicted."

She's right about the conflicted views. But this leads to an important question: How do leaders and managers in the social sector satisfy the differing needs of the many stakeholders they serve? Often these individuals are caught between a rock (demands from donors) and a hard place (needs of those their charities are serving).

Their organizations are expected to serve as the bridge between those demands and needs, and to an increasing degree, those leaders and managers face both external and internal demands. Those demands, unless managed effectively, can undermine their organizations' effectiveness at serving their multiple stakeholders -- beneficiaries, donors, staff, the public and others.

The social sector has emerged in the past decade as the most interesting, exciting and challenging of all working environments. New and innovative ideas of addressing poverty, hunger and other social ills are being explored, along with credible solicitations for financial and other forms of support based on quantitative analyses of programs.

All of this points to the much-needed improvement in the management of non-profit enterprises. And, we need for a spirited public debate on measuring success in the real world of multiple and conflicting stakeholder interests.

As Thomas Jefferson said, "We are all doubtless bound to contribute a certain portion of our income to the support of charitable and other useful public institutions. But it is a part of our duty also to apply our contributions in the most effectual way we can to secure this object."

Let the debate begin...

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Atul Tandon is a serial entrepreneur, humanitarian and author who writes and advises on principles and practices driving the performance and impact of social enterprises and nonprofits. See: http://en.wikipedia.org/wiki/Atul_Tandon. Reach him at atandon@tandoninstitute.com