Helping Donors Choose: Improving Nonprofit Ratings for the Future

05/31/2010 05:12 am ET | Updated May 25, 2011

With nearly 1.5 million nonprofits operating in the U.S. today, choosing the right ones to support can often be a difficult process. Potential donors want to maximize the impact of their dollars by finding the most effective and successful organizations.

Charity evaluators are a valuable resource for these donors, offering ratings and evaluations of nonprofits. If a donor wants to find out how much of their dollar will be spent on programmatic costs versus how much will be spent on administrative costs, these services are extremely convenient.

On the other hand - and the leadership of the charity evaluators will also agree - their use is limited due to the fact that they only look at the financial components of nonprofits. But as we all know, a charity's success and effectiveness goes well beyond a one-dimensional focus on nonprofit finances. As Ken Berger, CEO of Charity Navigator, has said, "The most critical dimension in evaluating a nonprofit has to do with achieving meaningful results." I couldn't agree more. While fiscal responsibility is certainly one important indicator, that metric alone doesn't reflect the entire picture of an organization's strengths, and can sometimes leave donors with a misleading impression of how effective a nonprofit actually is.

That's why I was so encouraged to hear that organizations like Charity Navigator, GiveWell, GreatNonprofits, and Philanthropedia are expanding beyond their one-dimensional focus. In an effort to increase their value to donors, rating agencies are making strides to broaden their rating to include governance and outcomes. By putting the spotlight on transparency, goals, and accomplishments, these services will offer a more comprehensive evaluation of the nonprofit.

For example, Charity Navigator has announced plans to introduce two added 'dimensions,' accountability and outcomes, over the next 18 months. The expanded rating system acknowledges that the truer hallmark of a successful charity is whether or not it is well-governed and has produced meaningful results in increasing economic opportunities for low-income families, for example.

It is critical that these changes happen sooner, rather than later, especially during these challenging economic times when many nonprofits are experiencing reduced revenue and expenses as well as reduced reserves. Under the current rating systems, this will result in lower ratings - thus inadvertently tarnishing the reputation of organizations that are doing good work. If rating systems' purview was broader, one would have a better perspective of charities from both a service and financial perspective.

We need to be aware, also, that no rating system is perfect, and that even the new models will have shortcomings and challenges of their own.

First, measuring outcomes requires time and a significant amount of resources. The majority of nonprofits are small - 65% of all nonprofits have fewer than twenty-five employees, according to a recent report from Independent Sector. Most of these charities do not have mechanisms in place to measure outcomes and therefore lack the capacity to evaluate and calculate and report on results. We need to determine a fair and accurate way to measure outcomes that doesn't put smaller nonprofits at a disadvantage.

Second, it is difficult to measure success and failure. In other words, outcomes are measured differently by organizations because of their unique missions. For example, a successful outcome for a nonprofit that works with disabled children is vastly different than that of a local performing arts space. Turning the quality of a nonprofit's work into something quantifiable and comparable is a challenge we can't overlook. Nevertheless, a degree of subjectivity will always be present.

Ultimately, while the information provided by rating services can become a more valuable decision-making tool, it's essential that donors also look at other aspects of an organization when evaluating. For example, donors may want to consider the life-cycle of a nonprofit. Is it a start-up, or has it been around for 100 years. The cost structures will be different, as will its style of governance. Similarly, the nature of a nonprofit's mission can also affect the financial picture. The business model, and how revenues and expenses stack up are not the same for a hospital and a volunteer-run mentoring program. Charity evaluators as they exist today are helpful tools to inform a donor about how a charity can appear from a particular financial standpoint, but in the end, the decision about whether or not to donate to an organization should be a personal, well-researched and well-rounded one.