Measure The Unmeasurable
July 1, 2008 Thomas McLaughlin
Managers at for-profit companies enjoy the very real advantage of knowing exactly how they will be measured. When success or failure is determined by the stock price, judgments tend to be pretty clear, at least in the short run.
Nonprofits have a by-now famous “double bottom line” of mission and margin. The latter is a straightforward calculation, but it is not terribly useful beyond being a broad gauge of future sustainability. The measurement of mission is of more interest, but how exactly does one go about measuring something as amorphous as “public benefit?”
This is one of many reasons why there aren’t many good metrics of the work that most nonprofits do. Getting broad agreement on what constitutes a public benefit is unlikely, let alone getting agreement on how to measure it.
But if it were not possible to settle the question of measuring public benefit, why wouldn’t it be possible to measure some things needed to provide it? The idea is to find things that can be measured and that are correlated in some way with what can’t be measured. Executives need markers that can be expected to be present when an organization is successful at achieving its mission. It’s the next best thing, of course, but at least it can provide a way to grapple with the bigger question.
With that in mind, let’s take up three things that most nonprofits need to be effective in providing public benefits:
- The quality of the workforce;
- Public image; and,
- Political capital
The need to maintain a good quality workforce in tomorrow’s world of labor shortages and restricted immigration is obvious. A good public image upholds the public’s trust, as well as fundraising capability, while political capital enables an organization to do innovative things while engaging the community as a legitimate partner.
These are all reasonable desires. But, where can data like these be found? To be most effective, the data to be measured need to be universally collected from all nonprofits in the same standard way. The only data collection tool used by all nonprofit public charities is the Internal Revenue Service’s (IRS) Form 990, which, at the moment at least, is mostly about financial matters. How can that be useful?
It turns out that many of the things that the IRS asks for are enough to construct some creative markers for these three qualities. Most of them are buried in various parts of the document, but they all offer useful information that can provide insight into the desired qualities. With a little tweak here and there, they can help you document useful markers of some overall desirable qualities.
Each indicator relies on two different lines in the Form 990. Below is each formula in words, then as the numbered lines on the 990.
Employee Benefits and pension plan contributions. Employee benefits and pension plan contributions as a percentage of total salaries and wages or divided by the total number of employees: (27A+28A)/(25A+26A) or (27A+28A)/90b.
Either of these indicators says something about how much the organization is truly willing to “invest” in its personnel. The first version creates a percentage that can be compared across organizations, while the second shows how much, on average, the entity puts toward employee benefits and pension plan contributions for each employee.
Spending on pension plan contributions can be skewed by higher-paid employees, so one way to control for this is to use column lines 27 and 28 from column B, program services expenses, which will make the same calculation for direct service individuals. Columns C and D, for management employees and fundraising employees, can be used in the same way. Spending on conferences, conventions, and meetings. Spending on conferences, conventions, and meetings as a percentage of total salaries and wages or divided by the total number of employees: 40A/(25A+26A) or 40A/90b.
In a similar way, this indicator shows how much the organization is willing to invest in training its employees. Again, this measure can be skewed by excessive spending on management employees, so replacing the total spending of column A in the above formulas by columns B, C, or D will permit the same calculation for program staff, management and general staff, or fundraising personnel.
Fundraising costs as a percentage of direct public support. Fundraising costs as a percentage of funds raised: fundraising costs divided by direct public support: 44D/1a. Fundraising costs, as a percentage of direct public support, is an easily obtained approximation of fundraising costs overall. Fundraisers tend to want to capture long-term fundraising gains that aren’t recorded in the same way by financial folks. This classic ratio shows how much of every dollar of fundraising goes to expenses associated with the effort. The lower the ratio the better, although there are practical limits since fundraising isn’t free. Also note that line 1a is sometimes misunderstood, so care needs to be taken that the reporting is accurate.
Management and general. Management and general costs as a percentage of revenue: 44C/12.
Management and general costs as a percentage of revenue reveals a similar kind of truth as the previous indicator, showing how much of every dollar brought in is spent on management needs. While one might wish it were not so, for most members of the general public low management costs equate to good quality services. And most nonprofit leaders agree with this objective in concept, even if they’re not comfortable with all the implications. Earned income. Earned income as a percentage of total revenue: 2/12.
Earned income, particularly in the context of social enterprise, is a key concern of many nonprofits these days. Often it is difficult to build an earned income stream, yet measuring earned income is most important so you can limit it.
This could sound counter-intuitive, but remember that the only thing beyond a charitable mission that legally separates a nonprofit from a for-profit is that nonprofits must pass the public support test. Too much earned income can actually alienate the general public by obscuring charitable purpose. This is one reason why massive medical centers and ultra-rich universities have lost faith with many casual observers. Use this indicator to keep faith with your constituents.
Political Capital. Lobbying choices. Schedule A, Part III.
Schedule A of Part III in the Form 990 is all about political activity. Nonprofit public charities cannot engage in partisan politics, but they can attempt to influence the public debate. This short section nonetheless contains a lot of extremely important information, mostly in the form of yes or no questions.
Tax-exempt bonds. Tax-exempt bonds, 64a.
The simple presence of tax-exempt bonds suggests two things about an organization. First, it implies that the entity is a larger and more sophisticated nonprofit, since it takes a fair amount of management capacity and borrowing power to issue these bonds. Second, it makes it almost a guarantee that the organization has the patience, management capacity, and the political acumen to steer a complex financing vehicle through its many steps in the local environment.
Sometimes one can’t measure important things directly. In that case, the next best solution is to measure something associated with it. The markers above try to do that. Needless to say, they are not conventional indices. Maybe they should be. NPT
Thomas A. McLaughlin is a national nonprofit management consultant with Grant Thornton in Boston. He is the author of the book Nonprofit Strategic Positioning (John Wiley and Sons, 2006). His email address is firstname.lastname@example.org