Let’s Make Sure Worthy Groups Get Aid

Now that American donors are safely past the end-of-year fund-raising season, it is a good time to make New Year’s resolutions about giving well in 2004. The greatest challenge facing the nonprofit world today is improving the allocation of resources. Americans give more than $200-billion a year, but much of their generosity is poorly directed. Many dynamic organizations that are having an impact fail to receive the support they need to grow and make a substantial difference in society, while many lackluster groups attract funds that enable them to continue plodding along ineffectually for decades.

Consider a simple difference between the nonprofit and business worlds. Because money doesn’t necessarily follow quality, charities don’t experience the organizational turnover that keeps businesses sharp and makes it possible for innovative new businesses to grow quickly, respond to new opportunities, and redefine their industries. In a competitive environment, one should expect new organizations to overtake older ones as part of the natural course of events. In the nonprofit world, that doesn’t happen regularly. For example, of the 20 largest social-service groups in the United States (excluding governmental and religious groups), 12 were established before 1920 and 17 were established before 1960. None were established after 1980. By contrast, more than half of the 30 companies in the Dow Jones Industrial Average in 2002 were added to the index after 1980 (displacing other companies), and more than a third were added after 1990.

A key reason for this difference is that it is inherently difficult to measure social-value creation. Indeed, many nonprofit organizations that are not actually fulfilling their missions maintain the appearance of doing so. By virtue of name recognition, professional marketing, or elite connections, organizations can attract significant funds even if they are not doing their work effectively.

Fixing this resource-allocation problem is easier said than done. In the United States most donors, particularly individuals — who are responsible for three-quarters of philanthropic giving — pay little attention to the comparative performance of the organizations they support. In part, that is because people’s charitable contributions are influenced by impressions, personal relationships, and status considerations. But it is also because nonprofit groups have no simple and reliable mechanisms to compare performance.

Perhaps the biggest stumbling block nonprofit groups face in improving this situation is the belief that organizations can be compared reliably only if their performance can be measured and quantified. Indeed, much of today’s discussion about improving the “capital allocation” in the nonprofit world revolves around the question of how to develop “metrics” to translate social value into numbers.

The quest for quantifiable social returns has become an obsession among nonprofit groups that envy the efficiency of business capital markets. While metrics have a role to play in assessing performance, nonprofit groups and grant makers should remain cautious when embracing numerical assessments. It is critical to remember that numbers have an unfortunate tendency to supersede other kinds of knowing. The human mind is a miracle of subtlety: It can assimilate thousands of pieces of soft information — impressions, experiences, intuition — and produce wonderfully nuanced decisions. Numbers are problematic to the extent that they give the illusion of providing more truth than they actually do. They favor what is easiest to measure, not what is most important. They are often used to dress up failure as success, such as when a company increases its short-term profits by slashing its research and development budget.

In the microcredit field — which offers small loans that help people start businesses and take other steps to become self-sufficient — organizations have long sought to balance financial and social considerations. In recent years many lenders have moved away from serving very poor clients because it is more cost-effective to deal with people who are less poor.

No matter how much lip service is paid to the social concerns, managers in these organizations tend to pay more attention to the hard numbers, just as college admissions officers pay more attention to SAT scores than the subjective information contained in student applications.

Metrics are most useful when they are developed by organizations to help manage their own work and gauge their own performance. Within individual fields, they can serve as measuring sticks, as well. It may be useful to rank college-access programs by enrollment rates, for instance. However, metrics are of limited use when it comes to making determinations about whether, say, a college-access program should receive priority over a kindergarten-enrichment program.

When it comes to the most difficult and important considerations — such as predicting an organization’s future growth, influence, or impact — the nonprofit world needs a commitment to apply judgment more than a commitment to apply numbers.

Rather than turning to business for guidance about how best to evaluate performance, nonprofit groups — and their supporters — may find it more useful to turn to the law. Every day citizens across the country weigh competing arguments and make life-or-death decisions that don’t employ quantitative data. This occurs when they serve on juries in criminal trials. The jury system is an excellent example of a structured process that uses decision rules and analytic tools — conceptual tests such as “reasonable doubt” — and relies, ultimately, on the application of courageous judgment.

The political philosopher William A. Galston has noted that when people with different views are “confronted with a plurality of specific interests,” when issues are “qualitative, not quantitative” and it is necessary to make determinations about which considerations should be regarded as more important, or more urgent, it is possible for groups to make balanced decisions. “There can be right answers, widely recognized as such, even in the absence of general rules for ordering or aggregating diverse goods,” he writes.

If governments and foundations could design decision-making processes that give people the information, incentives, analytic tools, confidence, and encouragement to apply their judgment more effectively and comfortably, resources would be distributed in ways that better serve society. Perhaps more money would be channeled to energetic social entrepreneurs who are building newer and better models to attack problems, while funds would be diverted from older, static groups that are coasting on reputation.

Most individual donors lack the time for these deliberations. In their case, the challenge is to make information available in a simple format to help them make decisions. One approach is to encourage the development of nonprofit research analysts whose responsibility would be to survey organizations within different fields and publish opinions about who is doing good work and who is not.

Most other fields have their arbiters of quality: Society enlists people to analyze and judge movies, books, restaurants, architecture, gymnasts, most valuable players, the relative merits of scientific research, the creditworthiness of companies, and so on. Should dealing with urgent social needs and solving problems be treated less seriously than every other kind of work? Why shouldn’t society also have professionals whose job is to “review” the performance of citizen organizations? They need not be simple bean counters. They could take into account many subjective factors: the quality of an organization’s strategy, the degree of difficulty and depth of need for its work, the evidence of impact (quantifiable or not), the hurdles that the organization has overcome, the organization’s growth potential, the energy and talent of its staff, its importance within a community, and so on.

As in other fields, nonprofit analysts (or reviewers) would rise or fall on the quality of their judgments or predictions. They would be checked by reviewers with opposing viewpoints, and they would be financed by the people and organizations that will benefit from a more efficient nonprofit group, initially foundations and citizen organizations, and, down the road, individual citizens (who will be able to purchase research reports to guide their giving just as they purchase investment advice today).

Today the growth in the nonprofit arena is outpacing the rest of society by a considerable margin. If the nonprofit world is to fulfill its promise, however, it will have to develop better feedback mechanisms. Grant makers and ordinary citizens will have to decide what work should be augmented, what work should be maintained, and what work should be discontinued. Making these decisions will feel downright uncharitable. But a failure to do so amounts to a guarantee that society will continue to deprive its most talented and dedicated social entrepreneurs of the resources they need to flourish.

David Bornstein is an author in New York who specializes in writing about social innovation. This article is adapted from his book

How to Change the World: Social Entrepreneurs and the Power of New Ideas, © 2004 by David Bornstein. Reprint courtesy of Oxford University Press.