The Wall Street Journal's Carl Bailik wrote a good article in the December 19, 2008 paper about the value of rating charities. He says that most individual donors do not have the time to fully research all of their charitable donations. Most people spend much less time researching their donations than researching their stock picks (clearly, being in the WSJ, this is targeting a certain audience). But donors still want to make sure their contributions are going to good causes, and not just going to pay for overhead or fundraising expenses.

Many organizations are trying to fill the needs of donors by ranking charities. The Better Business Bureau, Charity Navigator, and the American Institute of Philanthropy are the three examples that Bailik uses to discuss how charities are ranked in an attempt to help donors figure out what causes to give to. One of the system gives grades, the other stars, and the other a pass/fail. Bailik demonstrates that the rankings treat the same charities differently and overall come up short. I happen to agree.

The easiest ranking to poke holes in is the Charity Navigator. Their ranking is based on a reported tax form and it looks at the administrative cost as a percentage of overhead. Typically these costs do not consider donations in kind. For example, Special Olympics gets only two stars, but most of their facilities are donated by schools and most of the coaches are donating their time. You could guess that all of their expenses are overhead, so it is surprising that they even get two stars. Of course, this is no way to judge the Special Olympics.

Sometimes, this can be a good first start for a ranking, assuming you understand the business model of the charity to which you want to donate. One better way to look at charities is to see what they accomplish. In this way, you would want to look at their outcomes and the benefit of their services. Of course there is no standard measure for this since the benefits can range from healthcare, to the environment, to education, etc. At minimum, we need to start thinking about the appropriate framework for organizations to be able to demonstrate their progress in achieving their mission. With a common framework, it will allow donors to be able to see which organizations are being most effective, and it will allow charities to clarify their missions and focus on measuring the outcomes that really matter.

Once charities start measuring outcomes, then they can start looking at improving the outcomes, and this is where good performance management practices come into play. Of course if you tie performance management to demonstrated outcomes, then organizations that could demonstrate their effectiveness could garner more fundraising. Growth in the nonprofit sector would then be driven by effective organizations, rather than those that have low administrative expenses.

Happy Holidays.