Wednesday, April 21, 2010

Is There Donor Fatigue Due To Giving in Haiti?

Check out this interview Ken Berger did with Al Jazeera English at the end of March. He talks about giving to Haiti and if we should anticipate the problem of donor fatigue.

Wednesday, April 7, 2010

Predictions Past (2009) and Future (2010)

As we arrive at the 8th anniversary of the launch of our web site on April 15 2002, it is time once again to have a look at the past year and look forward to the year(s) to come.

Looking Outward

Last year I made ten predictions as we looked out at the nonprofit sector. Let’s review them and see how things played out:

1. Increased Funding by the Federal Government– This prediction certainly has proven true and the recent passage of the national health insurance package only continues the trend. The federal government is now estimated to have some modicum of oversight and control of as much as half of the US economy. Therefore, as long as it continues to expand its role, it will continue to farm out responsibilities to the nonprofit sector to accomplish these new duties. The US has the largest nonprofit sector in world history, in part because of the long standing tradition of using voluntary associations to address problems that in other societies are within the purview of government. Even as our government expands its role, the “hollow state” phenomena[1], in which services are delivered through third party nonprofits, will continue apace.

2. Decreased Funding from Other Sources – Sadly, I was spot on here. The data for 2008 (which came out months after last year’s predictions) showed the largest drop in private contributions in the 53 years it has been tracked. State governments are also cutting back substantially. Surveys conducted by Bridgespan[2] of the leaders of 100 nonprofits and a recent Nonprofit Finance Fund (NFF)[3] survey show that this trend is continuing. The NFF notes that “Cutbacks in government spending are particularly hard on ‘lifeline organizations’ and 59% expect to get even less government money in 2010.” The nonprofit sector is going through a hellish period in terms of its ability to garner adequate revenue to provide even the same level of service as in the past, while the demand for services continues to rise.

3. Rising Demand for Charities to Provide Information on Their Impact – Evidence of this rising demand for evidence of effectiveness and results includes the formation of the Alliance for Effective Social Investing (now just over a year old) that brings together many of the leaders in the NP sector with the goal of driving more funding to high performing NPs. There is a proliferation of new models of evaluating charities to measure their results and effectiveness. The Independent Sector effort to develop standard reporting tools to measure NP effectiveness is another significant indicator of this trend.

4. Mergers, Program Closures and Layoffs – There is clear evidence that this phenomenon (especially closures and layoffs) is becoming commonplace. The NFF survey for example indicates that “35% had cut jobs or salaries” and “36% reduced or ended programs”. Furthermore, they note that “nearly 90% expect 2010 to be as difficult as or more difficult than 2009”.

5. Scandals As Always, Only More So – We have not been able to get quantifiable date on this prediction one way or the other. However, since we get calls all the time on this, we can tell you that it sure doesn’t seem like the problem has eased up one bit!

6. Charities Having Problems Filing the New IRS Form 990 – A recent survey sampling of the 990 submissions by an expert colleague indicated that less than 10% of charities had completed the new form correctly. We have also encountered a number of agencies that are continuing to use the old form! This is a problem that will probably take a number of years to rectify. As one accountant told me after a recent meeting, “We are all petrified by the complexity and time consuming nature of the new forms.”

7. A Greater Divide in Opinion Over the Role of Government in the Charitable Sector – The Tea Party movement has exploded on the scene over the past year with a general protest against anticipated higher taxes and government involvement in a wider range of sectors of the economy. The charitable sector has been far from exempt! For example, an opinion piece in the March 25, 2010 issue of The Chronicle of Philanthropy is titled, “Foundations Risk Losing Their Independence in the Obama Era”.[4] The author writes, “More and more, in the Obama era [there] seems to signal a reduction in the independence of nonprofit world … and a concerted push to align the use of philanthropic resources and energies with those of the government…” Traditionally, creative and innovative new charitable endeavors have germinated independent of government involvement. With the creation of the White House Office of Social Innovation there appears to be a desire for government to “push” innovation rather than simply contracting out for services. The debate over this new role has been heated and will continue to be so.

8. Arts, Humanities and Cultural Charities Take A Beating – This has proven true, but I am modifying this prediction going forward to broaden it to include Human Services Charities that often rely on local and state government for the majority of their funding.

9. Health Care Charities Remain King of the Hill – What can I say? Spot on or what? Did you hear about the new national health insurance plan passing?

10. Religious Charities Remain Strong – Boy was this proven true. Even though there was the largest drop in private giving in 2008, religious charities saw an increase (!) of almost 2%! More than any other part of the NP sector! I anticipate 2009 and 2010 will provide us with similar results. Too bad the data takes so long to compile!

I have a one more predictions to add for 2010:

The Battle for the Soul of the Nonprofit Sector Will Intensify – The debate over measuring impact will increase in intensity as Charity Navigator and some of our colleagues put an increasing emphasis on measuring effectiveness and results (as noted earlier). We have begun to get critical reactions to our plans (two examples here and here), while others are stepping in support of us (two examples here and here). Why is this a battle for the very soul of the sector? Within a few weeks I hope to be publishing an article on this. That is a prediction you can count on!

Looking Inward

We see 2010 as a major year of change for Charity Navigator in the transformation of our rating system from one dimensional – looking at the financial health of charities, to a three dimensional system – that will also look at accountability/transparency and effectiveness/results. We have formed an Advisory Panel to assist in this effort and anticipate adding the second dimension (accountability and transparency) by the end of the spring of 2010 and revisions to our financial measures by the fall of 2010. We also hope to showcase some prototypes of information on effectiveness/results by the 2010 holiday season with the complete three dimensional system in place by the spring of 2011.

Looking Toward You

Last year we noted that for the first time we were asking our prior donors to give again and got a great response. That story has continued unabated and we have added another 10,000+ donors since this time last year! As a result, we are well on the way of meeting our goal to become a fully approved public charity by 2012 (we filed in 2007 and are currently in a 5 year advance ruling period). We have already moved from receiving 15% funding to 30% funding from sources other than the Board. Our goal is to increase that percent to at least 50% over the next two years. That additional funding will also help us in our effort to transition to our new rating system (which we are now calling Charity Navigator 2.0).

We thank you all for your tremendous generosity and support over this last year in spite of the down economy. We consider it an honor and privilege to serve you, while we continue to improve on our ability to be “Your guide to intelligent giving”.


[1] Frederickson, David G. and Frederickson, H. George. 2006. Measuring the Performance of the Hollow State. Washington D.C. Georgetown University Press.
[2] http://www.bridgespan.org/managing-in-tough-times-survey-update-november-2009.aspx
[3] http://www.nonprofitfinancefund.org/content.php?autoID=230
[4] Finn, Jr., Chester E. March 25, 2010. “Foundations Risk Losing Their Independence in the Obama Era”. The Chronicle of Philanthropy. P. 25-26

    Thursday, April 1, 2010

    Charity Navigator Responds

    This blog post was originally published in Harvard’s Hauser Center site.

    On March 7, 2010, Sherine Jayawickrama began on these pages a discussion of Charity Navigator’s proposed new rating system. As many readers know, CN is the largest US agency rating nonprofit organizations. Since its launch in 2002, CN has relied and reported upon financial information contained in the federal 990.

    It is no secret that over the years this rating system came under considerable censure. Critics charged that solely fiscal measures were flawed for a variety of reasons, and that CN’s ratings could be having the perverse impact of steering investment away from organizations that were actually effective, but which, because their particular circumstances –considerations not readily apparent in the 990 data- had overhead or fund-raising costs higher than CN thought prudent.

    We have listened to these criticisms. That is why we have announced that Charity Navigator is moving to a triad rating system, one that will retain fiscal measures (which may well be revised), but also account for an organization’s transparency and accountability and, most importantly, its effectiveness.

    Commentator Steve Lawry, has countered that he does not believe that a “simple system for rating outcomes” is achievable. Here he joins the numerous naysayers who have, since the inception of the outcomes movement over a decade ago, argued that the work of specific charities, whole classes of charities, or the entire charitable sector itself, is too complex to be held to any standard of accountability as regards results and effectiveness. Mr. Lawry also states that “Many good charities strive mightily to measure outcomes for their own management purposes.” We believe that he is wrong on both counts.

    While no one will argue that charities work in often complex situations, circumstances resulting from and vulnerable to any number of variables, the essential question, “Have you made any discernable, meaningful, and positive difference?” should not be beyond the capabilities of a charity to answer. Unfortunately, however, this is precisely the claim of far too many nonprofits. In fact, instead of the “many good charities” Mr. Lawry cites as striving “mightily” to measures outcomes for their own management purposes, our own investigation led to the inescapable conclusion that fewer than 10% of nonprofits are using outcomes at all, either as a standard by which to measure their effectiveness or as any sort of management tool. Moreover, rather than the evidence which would be available were Mr. Lawry’s assertion accurate, we instead find an overwhelming collection of excuses why nonprofits are, in fact, not applying outcomes to either their work or themselves, “It is too hard,” “It is too costly,” and “We don’t know how” being among the most often cited.

    In the end, Mr. Lawry criticizes the effectiveness component of CN’s new initiative as being an impossible task in a multivariate world. We reject that position entirely. No one is asking for a scientifically provable claim of proportionate credit for an incrementally improved situation. What the sector needs, what donors are increasingly demanding, is some sort of reasonable evidence that an organization succeeded in what it claims to have done. There is a distinct difference between the two, and to hide behind the enormity of measuring the big picture as an excuse for neglecting to measure the small picture is, in our opinion, an abdication of the responsibility the sector has for granting donors –governmental, institutional, or individual- more than some small satisfaction in the bromide of “We tried and our intentions were honorable.” Ours is not a “pretense,” as Mr. Lawry put is, that we can credibly score outcomes, but rather a faith that we can report on those outcomes that charities are establishing and achieving themselves.

    Moving on, we find Dan Pallotta claiming in the first comment to Mr. Lawry's entry that “No rating system can possibly capture the underlying complexity [of nonprofits’ activities and operating environments], and worse, a rating system enables the public addiction to simplicity.” “Simplicity” is not the goal; trust is; specifically the trust of donors that the information they are given is accurate and verifiable as regards their social investment. There are two points to be made here. The first is that, while everyone recognizes that donors give for a variety of (often emotional) reasons, they nonetheless very often seek and appreciate some guidance. Within virtually any field of nonprofit endeavor, there are usually a number of organizations at work. Which among them, donors often seek to learn, is the preferable investment? The second question is How can I trust what I am being told?

    Responding to these questions is the underlying goal of not only CN’s new initiative, but its entire history. This is why CN has remained so fiercely independent, even when an easier fiscal path might have been found in a different arrangement between ourselves and those charities we rate. In a universe of self-serving information, we are trying to be a truly objective source that can answer at least some of the questions thinking donors have. We view neither the questions at hand nor our audience as “simple.”

    Finally, Messrs. Mitchell and Schmitz weighed in to the conversation with a balanced assessment of both the inherent flaws in a rating system based solely upon fiscal measures, and the complexities of measuring outcome accountability. They wrote, “Nonprofit organizations need to take more responsibility for demonstrating results to stakeholders. If a nonprofit is really accomplishing something, it should be able to show it - and to the extent that it can show it, the nonprofit can be understood to be effective.”

    This is precisely the position that CN is taking as it crafts the tools it will use to report on charities’ effectiveness. While there are several measures that might be considered, there are a few basic question that a charity ought to be able to answer:
    1. Is it using outcomes in the design, management, and measurement of its efforts?
    2. Are those targets that it sets “reasonable” outcomes? In other words, are they, at minimum, meaningful, sustainable, and verifiable?
    3. Is the organization achieving those outcomes?

    If an organization cannot or will not answer these questions, what does that say to its donors, both current and potential? Similarly, if an organization cannot or will not reply to inquiries regarding the transparency and accountability of its management and decision-making, then what does that say?

    These are the questions Charity Navigator will be posing, and reporting on. We recognize that it is a substantial undertaking we have set for ourselves. We recognize that any system initially devised will require continuous improvement as we go. But we are also firm in our belief of four things:
    1. That charitable donations should not be merely “giving”, but rather a social investments
    2. That an informed donor is the best social investor
    3. That the effective organizations represent the wisest, and most efficacious social investments
    4. That we owe it to our constituents to provide the best information we can possibly can to help guide their giving decisions.
    In fact, we hope that charities that provide this kind of information to donors will find it easier to attract funding than charities that don’t. We think this is what donors are and will be looking for and NPs that respond appropriately will have an advantage over those that don’t.

    In the end, we disagree with Mr. Lawry; we do not think that the challenge is so big that we ought not try to meet it. And we disagree with Mr. Pallotta. The audience is not simple, and neither is the reporting system we intend to launch. While the national assessment apparatus he envisions might be a good idea someday, given current realities that day is far off indeed. Meanwhile donors and the sector need answers now.

    We understand the cautions offered by Mitchell and Schmitz, and we are grateful for their thoughtful description of the terrain before us. But we are also determined to follow the course we have set out for ourselves. Mr. Pallotta cites the figure of $300 billion given to charity each year. When other sources of revenue are added (government and fee for service) the total jumps to roughly $1.5 trillion. If his figure is accurate, we believe that all would agree that it is too substantial an amount to be “given hopefully” rather than “invested wisely.” We intend to do our part to see to it that the latter becomes the norm.

    Ken Berger is the President and CEO of Charity Navigator. Dr. Penna is an independent outcomes consultant, author of the forthcoming Outcomes Toolbox, and an advisor to Charity Navigator.