OK, that may be a bit of an exaggeration. But not much of one. Because Charity Navigator gives backwards incentives to make sure that program activities are done by program staff and not volunteers. And they are entirely indifferent to the impact that an organization, only the inputs.
Let’s take two social services nonprofits as an example of this. To make things fair, they both start in the same place:
- They are each $10 million organizations in both revenue and costs
- They spend 80% on programs, 11% on administration, and 9% on fundraising — a model CN organization. (Clearly, they should spend more money on fundraising to grow faster, but we’ll ignore that for now.)
- They each get a $1 million grant to help fund employees who provide direct program services to the community.
- They are each growing their revenue by $300,000 per year.
Suddenly, this grant is cut. (Cue scary music: dun Dun DUUUUUUUNNNN!)
Organization A is able to get another grant to mostly replace the existing one and fundraise for the rest.. They continue on as they were going before, except their fundraising costs go up to 11% of revenues.
Organization B realizes that they have been doing with employees what volunteers can do. They get a grant for $100,000 in program expenses per year to pay for staff to recruit, cultivate, train, and deploy volunteers. In year one, they are able to provide the same services as before. In years two and three, they are able to increase their services in the community as volunteers beget new volunteers.
Which nonprofit would you support? I’m thinking most would (and should) support B over A — biggest impact on lower revenues means it’s more effective. Not that A is bad; just that B is a doing more with less.
And you might think that Charity Navigator would agree with you. However, it has has a growth imperative: in order to get a maximum rating in program expenses, you must grow your program expenses year over year. Not your program impact; your program expenses.
So let’s see how this breaks out after three years.
Charity A goes from $10M to $10.9M in revenues. They go from $8M to $8.5M in program expenses — an increase of 6.3%. This gets it 8.3 points of increase in program expenses. Its fundraising expenses and fundraising efficiency measures, however, each go down by 2.5 points because it has crossed a completely arbitrary Charity Navigator threshold.
Charity B stays at $10M in revenues and at $8M in program expenses. This gets it 2 points on program expenses by CN’s calculations. Its fundraising expenses and efficiency stay the same.
So A does 6.3 points better than B on program expense increase and loses 5 points for fundraising expenses and efficiency. In summary, CN says that charity A is better than charity B not because it did more — it didn’t — but because it spent more.
To give credit where credit is due, CN did remove increasing overall revenue as one of the seven financial criteria in their 2.1 release. Now if we can only get rid of the other six.
You may think that I jiggered this to make this example look good. However, it’s actually a worst-case scenario for Charity A because of the increase in fundraising costs.
It also highlights that, according to Charity Navigator, you would be better off using staff than volunteers to do your programs, because you spend money on staff.
But this is actually a symptom of a larger problem: it highlights how Charity Navigator doesn’t care about impacts. We’ll talk about that more tomorrow.