Why doesn’t Charity Navigator care about impacts?

A couple of months ago, we talked about inputs, activities, outputs, and outcomes, saying that the closer you can get to measuring whether you actually help people the better you are.  

Charity Navigator measures the amount spent on activities.  So according to them, you would be better off spending $20 to help 10 people than $10 to help 20 people.  As we talked about yesterday, this biases against the use of volunteers; because they are not paid, any services delivered by them don’t count.

To be fair, there’s usually a correlation between amount spent and outcomes (that’s why it’s so unfortunate that Charity Navigator biases against larger organizations, as we discussed on Monday).  However, when that goes off the rails, Charity Navigator is the last to know.

Take Cancer Fund of America.  Here’s Charity Navigator’s three-star rating of them as of 2013, which is buoyed by four stars in accountability and transparency and very strong growth in program expenses.  At the time, it was rated higher than the two stars given to a clear slouch in the fight against cancer: the American Cancer Society.

You may recognize Cancer Fund of America from their profile in America’s Worst Charities, a project of the Tampa Bay Times and Center for Investigative Reporting or from the 2013 CIR report.  Or the lawsuit from the FTC and all 50 states and DC against them as a sham.  Or them shutting their doors earlier this year.

Or you might recognize them from Charity Navigator’s blog, where they talk about Cancer Fund of America being a sham.  When giving donors advise on how to avoid a scam, they say

“Take the time to research the charity’s finances, governance practices and results. You’ll find much of this analysis, for free, at Charity Navigator.”

As a watchdog, it’s one thing to let the sheep get eaten.  It’s another to recommend the wolf to the sheep.  And when you both recommend the wolf to the sheep and use that recommendation as an example of sage sheep-protecting advice, congratulations — you’ve reached Charity Navigator level.

To be fair, a lot of people missed this for a lot of years.  But Charity Navigator continued to rate Cancer Fund of America highly well after it was seen to be a scam because it looked only at program expenses and it didn’t care at all what those program expenses were or if they were having an impact.

And, with the release of CN 2.1, it still doesn’t.

You might say that everyone makes mistakes.  That certainly is true.  But most responsible people admit their mistakes, apologize for them, and change to avoid them in the future.  Charity Navigator held themselves out as a paragon on the very charity they missed and made no changes.

But, you probably are saying, it’s really hard to measure impacts.  Like really, really hard.  Especially for an outside organization.  And I would agree with that.  Charity Navigator is trying to police the entire nonprofit world with six analysts — it’s not easy at all.

But that misses two important points.  First, it is one thing to give advice that is unhelpful; it’s another to give advice that is actively destructive.  Charity Navigator:

  • Suppresses organization size (and impact) by ignoring the costs of scale
  • Ignores the ways a nonprofit can have an impact beyond its initial online constituency by eschewing joint cost allocation
  • Rewards hoarding money
  • Advises against giving to nonprofits who need it most
  • Advises against giving to nonprofits who are more efficient with their program expenses

I can forgive challenges in trying to tackle the challenging nonprofit world.  But your motto can’t be “when in doubt, do harm” in a reverse Hippocratic oath.  At the point that Charity Navigator says “don’t give your money to the losers at the American Cancer Society — go with this scam instead,” then crows about it rather than apologizing to the people it deceived, it is an actively negative force.  Maybe that will change with new leadership, but as I mentioned on Monday, I’ve taken too many runs at Lucy’s football to easily trust in another.

And second, others are doing this far better.  Last month, GuideStar released its platinum ratings, which are the result of a concerted effort to look at the actual impacts of nonprofits.  Causes are able to talk about the impacts in ways that are relevant to them and their donors and compare their impacts to other organizations.

It’s still a work in progress, launching only last month, but it’s still far better than anything from CN, because it tries to quantify the change nonprofits make in the world.  Additionally, in the GuideStar profile, there’s everything that’s in a Charity Navigator profile from financials, but without the misleading guidance.

I urge all nonprofit leaders to take a look at what is required to get platinum here.  

There’s also Great Nonprofits, which allows constituents to review the impact of a nonprofit.  This might have sounded odd 25 years ago, but by now, all of us have bought something on Amazon or tried a Yelp restaurant based on the review.

These efforts are important because donors do deserve to know what impact they are having and to be protected from scams.  They are crawling through the desert looking for it.  And when they find the oasis is actually a mirage, they are trying to drink the sand that is Charity Navigator.

So let’s give out water, as clear and pure as we can make it.

Why doesn’t Charity Navigator care about impacts?

Why does Charity Navigator hate volunteers?

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.

Why does Charity Navigator hate volunteers?

Why does Charity Navigator advocate hoarding?

Another part of Charity Navigator’s financial rating system is to have reserves for a rainy day.  In order to get a top rating from Charity Navigator, an organization must have 12 months of operating expenses in the bank (depending on the sector: lower for food banks and relief organizations; higher for foundations, libraries, parks, foundations, etc.)

I fully agree that nonprofits should build reserves.  There are natural ebbs and flows of both revenues and expenses in the nonprofit world; usually one is ebbing while the other is flowing.  Additionally, funders sometimes have demands that are off-mission, counterproductive, or political.  You need a bank of money so that you can say no to quick bucks at the long-term expense of your mission.  And you want to be able to take advantage of unforeseen opportunities as well as preparing for unforeseen difficulties.

Because it has a basis in need, this may be CN’s most helpful financial metric, which is much like the Taller Than Mickey Rooney Award: you can still be very short and win.

Remember, Charity Navigator purports to be a guide to where you should give your money as a donor.  And there are two problems with it as guidance to donors.

First, it rewards the hoarding of money.  There literally is no upper limit on how much you can have in reserves and still max out your reserves rating.  In fact, they brag about this on their site:

“Givers should know that other independent evaluators of charities tend not to measure a charity’s capacity. Indeed, charities that maintain large reserves of assets or working capital are occasionally penalized by other evaluators. In our view, a charity’s financial capacity is just as important as its financial efficiency. By showing growth and stability, charities demonstrate greater fiscal responsibility, not less, for those are the charities that will be more capable of  pursuing short- and long-term results for every dollar they receive from givers.” (here)

The simple question is would you rather fund an organization that ten months of expenses in the bank or ten years?

My inclination, as I would think most carbon-based lifeforms’ inclinations would be, is the ten-month organization.  If you have ten years of reserves in the bank, you are almost certainly not funding worthy projects and not investing in your infrastructure or growth.

BBB asks that you cap your reserves at three years to make sure you aren’t doing this — it seems like a better practice that CN is actively avoiding.  Or, put well from ACEVO, Charity Finance Group and the Institute of Fundraising:

“Charities need to justify their reserves. Holding a high level of cover for risks and unforeseen events appears sensible, but is this right if worthwhile projects are going unfunded? Charity funds are meant to be spent; therefore charities should be able to provide solid, considered justification for keeping funds back as reserves and not spending them.”

Nonprofits do not exist for the purpose of existing.  They exist to solve a societal problem.  If you have too much in reserves, you are privileging your existence over your mission.  And to that I say

shame-bell-lady-from-game-thrones

Second, it advises against giving to those who may need it most.  Let’s say there are three nonprofits, both with substantial (let’s say 15 months worth of) reserves.  Disaster strikes: a grant that makes up more than half of each of their budgets dries up.  Thankfully, they have prepared for this rainy day and, after consulting with their boards, they each take action:

  • Nonprofit 1 has a policy that they will not go below 12 months of reserves, per Charity Navigator’s advice.  They spend some from their reserves, but have to make small cuts in program and large ones in infrastructure to keep their bank balance solid.
  • Nonprofit 2 also believes strongly in a solid reserve, but not at the expense of their programmatic activities.  They dip into their reserves, taking them below the 12-month mark (knowing they will be penalized even more if they cut program activity), and prop up their program activities to a stable level.  However, they make no move to upgrade their fundraising abilities to replace their revenues.
  • Nonprofit 3’s board says that moments like this are the reason you have reserves.  They do what it takes to replace their program expenses and invest in ways to increase their unrestricted giving to replace the missing funds.

Charity Navigator ranks these organizations 1, then 2, then 3.  As a donor, three is the only one I’d want to give to — the only one that cares enough about their programs to sustain them for the short term and work to salvage them for the long term.

At the point where you are advising people to give to nonprofits in the exact wrong order than the one you should be, you probably need to rethink your financial metrics and do more than rearrange the deck chairs.

But that’s not the worst part.  Not only does Charity Navigator advise against giving to those who need it most; it advises against giving to those who have the most impact (or at the very least, is impact agnostic).  We’ll talk about that more tomorrow.

Why does Charity Navigator advocate hoarding?

Why Charity Navigator ignores standard accounting practices

Or, perhaps this would be better titled “why does Charity Navigator ignore standard accounting practices?”.

For those blissfully unfamiliar with nonprofit accounting regulations, allow me to burden you for a moment.  When a nonprofit combines fundraising and program activities, it is required to allocate part to fundraising and part to the program expense.  A nonprofit can do this if it meets three criteria:

  • Purpose: does the program part of the expense benefit the mission and societal good?
  • Audience: is the communication going to an audience that needs that communication for the societal benefit?
  • Content: is the content genuinely of value to the mission?

So it is not something done lightly.  But when Charity Navigator does its rankings, it takes out joint cost allocation.

Geoff Peters, in his excellent post Can’t we replace Charity Navigator, puts it thusly:

“Charities are required to follow GAAP Accounting rules and FASB standards in order to receive a clean audit opinion.  Yet when they follow those rules, Charity Navigator reverses the joint cost allocation which is required under audit standards and restates (misstates) the finances of the charity.  Then the media picks up on that misstatement and publishes it as if it were true.  This results in damage to the charity’s reputation and is based on false information but since the media accurately quoted Charity Navigator’s misstatement, they cann300px-prometheus_adam_louvre_mr1745_edit_atomaot be sued.”

The idea that Charity Navigator thinks that it knows better than the IRS, BBB, FASB, GAAP, and many other acronyms in laughable hubris, the type that Greek myths punish with your liver being continually eaten and regrown.

But sometimes the vocal minority has a point.  So let’s look at whether joint cost allocation makes sense.

Charity Navigator says:

We believe that donors are not generally aware of this accounting technique and that they would not embrace it if they knew a charity was employing it, nor does Charity Navigator. Therefore, as an advisor and advocate for donors, when we see charities using this technique we factor out the joint costs allocated to program expenses and add them to fundraising.  The exceptions to this policy are determined based on a review of the 990 and the charity’s website (in some cases we review data provided to us from the charity directly).  We analyze these items to see if the organization’s mission includes a significant education/advocacy program or other type of program that would directly be associated with joint costs.  If that is the case, we inspect in further detail the charity’s expenses in regards to those specific programs.”

There are several reasons this logic is spurious:

  • First, is it just me or does this say, in essence, “as an advocate for donors, we think they are stupid.  We think they can’t figure out that if they get a mailing, someone has to pay for it.”?
  • The fact that some people are aware of something is a reason to educate recipients of data, not to judge the providers of it.  For example, I believe not many people know how poor Charity Navigator’s ratings are, so I’m dedicating a week of posts to it.
  • As we stated earlier, in order to count something as a program expense, a nonprofit has to establish that it is an essential part of their mission.  What Charity Navigator is saying by backing it out is that they think that almost all nonprofits are lying about this.
  • In order to ferret out those few CN doesn’t believe are lying, they will analysis the mission and the communications to figure out if it is a legitimate purpose.  Call me crazy, but I think the nonprofit is probably a better judge of this.

This last point is especially true when you consider that CN has six program analysts and rates over 7500 charities.  With a little math, you can figure out that they spend about 90 minutes analyzing any one nonprofit, assuming no bathroom breaks or meetings.  Considering that the nonprofit’s staff, board, and audit committee spends a bit more of time on this than CN, then it’s certified by the federal government (not a strong argument, but one nonetheless), it appears that CN should take the proverbial long walk off a short pier trying to refigure every nonprofit’s mission for them.

It also goes to the question of what a world looks like in which you don’t do this type of allocation.  Let’s say you want to educate people about an important piece of legislation or ways to screen for prostate cancer.  How should you reach these people?

Yes, email is great; that will help you preach to the converted.  How do you reach people who don’t believe in what you do?  Earned media is great.  But if you are failing to recall all of those stories on your local news about how to screen for prostate cancer, it’s probably because they didn’t exist.  Not everyone has a sexy issue.

The truth be told, more people hear about more missions through their mailboxes and phones than through any other means.  

And those are expensive, so they have asks attached to them.  It is natural that all of the fundraising parts of these asks should be considered fundraising.  But we are dependent on people knowing about and acting on our issues in a variety of ways.  And that which is program expense should be program expense.

CN was sincere when they said they didn’t think that mail had a place with nonprofits.  They could not be more wrong.  Choking off joint allocated media doesn’t just strangle fundraising; it also throttles mission.

And thus, their guidance is better off ignored, or better yet repudiated.

Why Charity Navigator ignores standard accounting practices

Meet the new Charity Navigator. Same as the old Charity Navigator…

Last week, Charity Navigator released its new 2.1 rating system after reassessing its financial ratings.  This was an approximation of my reaction:

248578-full

I’d heard about Charity Navigator 3.0 and thought that maybe they would finally start focusing on nonprofit results.  But then they tried to use their lack of expertise to judge the logic models of experts in the field.  I argued then as now that I would trust the American Heart Association on how to prevent heart disease more than Charity Navigator, just as I would trust the doctor or nurse in the ER more than an intern at the hospital’s accounting firm.

I was hopeful with this effort was euthanized.  And I’d hoped that new leadership and time would change things.  But then their new leadership said that (in essence) mail may not make sense for nonprofits (story here).  As if we need less money to go to noble causes, not more.

Then they surveyed nonprofit leaders about the effectiveness of their metrics.  I gladly participated, telling them what were their most and least helpful metrics (answer: they were all tied for least helpful, in that they are not just not helpful but counterproductive).  Again I hoped for change.

What we saw on the first were a couple of tweaks: the manicure to a patient with a sucking chest wound.

This is frustrating, but I believe in the idea of giving insight into nonprofits for those who want it.  Like companies, people, or governments, there are good nonprofits and great nonprofits and scam nonprofits and blah nonprofits.

And I like that nonprofits are stepping up to do this.  When governments have to get involved, we too often see a cleaver used instead of a scalpel.

Charity Navigator’s own accountability and transparency metrics are very strong and helpful (other than the misguided view of what a privacy policy is).  When you don’t have things like an independent board, systems to review CEO compensation, regular audits, and so on, there’s a good chance you might be a scam (or very young as an organization).

But Charity Navigator continues to prop up the overhead myth, as described here.  While this is the most grievous sin, it is by no means the only one.  Thus, this week, we’ll take a look at why you should not only ignore the Charity Navigator financial metrics, but actively do the opposite.

With the new Charity Navigator ratings, program expenses are on a rating scale instead of using the raw value.  This focuses even more on the fallacious overhead rate, giving greater emphasis to differences among nonprofits.  In my post on the overhead myth, I talked about how a focus on overhead generally will prevent a non-profit from making the investments needed to grow.  Now, let’s look at a specific case of how focusing on fundraising expenses hurts growth, that of diminishing marginal returns.

Perhaps like me your econ class was at 8 AM, so let me explain with a thought experiment. Let’s say you were going to do a mailing to only one person.  You’d clearly pick out the best possible donor to send to — the person who gives you a significant donation every single time.

Now, let’s say you found an extra couple of quarters in your couch and wanted to mail a second person.  You’d find another person who is almost as good as the first — maybe they give a significant donation 99% of the time.

Let’s repeat this 10,000 times.  Now you are getting into people who are either less likely to donate or who will likely give smaller gifts.  Your revenues per mailing sent will still be very good — it will more than pay for itself by a wide margin — but not as good as that first person.

Now repeat 100,000 times.  The potential donors are getting even more marginal here.  But your expenses have barely gone down.

This is diminishing marginal returns in action.  As you try to reach more people and grow, your outreach becomes more probabilistic and less profitable.  

But it’s still profitable. (In the real world, you would hopefully be looking at this along the donor axis rather than the piece axis, asking if each piece added to lifetime value, but let’s not gum up the thought experiment).

If you had a magic box into which you could put $1, and get $1.10 in lifetime value out, should you do it?  Many of we fundraisers would be putting money into that box like a rat designed to get a, um, pleasurable experience when it pushed a level.  And we’d be right to.  More money = more mission.

But by focusing on the cost of fundraising, CN would have you cut off at the 10,000 mark (or not to mail at all).  Less money, fewer donors, less mission.

That’s the starvation cycle in action on the fundraising side of things.  And it’s made even worse by Charity Navigator’s stubborn refusal to allow for joint cost allocation of joint fundraising/programmatic activities, which we’ll cover tomorrow.

Meet the new Charity Navigator. Same as the old Charity Navigator…

Trust indicators in direct marketing

Another challenge with overhead ratios is that they are proxies for trust.  People trust XX% of the dollar goes to the mission because it seems honest (even though a scam can fake this number along with all of the others).

People want to believe in something bigger than themselves.  This credulity means that we fall for cons.  But it also means that the real thing is that much more inspiring.

There are five sources that I would hold up as ways to prove yourself to someone you just met — that new constituent that you are on a first date with:

  • Charity Navigator’s Accountability and Transparency measures.  I know.  I gave Charity Navigator a very hard time on Wednesday.  But that’s only because they deserve it.

    But their accountability and transparency measures come from a really good place (other than privacy policy: running an opt-in only list exchange/rental campaign would hamper much of the good that nonprofits do nationally). They are a good starting place for your efforts.

    And if you do well there, you can point there when donors complain about your low scores on the financial side of things, where you should be aiming for about two stars, maybe three.

  • The Better Business Bureau Wise Giving standards here.  BBB is a known name and their seal can help as a trust reinforcer online and off.  I wouldn’t put it on your outer envelope since plainer envelopes get opened more, but on reply devices can help.  There’s good stuff here on cause-related marketing standard as well that other ratings don’t go into as much.

    They also made this great chart:

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  • GuideStar.  If you haven’t been there in a while, they have a beautiful new redesign that helps nonprofits lay out their logic models and the way they are making an impact.  Moreover, they don’t have a bunch of pseudo-experts spending five minutes trying to understand and judge the work of actual experts’ lifetime of experience on a topic like some organizations who will remain nameless (*cough*cough*CharityNavigator3.0*cough*cough).  Instead, they let you lay out your arguments and let educated donors decide.

  • Independent Sector.  While I don’t know of a rating system or a seal that comes from this, the 33 principles are really good and worthy for board governance.

  • Great Nonprofits.  A different model where your constituents let you, and everyone else, know what they think of you.  At first, it can be a little heavily weighted toward the loud disgruntled (as can any rating system: read Yelp lately?), but once you make it a part of your marketing, testimonials will come in, building trust and social proof.

These are all good ways of building trust without resorting to the overhead rate that cheapens us all.

Trust indicators in direct marketing

Inputs, activities, outputs, outcomes, and impacts in direct marketing

I’ve made the case to avoid the easy, seductive, and wrong-headed use of overhead rates as a way of assessing and marketing nonprofits.

However, this rejection can not be nihilistic; we need to be able to communicate what we do and why that matters.

And, more specifically, since we know that people donate more and more often to prevent a bad thing than to create or sustain a good thing, we need to be able to communicate it in this way.

Our activities can fall into four buckets:

  • Inputs: what resources do we have to get our job done?  The biggest of these, of course, are time and money, but people and expertise also fall into this category.  Picture the Apollo 13 scene where they have to turn this filter… into this filter… with this box of stuff.  Inputs are the box of stuff.
  • Activities: what do you do with your resources?  We love to talk about these.  We give our programs fancy trademarked names and want our donors to care about these.
  • Outputs: what do you get by using your resources?  A training program creates people who are trained.  A research effort creates a white paper and a study.  Everyone loves to talk about outputs because there is a number: we filled X beds, we had a Y% graduate rate, we served Z meals.
  • Outcomes/impacts: what is the effect of your outputs?  A humanitarian delivery of food doesn’t end when the food reaches the dock — the output is reduced hunger among this target population.  Some people look at outcomes and impacts as separate things, with outcomes being a short-term implication and impacts being the long-term impact.  For me, there’s short-term, medium-term, and long-term impacts of the action.

Impacts and outcomes are hard.  Did your delivery of food reduce hunger or was it an improvement in overall economic conditions?  Once you increased the graduation rate, did those people go on to live better lives as a result?

Donors provide us inputs.  Their goal is to buy an impact.  They think that with their donation, they can buy a little more good in the world.

And they care not at all about the name of your trademarked program or the number of outputs that you have.

Your job is to connect the dots between the donor providing the input and what change they will help create.

If you are trying to sell someone on buying a hammer and a nail, it’s easy to talk about the hammer allows you to put a nail in a wall.  Someone might say that the goal is really to hang a picture.

But what the person really wants to do is have a feeling of family, nostalgia, and memories.  To do that, you need to hang a picture and to do that you need a hammer and nail.

So, how do you present your programs without resorting to the destructive “88% of your donation goes right to the people we are trying to serve?”

You cut as much out of the middle part as possible.  In Stephen King’s On Writing, he talks about cutting the parts of the book that people skip over reading (even cutting a section he loved but that his wife Tabitha thought was not necessary).  You must do this too.

You need to cut the activities and outputs to the bone.  Your support keeps the boot of despair off of young people, allowing them to succeed as productive adults — and succeed they do: look at Brian’s story.  You will prevent empty chairs at Christmas dinner.  You make sure that our country doesn’t forget those who served us when they have a time of need.

There’s nary a program name or a 14% percent this or a discussion of logic models.  Start with the end in mind.  That’s what lights a fire in someone and causes them to care little for how much an overhead ratio goes up or down.

Inputs, activities, outputs, outcomes, and impacts in direct marketing