Improving Nonprofit Funding Decisions through Impact Measurement
By: Unmesh Sheth, Founder & CEO, SoPact
Did you know that 77% of nonprofits have seen increased demand for their programs and services from beneficiaries over the past year? At the same time, however, 64% have experienced increased demand for transparency of funds from benefactors (Source: Nonprofit Trends Report, Salesforce Research, 2018). In other words, nonprofits are now tasked with catering to increasing needs of two very different — but very important — stakeholder groups.
While donations are also trending upward, they are doing so at a slower pace. Meanwhile, fewer than half of nonprofits have seen increased volunteerism. The result is an industry being pushed to do more without necessarily having the resources to do so.
How can your team make the argument that your nonprofit deserves more funding, because you’re making an impact?
I think impact measurement can help.
In the last five years, I have had an opportunity to listen, connect, and actively work with nonprofits, for-profits, foundations, impact investors, and social enterprises. While I started as a philanthropist, I soon had a mission to connect the social sector with technology to facilitate a more transparent social impact measurement, management, and communication. Here’s a bit about what I’ve learned.
Broadly speaking, we can simplify the impact ecosystem to three sets of players: funders (i.e., foundations, governments, pension funds, family offices, etc.) providing resources, fund managers (universities, impact funds, accelerators, etc.) which act as facilitators, and nonprofits (or for-profits and social enterprises) delivering services to beneficiaries.
Funders such as foundations, governments, and public agencies working with nonprofits are often looking at the best way to allocate capital. Traditionally, the grant-based fundraising process is limited to writing proposals involving your organization’s story, program capabilities, and financial and operational outputs. I think this is a missed opportunity in collecting insight into outcomes, whether we’re talking about the funder level or nonprofit level. As fundraising becomes more competitive, and more Millennials engage in philanthropy, funders need to rethink their approach and investment thesis for fund allocation. In fact, we are seeing evidence of many foundations starting to evaluate impact investment as a vehicle for a long-term social impact. In this article, we will review three impact measurement approaches that funders can take to assess grantees/investees.
Balancing Supply and Demand: Identifying high impact possibilities
Income inequality remains an issue. Low-income communities across the country find it difficult to get out of poverty, especially in areas with a soaring cost of living, as United Way research points out. In the United States today, the strongest predictors of your life’s trajectory are where you are born, your race, and your parents’ income. Although social mobility has not changed much over time, it varies widely from place to place. Economists have found that the probability of a child born into the poorest fifth of the population in San Jose, California making it to the top is 12.9%, not much lower than in Denmark. In Charlotte, North Carolina it is 4.4%, far lower than anywhere else in the rich world. So, in these areas, poverty rates, unemployment rates, and other socio-economic conditions are often unsustainable. Sadly, although for the most part, redlining and covenants that restricted housing opportunities for people of color are mostly in the past, financial institutions have a ways to go to invest more in low income areas. I think that to accelerate progress, we need to get more funding to eliminate issues like the cycle of poverty, drug addiction, and empower previously disenfranchised communities to build a better life.
Private Investors and Community Development Financial Institutions (CDFIs) often partner with Investment Funds and Community Development entities to work with qualified active low-income community businesses through concessionary capital-boosting. Kiva Zip is one example of this, with zero-interest loans. However, funders must establish a clear guideline based on well-researched data available by location from each distribution of funding. The critical question is how do we prove that these entities are distributing funds within an area that needs it the most, instead of acting like a traditional bank that doesn’t incorporate social return on investment.
One innovative solution is where CDFIs look at economic conditions based on regional economic research data from IMPLAN. IMPLAN can help to evaluate the economic impacts of changes in the local economy. These data can correlate with the actual distribution of fund data. Platforms like SoPact Impact Cloud can help the organizations transform their current CDFI transactions mapped with socio-economic transaction distribution. Also, it allows policymakers to verify t fund allocation quickly.
Cost-Benefit Analysis of a Program: SROI
This approach, commonly known as Social Return on Investment (SROI), popularized by the Robin Hood Foundation, allows funders to review individual programs within a nonprofit or a program across multiple lending institutes. This path is useful when multiple agencies are submitting a proposal with a similar objective. How do we prove one agency program is more effective when they all have similar outcomes?
While SROI is quite useful, the challenge is to calculate the cost and benefit in the most meaningful way. The methodology requires an evaluation of overall social/economic outcomes against the total inputs provided by an organization.
An organization must identify their outcomes and use financial proxies assigning them a monetary value to calculate the cost and benefit ratio. The process of defining financial proxies can be time-consuming, and most SROI tools rely on a survey-based data collection. A good way to get organizations started with SROI is to aggregate their existing data, such as CDFI transactions. Often, this requires a better data warehouse approach where an organization can quickly import their data/transactions and summarize them into an indicator. Then, with the help of tools like IMPLAN, which can provide the right data to make informed recommendations and Social Impact Calculator, which can calculate the monetary impact of the investments done in the certain community and certain sector by plugging the values.
Using multiple tools and data input can make it complicated to get insight into outcomes since that requires mapping the impact of outcome indicators. How can we simplify this approach, where economic results are calculated based on external research data? Analytics platforms are starting to make it easy for any mission-driven organization to quickly import internal data and analyze it compared to external economic data, to demonstrate that an organization like yours is making an economic impact in an underserved area.
Using Outcome Insight to Improve Trust
Today most nonprofit organizations measure impact in a limited way: with inputs and outputs. The difficulty of finding outcome insights from grantees can create a cycle of mistrust, as funders are not confident about long-term social change. While Randomized Controlled Trials (RCTs) have been seen as one popular vehicle to measure outcomes, many funders are hesitating to use it because it’s slow and expensive to run them. I suggest that nonprofits develop a systematic outcome measurement process to collect data to measure baseline and endline results. While that may seem daunting, a “lean data” approach can provide some helpful insights into beneficiary and community outcomes.
To demonstrate that your organization is making a difference, it’s helpful to be thoughtful about your impact measurement.
If you use research data and flexible technology, this can help you show your impact more effectively. Research-based data and better data tracking through technology can also allow funders to make better decisions based on a more reliable and effective process.
- The Nonprofit Recurring Giving Benchmark Study: Research on how to improve your nonprofit fundraising through attracting recurring donors
- Fireside chat on impact measurement with Mission Measurement and The Conference Board.
- The key to attracting multi-year, unrestricted funding
Curious about what other nonprofits are doing around impact measurement? Get a free copy of this e-book with 3 nonprofit impact measurement experts.
About the Author
Unmesh Sheth is a founder of a social impact management company, SoPact. SoPact’s ImpactCloud is a platform that aligns outcomes between funders and grantees & investee using comprehensive impact management approach, simplifies data collection and improves data trust within a network. Improved transparency and accountability allow an investor to make better and faster decisions about social and financial performance. SoPact’s Deep Impact Network is a community of social entrepreneurs & impact investors solving our world’s hard problems.
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