The “newsworthy” element of the anti-overhead ratio press release yesterday was the involvement of Charity Navigator. The group has 3 million users, is regularly pointed to by the mainstream media and studies show that their ratings affect donor behavior. The fact that they are transforming their system, a system that they’ve successfully built their organization around, is big news.

But of course the flipside here is that Charity Navigator is playing catch up.

Not to be lost in the “standing ovation” for Charity Navigator is the fact that GreatNonprofits, GiveWell and Philanthropedia are all offering alternative evaluation tools that are available right now. While Charity Navigator is trying to fix a broken system, the three small startups are trying to build something new and positive from the ground up.

Importantly, all three groups recognize that their evaluation tool does not by itself provide all the answers. The problem with the overhead ratio is not that it is somehow a bad measure, it is that it should never be used by itself to evaluate an organization. Even when it is used, a donor needs to understand why the ratio is as high or low as it is.

GiveWell, GreatNonprofits and Philanthropedia all understand that true evaluation is an exercise that that does not lend itself to simple tests, but instead requires building a mosaic of information about an organization until a meaningful picture emerges. Regardless of whether you like or dislike the tools and approaches of these three groups, they are WAY ahead of everyone else in building evaluation tools that hold the promise of helping individual donors make better decisions about their giving. They are way ahead of Charity Navigator, but Charity Navigator has the media platform and user base that gives them a huge advantage.

However, the mosaic nature of evaluation means that we should not be rooting for a “winner” to emerge in this space. We don’t want a single evaluation tool to displace the others. We need multiple tools. So at the end of the day, one of the most encouraging elements of the press release was the fact that it was a joint release issued by the leading evaluation platform, the three most promising startups and GuideStar, the central hub for nonprofit information.

We’ve got a long way to go, but we’ve just witnessed an event that I think marks an important historical moment in philanthropy. Remember, before Charity Navigator, the average donor on the street was very unlikely to punishingly ask nonprofits about their expense ratio. If we truly see these evaluation groups gain momentum around their approaches, we may very well see the day when average donors ask nonprofits about their outcomes, their stakeholder rating, the availability of independent analysis of their programs or the opinions of experts on the organization. Importantly, while nonprofits often have to conform to overhead expense ratios, these other evaluation approaches align with the goals of nonprofits rather than asking them to jump through arbitrary evaluation hoops.

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This is a guest post by Erinn Andrews, COO of Philanthropedia, which I blogged about in October. You can find my write up on their efforts here.

Providing donors with better information—actionable and scalable—all in one place

By Erinn Andrews

Clearly, people care. If we look at charitable contributions in 2008, we see that individuals donated more than $250 billion to nonprofits. I assume donors weren’t forced to give away that money—they wanted to. But what goes through their minds as they decide where to write that check? And especially for newer, younger donors, with more than a million registered nonprofits out there, where does one even begin?

This week, I posted a blog entry introducing Philanthropedia’s idea about a Foundation for Everyone. Philanthropedia is an online resource and tool for individual donors. We ask nonprofit experts (with an average of 10 years of experience) to identify strong nonprofits and allocate money across the organizations. On the basis of these recommendations, we create an Expert Mutual Fund that helps donors support an entire sector rather than just one nonprofit.

Now, thanks to Sean, we have the opportunity to share more about our perspective and explain how we hope to help donors as they make donation decisions.

At Philanthropedia, we see 3 factors shaping the problem donors face: Individuals lack good information that is actionable and available at scale, across multiple social causes.

What does it mean to have “good information at scale?” In general, we think the nonprofit marketplace has very little good information about nonprofit success. And, in contrast to capital markets, measuring nonprofit impact is extremely challenging because it’s difficult to quantify. Some independent organizations have attempted to solve this problem by rating, ranking, and scoring nonprofits according to various metrics.

As Lowell, Trelstad, and Meehan explain in The Ratings Game, at one end of this spectrum, organizations examine only a few metrics, a model which is highly scalable and inexpensive. Charity Navigator, for example, evaluates nonprofits primarily according to financial metrics such as fundraising efficiency ratios—which many have criticized as being too narrow a measure to assess nonprofit effectiveness. To their credit, Charity Navigator recently announced their plans to add additional dimensions of evaluation to their rating system. We think this is a great move in the right direction.

At the other end of the spectrum, organizations weigh a variety of measures, a model which is more comprehensive and likely more accurate. Employees at the BBB Wise Giving Alliance, for example, evaluate a nonprofit’s “financial efficiency and stability, governance and oversight, performance measurement, and the quality and accuracy of the organization’s fundraising and informational materials.” (source)

Unfortunately, there are limitations to both forms of nonprofit evaluation. On the one hand, relying on financial data from only one year “tells you about the [nonprofit’s] use of resources, not about the program effectiveness.” (source) And on the other hand, conducting in-depth research is much more time-intensive, costly, and therefore limited to a smaller number of organizations.

What does it mean for information to be “actionable?” The next challenge is how to share the information in a way so individuals can make a decision about where to give. Examples of actionable information are: presenting the donor with a donation strategy, with suggestions about the meaning behind different evaluations, or with ratings to help donors compare organizations. Charity Navigator, for example, uses an easy to understand 4-star rating system, while other organizations choose to provide anywhere from basic facts about nonprofits to comprehensive reports. To someone outside the nonprofit world, presenting information as facts or reports without further recommendations can be difficult to act on.

Philanthropedia’s solution. Therefore, given the unavailability of good information (at scale), we, at Philanthropedia, believe that nonprofit professionals—experts—in the sector are the next best option to evaluate nonprofits. Foundation professionals, academics, and nonprofit executives have access to non-public data, and, because they’ve been working in the sector for a long time (on average our experts have ~10 years of experience) they have advanced mental models for how to weigh the many factors one ought to consider. For us, “good information” about nonprofits will combine both objective facts and subjective assessments to allow for a more holistic review of nonprofit performance. And, this method is inexpensive and scalable (even though we’re not at scale quite yet) because we enlist the help of experts and can concurrently run our research in 2-month cycles. Many thanks to the 261 experts who have already contributed to this work.

While relying on experts to measure nonprofit effectiveness is still imperfect, we believe we can meaningfully capture the aggregated beliefs of a group of well-informed people and understand which organizations they currently think are impactful. And, experts are only a starting point. We then supplement the top-nonprofit profiles with information from Charity Navigator (for financial metrics), GreatNonprofits (for beneficiary voice), and eventually GuideStar (for tax 990 forms). We believe it’s important to bring together and make public multiple measures of nonprofit performance.

Finally, to make this information actionable, we present our research to donors in the form of an Expert Mutual Fund. We ask our experts to allocate 100 monetary points across the top organizations. The result is an easy-to-understand donation strategy that allows donors to support an entire social cause rather than just one organization. Because no one organization will have the solution to the problems within that sector, we believe a diversified giving strategy is a great way to support a social cause.

While there is still a lot of room for improvement, we hope we can move one step closer to providing donors with good information about a number of social causes and make it easier for them to take action to support some of the strongest nonprofits out there—all in one place!

We invite your feedback, suggestions, and comments and look forward to hearing from you.

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