Return on Impact: The Other ROI
Charities have an overhead problem.
The problem isn’t that overhead is too high. The problem is your donors believe overhead is the best way to measure effectiveness.
When you tell donors that “85-cents of every dollar goes towards our mission,” you make it worse. You are training donors not to consider the impact your program has on your community.
In a way, it’s like an investor looking for a company to beat quarterly earnings projections. Donors think they should reward charities with the lowest expense ratio. We’re teaching them the false premise that low overhead means high mission impact.
We should teach donors a new metric.
Return on Impact
The hallmark of impact investing is the ability to measure and report on the social performance of an investment. I call it an investment because philanthropic ventures are intentional acts that generate a social return.
Let’s say you want to raise childhood literacy at your after-school daycare. You start a reading program. And, as a result, single mothers can work extra hours, which increases household income.
In traditional cost-benefit analysis, the extra income (less any program expense) measures performance. But, after interviewing parents, you discover that the real value is much higher. You have created social value above the economic value you already calculated.
In traditional reporting, donors learned they help provide a literacy program to 20 children.
Reporting the Return on Impact is different. You tell donors that their investment helped 20 families increase their household income. Their investment also provided an after-school literacy program.
Which message has greater value for current (and future) donors?
While it is difficult to monetize social outcomes, stakeholders can help develop a valuation model. We can build a framework for more transparent measurement. We can measure the effectiveness of our charity and its programs. We can bring value to donations.
The only question is whether we are willing to get donors to pay more attention to our accomplishments and less to our overhead cost.