(This post is from Tim McCarthy, founder and chief mission officer of the Business of Good Foundation. It originally appeared in the September 2012 newsletter of the Business of Good Foundation. See Tim's other posts, here.)
What gets mesaured, gets done. The voice for creating better measurements continues to grow in the nonprofit world, and that’s certainly a good thing, but my experience in business says much depends on what and how much you measure. In measuring performance, quantity often exceeds quality.
The “American Way” says, “More is better.” It is not.
I’ve learned to develop “key performance indicators (KPI),” which are few and meaningful. The tricky part of KPIs is that one must look for causes rather than outcomes to measure. My son says “measure leading, not lagging, indicators.” Outcomes (lagging) are revenues generated and costs reduced or contained. The problem with these being measured is that by definition, once we’ve measured them, it’s too late to affect them. For more effective (leading) measures, identify the cause of revenue increases or costs reduced and measure those instead. When we positively impact the causes we will eventually create desired outcomes.
In our foundation’s case, our primary revenue generator is a for-profit business whose profitability is driven by increasing customer satisfaction and controlling variable payroll expenses. So, we religiously measure customer satisfaction levels. If we made more people happy this month, our revenue is likely to increase next month. For our key expense KPI, we chose “% of sales” for part-time labor that is efficient, and we manage to that number. So, we know if we rated over 91% in customer satisfaction and managed temporary labor to 5% of sales, during any period our profit is likely to improve in the upcoming quarters. This is the ultimate goal for us, since profit funds our foundation.
In our nonprofit work, we’ve decided that the best ways to measure our effectiveness are 1) scale, and 2) leverage. That is, 1) how many people did we help, and 2) how much time and money was invested to achieve the desired outcome? Our ultimate goal, and therefore what we measure, is to eventually achieve a 1:50 leverage ratio, meaning, a $10,000 investment results in $500,000 in social and/or economic impact. Our nonprofit measures still need more work, but we’ve improved a lot in 2012. So, back to work we go.
What measures are you managing to?