In brief: The key to reducing inefficiencies and waste in the third sector starts with creating a commonly shared vocabulary. By taking inspiration from the way private sector companies measure and communicate success, we think a new lexicon around how charities measure performance will drive efficiency and allow many third-sector organisations to really articulate their impact. We have an idea for what that should be.
The context
The focus of this article is something called the “Third Sector”, a.k.a the voluntary or nonprofit sector, which encompasses organisations and initiatives driven by social or environmental objectives rather than profit. Comprising charities, non-profits, and social enterprises, the sector is crucial in addressing societal challenges, fostering community development, and advancing positive change. Its activities range from local grassroots efforts to global campaigns, all united by a shared commitment to making a meaningful impact on society. SoGood Partners is a non-profit enterprise with a mission to support third sector organisations.
Talking about something is difficult without the right words and language. In fact, the theory of linguistic relativity suggests that the language we speak can influence our thoughts and even how we experience and understand the world.
What’s that got to do with Third Sector organisations? Well, in any sector there’s a necessity for a shared language to communicate performance and success. To compare companies or organisations against each other, to understand how efficient they’re being and, ultimately, to determine if they’re achieving the objectives they set out to.
That consequently makes problems and issues more transparent to wider society, building trust in the process. This is particularly important for the Third Sector, where individuals are often trying to decide which voluntary organisations or social enterprises to give their money to amid a plethora of seemingly worthy registered charities and non-governmental organisations.
Given our core focus at SoGood is on increasing third sector efficiency through digital transformation, this is a topic that’s front of mind for us.
The vocabulary problem in third sector organisations
The issue we see is that there’s currently no widely shared and adopted lexicon for third sector organisations. The innovation and ideas are there, but the language to define success and performance is not.
The Good Innovation report
That’s backed up by a recent report from Good Innovation featuring the thoughts of 52 leaders in the third sector. One of the valuable key takeaways was the need for shared language and shared metrics to compare impact. Something that talks about more than simply money in and money out, or the number of people engaged in voluntary groups.
Many third sector organisations will have numerous internal KPIs, but nothing public facing that’s all-encompassing and used elsewhere in sector groups. Essentially, there has to be a more effective way of articulating impact and performance with a single, shared unit of measurement.
Effective Altruism
We look at the work of Effective Altruism as a source of inspiration. The organisation tackles the question of what the best charities are to give to with a methodology that compares different charities across various Third Sector groups. They use trusted evaluators to conduct primary research into which interventions or actions are effective within a cause, track how much registered charities are spending, and monitor whether a charity is successfully carrying out the work they claim to be doing.
This allows them to make an evaluation on which third-sector organisations are making the most impact. A widely-shared lexicon and unit of measure would take this concept a step further.
How other sectors define success
It’s helpful to take a look at how success is generally measured in other sectors and organisations. To do this we have to use broad generalisations to draw comparisons and illustrate our position.
The private sector
Let’s face it, the commercial world is widely known to operate more efficiently than the Third Sector. There are established measures and language that hold businesses to account that everyone immediately understands:
The objective: Return on investment
Private sector organisations have shareholders whose sole interest is the amount they earn in exchange for the money they invest in a company.
Stakeholders: Shareholders
This is why the ultimate stakeholders in commercial enterprises are shareholders — the people (or other organisations) that have invested in a company and await their financial rewards.
KPIs: Profit
The rewards are measured as profit — the difference between money made by the company and all expenses incurred.
Unit of measure: Money
In commercial organisations, profit is counted in monetary terms. There can be soft benefits and other achievements (e.g. customer satisfaction), but at the end of the day, money is everything.
This shared language makes it possible to quickly judge a company’s performance and compare it against a competitor. And that measurement builds a culture of efficiency: you need to be efficient and cut waste (to reduce costs) if you want to increase profit, otherwise shareholders will not see a return on investment and take their money elsewhere.
The public sector
The public sector sits at the other end of the scale. Here, the language gets a little more fuzzy and unclear when it comes to measuring performance.
The objective: Return on public funds
Public sector organisations are charged with spending the money they collect on behalf of society, and they are under obligation to do so in a conscientious way, ensuring best outcomes are achieved.
Stakeholders: Taxpayers
The public sector is largely funded by taxation. The general public — including private sector organisations — is subject to an array of taxes, designed to collect money to fund public sector operations.
KPIs: Value for money
Public sector success is judged by the perceived impact delivered through the deployment of tax monies in society.
Unit of measure: Voting intent
In a democratic country, the population expresses its approval (or disapproval) through the act of voting in elections. This could be at the committee, local government or national level.
When users judge public services like the NHS, schools or police, there’s no commonly used measure that holds these organisations to account. Performance is essentially measured by how we in society feel about an organisation, rather than how effectively it operates, leading us to decide to vote a certain way at the next election. As a result, there’s far more inefficiency inherent in the public sector than in the private sector.
Our solution: a lexicon for third-sector organisations
We think that the Third Sector needs to take inspiration from the private sector to avoid the pitfalls of the public sector. There needs to be a shared method of measurement that is robust, widely known and accountable, making it simpler to compare and contrast charities, track the development of organisations, and understand whether they’re achieving their objectives or coming up short.
Here’s what we propose:
The objective: Return on goodwill
Goodwill is used here to encompass altruism, compassion, alignment with a cause or simply a personal connection to a charity. We believe that the objective of Third Sector organisations should be evidenced in the way they make a real difference to civil society.
Stakeholders: Donors
Whilst it is correct that Third Sector organisations are ultimately responsible to their Trustees, it is perhaps more useful to consider donors as the ‘real’ stakeholder group in the relationship. Whatever the structure of a Third Sector organisation — voluntary organisation, community interest company, social enterprise or non-profit — it pays to think about donors as stakeholders. Their direct support ensures continuity of funding and sustainability.
KPIs: Fulfilment of need
In order for these performance metrics to work, they need data that measures the direct support and benefits delivered to their service users. At SoGood, we’re looking to translate this into an equation whereby the ‘needs’ of service users can be quantified. Third Sector organisations should apply the same measurement to the services they offer and aim to capture how successful they are in meeting the needs they address.
Unit of measure: Efficiency percentage
Having a specific unit of measure in the shape of an efficiency percentage has the potential to be a game changer for the Third Sector, allowing it to compete for significant resources that are usually reserved for commercial activity.
It would help to drive efficiency within these organisations and tackle one of the charity sector’s biggest issues: waste. But more than that, it would enable charities to articulate their impact – ensuring the wider public understands how a specific charity organisation is operating and performing and whether their money will be put to good use.
Emotional payback
Third Sector organisations tend to be run along public sector principles. We believe this is wrong. In order to thrive, charities are advised to borrow from the private sector. Unlike the public sector, where funding is often given, charities must fight for income – just like private sector companies.
Charity funding sources need to be convinced before parting with cash — just like consumers need to be convinced before making a purchase. Essentially, a transfer of value sits at the heart of these transactions.
Whilst the value relationship is clearer in the commercial world, it also exists in the charity space. Someone donating to charity receives an emotional benefit. The World Giving Index 2023 report published last week by the Charities Aid Foundation finds that global generosity remains strong. To quote from the report, “4.2 billion people gave money, time, or helped someone they didn’t know in 2022”, representing 72% of the world’s adult population. It is also heartening to read that “the United Kingdom is now in the top three countries for donating money”.
The emotional payback from donating to charities can be multifaceted and deeply fulfilling. The typical top three emotional rewards individuals experience are:
Sense of Purpose: Donating provides a sense of purpose and meaning. Knowing that your contribution positively impacts others’ lives can give you a profound sense of fulfilment.
Joy of Giving: Many people experience joy and happiness from giving itself. Helping others can trigger positive emotions and a sense of accomplishment.
Connection and Empathy: Donating fosters a connection with the broader community and empathy towards those facing challenges. Understanding and addressing the needs of others can create a profound emotional connection.
The emotional payback can vary widely from person to person, and the impact of charitable giving is deeply personal. The emotional rewards often extend beyond the immediate act of giving, influencing one’s perspective on life and the interconnectedness of communities.
Charities can amplify these emotional paybacks through better use of data and metrics to support positive impact messaging and efficient use of donations. Imagine how much more money could be unlocked – and impacts increased through greater efficiency and transparency?
Conclusion
The approach we’re suggesting here will require widespread adoption for it to truly become effective across the sector. At SoGood, we’re laying the foundations by defining terms to help Third Sector organisations measure their contribution and demonstrate their successes. Watch this space.
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