Evaluating the charity evaluators

As any nonprofit client or prospective client who has worked with me can tell you, I am committed to nonprofits providing documented proof of legitimacy to donors.

I don't work with or support scammy appeals or organizations, and I qualify my clients on many of the same criteria that donors use. Why? Because if they can't meet minimum reporting  requirements, they aren't going to find funding. I do a lot of research to ascertain if they have a shot at succeeding with their funding plans.

Unfortunately, some of the research resources available to me don't cover most of the clients I serve.

I'm talking about the so-called charity rating or evaluation sites/organizations. Most of these organizations do not rate any charity that files anything other than the 990. They don't accept audited financial statements, annual reports, 990EZ's and certainly not the 990N, the so-called postcard.

In effect, that means that if your revenues aren't already well above six and even seven figures, you aren't going to get rated.

For instance, one of the best known and most highly respected evaluation organizations is Charity Navigator (CN). I use them where applicable, and I support their mission to bring transparency to the world of charitable giving, so I definitely don't have an axe to grind with them. And you can access information about some smaller charities, you just can't get a rating for them.

CN's rating criteria is an excellent example of the shortcomings of the methods used to rate public charities. They don't rate every public charity, not even close to it. They rate about 7500 charities as of July 2014, according to their own reporting. The National Center for Charitable Statistics (NCCS) lists over 1 million 501(c)(3) IRS-approved organizations in the U.S. as of 2010.

You can't even get a rating from these ratings organizations unless your nonprofit meets certain criteria.  For example, on CN's website they list this information relative to qualifying revenue dollar amounts and length of time in business required to receive a rating:

"We do not evaluate organizations that file the Form 990-EZ. The Form 990-EZ requires less financial reporting than the Form 990, and as such, we would lack important data needed in our analysis.

Sources of Revenue:  Because our goal is to help individual givers, we evaluate only those charities that depend on support from individual givers. Specifically, we require public support to be more than $500,000 and total revenue more $1,000,000 in the most recent fiscal year. And we do not review charities that receive most of their funding from government grants, or from the fees they charge for their programs and services.

Length of Operations: We require 7 years of Forms 990 to complete an evaluation."

In theory, I don't have a problem with revenue or time in business being used as qualifiers. The 990 is a legal document that implies that the data is certifiably reliable, and that's a good thing. It's not only the criteria that the rating sites use, it's the criteria used by both grantors and individual donors as well.

Substantial existing revenue and longevity certainly impact the effectiveness and scalability of programs, so I understand why it is important to both rating organizations and grantors or donors. It's good in theory, as far as it goes.

When theory meets reality

Between theory and practice there often exists a wide gulf. In practice, these ratings almost guarantee that substantial funding for smaller nonprofits is, if not nonexistent, certainly drastically curtailed.

Again, it isn't the concept of ratings I oppose. Anything that protects donors from the all-to-prevalent con artists using charity as a cover story is a good idea. But it allows for some serious gaps that put both smaller nonprofits and the general public at risk.

As someone who works with both start-up and small but established nonprofit clients, I can attest that concept doesn't serve to maximize diversity in problem solving.

In general, small nonprofits aren't particularly attractive grantee prospects until they have been around for awhile. Typically about three years is the point at which they are somewhat stable and have results to display. That still leaves a big gap between three and seven years, at precisely the point where the nonprofit needs to be actively growing.

Obviously, these rating favor larger charities. But is larger always better?

Large organizations tend to be cumbersome for front line staff working at the grassroots level. There are so many layers of bureaucracy to penetrate that some of the best solutions to problems never make their way into the communities or demographic that the parent organization purports to serve.

Still, size does matter. The larger the organization, the larger the revenue line gets and that supposedly equates to greater effectiveness. For charities working at the local level, that simply isn't true. In a way, when we only donate to the big, visible and well funded charities, we may in fact be perpetuating rather than solving problems.

At the same time, we want to know that the money we donate isn't going to pay for a fancy car or a private island in the Bahamas for the CEO or the charity founder. The only somewhat objective way we have to assess legitimacy is through the rating organizations. It's a vicious cycle. You can't get rated without money, and you can't get money without being rated.

Why should we care about some little grassroots charity?

All industries need new ideas and fresh approaches. The communications industry did not develop the personal computer, the shoe-box sized mobile phone or the smartphone. They exist because someone saw a need to approach old problems in new ways. Every big company was once a small company.

Not every charity should survive, any more than any other small business should survive. Be that as it may, there is a huge gap between 7500 and 1,000,000-plus. Somewhere in that gap there are good small organizations with the potential to become much greater forces for good.

If not this way, then how?

There has to be a better way to evaluate start-ups and smaller organizations for effectiveness than just their revenue.

When revenue is the main criteria for even selecting a charity for review, it does a disservice to everyone.

If a small or newer charity is taking in $50,000 and growing that figure by 10% Y-O-Y and achieving maximum impact with that money,  it may very well have discovered or implemented an approach that can be repeated elsewhere if it can expand. It can't build capacity without more money, and it can't get more money if prospective donors can't research it. Capacity building grants are usually not something that are awarded without considerable research by the grantor and most of them start with the ratings organizations.

 Instead of growing, many of these smaller NPO's struggle at the same level year after year, never realizing their full potential. They can't hire better, more effective staff or attract capital because from a ratings standpoint they simply don't exist.

If the goal of charity evaluators is only to keep existing organizations in business and stifle competition for already scarce support dollars they do a very good job. If they exist to help donors make informed decisions about supporting new blood and better ways to solve problems, I rate them at less than one star.

What's the answer?

There has to be a way for these evaluators to include a "small organization" component.

Perhaps they could reduce or eliminate the revenue requirement in favor of an effectiveness rating for smaller organizations.

Smaller nonprofits could receive a rating like "effectiveness increasing, effectiveness adequate or insufficient effectiveness". The financial reporting might be accomplished by accepting audited or accountant's reviewed financials or annual reports together with the 990EZ. Or even put them on a progress watch list. If they continue to report stable performance for a period of time, they could receive a "OK to donate" stamp.

What are your thoughts on the matter?