Cost per outcome: The new crystal ball for nonprofit success
By Sidni Shorter In Accounting Posted July 3, 2014 0 Comments

Cost per outcome: The new crystal ball for nonprofit success

Nonprofits are constantly looking for new ways to demonstrate impact to funders, particularly to foundations that have less to invest and apply increased scrutiny to their grantees. So you can imagine why “How to predict the success of a nonprofit program before it starts” captured my attention in the Chronicle of Philanthropy.

Small foundations drawn to operating

According to the report, small and mid-sized foundations with assets between $1 million and $10 million granted almost as much money for general operating support as they did for program-specific support in 2013. In contrast, larger foundations with assets between $10 million and $50 million granted about two-and-a-half times as much program-specific money ($48 million) as general operating grants ($19 million).

The nonprofit sector has traditionally demonstrated progress on a social issue with custom reports that invent the wheel each time and are difficult to compare with equally unique reports about families saved, children fed or forests preserved. But what if there was a standard measurement that could forecast the potential success of a program before it started and be used to compare one program with another?

“Measuring how much it costs to produce a single ‘unit’ of impact, called ‘cost per outcome,’ can tell with a high probability whether a nonprofit program will work. This method can save charities time and money and can make it easier for foundations to choose which programs to support,” claims Perry Yeatman, principal and chief marketing officer at Mission Measurement.

From the Execute Now! perspective, we frequently provide forecasting reports for our clients, which are essential exercises in planning for different financial scenarios. Like the lender example, we’re, in essence, making educated bets based on a study of the data, or in our case, the budget.

The same logic applies to nonprofits that are using the cost per outcome method. For example, a program focused on teaching parenting for teen mothers would consider location, instructor experience, grandparent involvement, the mother’s grade level and the father’s participation. The nonprofit can weigh the costs and benefits of different scenarios such as length of program, paid or volunteer instructors, proximity to high-pregnancy neighborhoods and more. These factors may affect outcomes such as reach: Where one program might reach 500 mothers, another may reach 1,200.

Yeatman says while “cost per outcome doesn’t ‘prove’ program effectiveness in the same way a historical multiyear evaluation study does, it can pinpoint which programs are most likely to deliver the intended impact and forecast how much each will spend to achieve it.”

Not all programs lend themselves to this kind of analysis but for those that do, foundations and other funders can evaluate data with an 80 percent accuracy rate versus waiting for the results of a five-year longitudinal study to determine if their investment was well spent.

Some of the benefits Mission Measurement boasts with cost per outcome are:

  • It saves time. While other measurement programs take more than six months after a program is complete, cost per outcome can be done in a couple of weeks beforehand.
  • It can be done before the program begins. Cost per outcome is based on the existing analyses of thousands of programs so you can consider your measurements based on known factors ahead of time.
  • It creates data you can compare. Two programs trying to achieve the same outcome can easily be compared. Nonprofit A costs $1,500 to reach outcome Z while Nonprofit B costs $2,000 to reach outcome Z.
  • Nonprofits don’t have to spend a fortune on evaluation. Cost per outcome can cost as little as $5,000 per program, according to Yeatman. For an organization considering a $100,000 program, it’s a small investment to provide your board with some success insurance.

I encourage you to consider looking at your programs and determining if they can be evaluated on a cost per outcome basis. It would not only give your funders peace of mind to know you’re participating in a recognized form of measurement, but it would also help your staff easily determine how they compare with peer organizations as well as track internal progress from year to year. Ultimately, the cost per outcome method will give your financial reports greater meaning and a benchmark your board can better understand.

By Erica McGeachy Crenshaw, CEO of Execute Now!

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