Wednesday, July 2, 2008

When It Comes to Nonprofits, Does Location Really Matter?

by Jeongyeon Shim, Domestic Program Analyst, FasterCures

Recently, Charity Navigator published its sixth annual Metro Market Study. The study ranks 30 different metropolitan areas based on the financial performance of nonprofit organizations in each area. Based on the aggregate performance of nonprofits for each metropolitan area, the areas are ranked according to CEO compensation, level of financial reserves, volume of funds raised, and other Charity Navigator financial metrics.

Some nonprofit experts and concerned individuals have highlighted, in various venues, the limitations of Charity Navigator’s focus on financial performance in evaluating nonprofit organizations. Financial metrics based on data from tax forms have the advantage of being available for most organizations, but they provide limited insight into an organization’s actual impact or potential. For this reason, FasterCuresPhilanthropy Advisory Service (PAS) program focuses on the qualitative aspects of nonprofit disease research organizations, including their strategies, management policies, governance structures, and results-to-date.

I am concerned that the Metro Market Study’s focus on financial metrics may provide an unbalanced view of the performance of nonprofit organizations and wonder about the consequences of prioritizing geographic location above all other considerations. What insight does this singular focus on location convey?

Some nonprofit organizations, especially those serving local communities, operate on a local level, and for those organizations, location does affect both their missions and financial performance. However, there are also a sizeable number of organizations whose missions are to serve on a national or even global level. Therefore, the importance of location is different across the types and missions of the organizations—which does not seem to be taken into account in the Metro Market Study.

Fundamentally, I question the value of using location as the first criteria to analyze the financial performance or concluding that charities operate according to the general practices of their metropolitan areas. For example, the focus of FasterCures’ PAS program is on nonprofit organizations engaged in medical research and none of the organizations to be studied aim to develop a treatment only for the residents of the community where they are located, rather they aim to find cures for all. This is true not just for the mission of the organizations, but also for its financial aspects. For example, all of the five organizations ranked as raising the most funds through special events, as reported by Charity Navigator’s Special Event Study, conduct their fundraising events across the country, rather than just in the community where they are headquartered.

Another concern I’d like to raise is the ultimate value of the information produced through this study. Should a nonprofit organization based in Detroit, the metropolitan area with the lowest overall score (Charity Navigator’s measure for overall financial health), move to Miami, which has the highest overall score, and would its financial situation improve (or can it even move given its mission)? Probably not. The same goes for donors. Should the donors make their giving decision based on the location of the headquarters or take the location as a sign of financial health? And how will this help donors interested in giving to nonprofit organizations based in their own community?

A comprehensive analysis of other factors, such as the organization’s area of focus, strategy, process, and governance structure, are probably needed and more important than headquarter location in guiding giving decisions and determining the drivers of financial health.

Charity Navigator is one of the largest databases on nonprofit organizations with a wide scope of coverage. These advantages can be used to understand the key drivers of growth and performance in nonprofit organizations and conduct meta-analyses to understand larger trends. Its analysis of the nonprofit marketplace should focus on variables that really matter—I felt the Metro Market Study fell short of living up to its potential.

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