Successfully Communicating Nonprofit Success – Part Two: Impact

Last month, we discussed broadly the importance of defining, measuring and communicating nonprofit success in terms of efficiency and effectiveness. This week, we’ll discuss communicating nonprofit impact, and offer considerations as organizations look ahead.

Impact

These first two dimensions of success have relatively narrow focuses. Quantitative measures of efficiency focus on the internal operations of an organization, whereas qualitative success stories focus on the specific actions and outcomes it has achieved. A third option—economic impact studies—provides yet a broader perspective into a nonprofit’s impact.

Generally, economic impact studies quantify the effect that an economic event has had—or will have—within a regional economy. Economic events include activities such as the opening of a new hospital system, a change in policy or law, or a trade show. Essentially, the studies measure how spending associated with an economic event flows through a regional economy using metrics such as spending, tax revenues, job creation and labor income. In the case of nonprofits, to quantify the economic impact of an organization in terms of dollars, one examines the economic effect of spending that can be linked to the nonprofit. This activity is divided into two components, direct spending and secondary spending.

Direct spending is the money spent directly by nonprofits or visitors in the regional economy due to the activity of the nonprofit. The direct spending is re-circulated throughout the regional economy, creating what is called “secondary spending.” Secondary spending measures subsequent rounds of spending in the regional economy, and is divided into two parts, indirect and induced spending. Indirect spending represents gains in industries in the regional economy where the direct spending occurred. For example, when demand for services at a nonprofit hospital grows, patient payments increase (direct spending), and the hospital must subsequently increase its spending on supplies and personnel resources (indirect spending) to keep pace. Induced spending represents increases in regional spending due to increased income associated with direct spending. For instance, if the hospital’s employees work overtime to keep up with the increased demand, the money they spend in the regional economy with their extra earnings is induced spending.

When conducting an economic impact study, economists first gather information about the direct spending associated with the nonprofit. This information may come from the organization’s financial statements, surveys of people that use or benefit from the nonprofit or from analysis of macroeconomic information. Estimates of secondary spending are created through the use of input-output models that trace the spending through the regional economy by accounting for industry interactions. These interactions are the spending by each industry to acquire inputs, such as raw materials and labor, which are necessary to produce outputs, such as goods and services, used within the regional economy. These models also account for the various outflows from the region to the rest of the nation’s economy, which are commonly referred to as “leakages” since they represent funds that are leaving the regional economy. The more spending that is focused on goods and services produced in the regional economy, the lower the leakage. Finally, estimates of direct spending and input-output models are used to calculate secondary spending.

To quantify the economic impact in terms of jobs, one determines the number of positions that can be linked to the nonprofit. Similar to a spending analysis, the number of jobs can be divided into direct jobs, indirect jobs and induced jobs. Direct jobs are the number of employees working at the organization in a specific region. Continuing the nonprofit hospital example, direct jobs are those held by the hospital staff, whereas indirect jobs are held by employees at the organizations and companies that supply and support the hospital. The increased wealth of employees generated through the salaries in direct and indirect jobs creates demand of additional goods and services. These additional goods and services are provided by individuals that hold induced jobs.

These studies also offer nonprofits—charities, in particular—the ability to understand the economic impact for those that benefit from their services most directly. For instance, analyzing a food bank’s impact can shed light on how the organization’s services are contributing financially to the employment, health and education of specific members within a community. It is well-documented that hunger and food insecurity can hinder a child’s success in school and subsequent employment. Improving success in school leads to better grades and, ultimately, gainful employment. A nonprofit’s spending to assist the child’s family therefore supports the regional economy through spending by the recipient. Providing food for children also reduces illness, which minimizes time that parents have to be away from work, and can lead to reductions in medical services provided by other charitable organizations. An economic impact study examines and quantifies all of these direct expenditures, and then calculates the total economic impact by estimating the secondary spending in the economy.

Given the diversity of nonprofit organizations and their varying definitions of success, economic impact studies provide a unique opportunity to pinpoint an organization’s direct economic contributions in terms of spending and jobs, and then contextualize it within the very community it serves. In other words, while efficiency measures quantify an organization’s internal use of funds, impact studies determine an organization’s external contributions. Each specific organization requires its own unique analysis, but the approach is entirely versatile and adaptable—regardless of a nonprofit’s size, and regardless of whether it is a public charity, private foundation, international NGO, cultural and arts organization, trade association, health and human services provider, or institution of higher education.

Looking ahead

Our current economic environment provides an opportunity for nonprofits to recover financially, but it does not guarantee their success. Now more than ever, long-term and sustainable growth requires that nonprofits build goodwill and trust of their supporters through demonstrating the positive impact of their work in meaningful ways. To do so, nonprofits should maintain a dynamic and differentiated approach when it comes to communicating their success to key stakeholders. This involves a combined focus on both the quantitative measures of efficiency and the qualitative stories of the organization’s outcomes and benefits within the community it serves.

Not to be overlooked in this mix, however, is the option for a more robust economic analysis of a nonprofit’s work. This extends beyond the isolated outcomes that an organization’s programs achieve. It shifts the lens of success outwards—toward the community and the regional economy at large—in order to quantify a nonprofit’s contributions to spending, revenues and jobs. In doing so, these studies provide a powerfully tangible proof point around the real economic value that a nonprofit delivers to a community.

As those in the industry know, this total value can be quite large. But historically, nonprofits have not had the processes and tools at their disposal to quantify its full scope, and then leverage those insights in order to build on their successes. Looking ahead, the economy will hopefully continue its gradual upswing, but competition for funds and advocates will remain entrenched, prompting more nonprofits to reevaluate what they are communicating to their key audiences in order to bolster support. As a profound opportunity to demonstrate impact within a community, economic impact studies are still a largely untapped approach, but we expect to see more organizations waking up to their full potential in the months and years ahead. Those who do should find themselves at a real advantage.

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