I recently read an interesting interview on the New Philanthropy Capital website (www.thinknpc.org), with David McCulloch, the Chief Executive of the Royal Voluntary Service, talking about charity impact and some future trends for UK charity funding.

http://www.thinknpc.org/blog/the-time-is-now/?utm_medium=email&utm_source=New+Philanthropy+Capital&utm_campaign=4722080_3nd+eshot+Annual+Conference+Oct+2014-+September&dm_i=UL9,2T7KW,5JWQUY,A7PDC,1

Mr McCulloch said that ‘the challenge (of charities measuring and evaluating the effectiveness of what they do) is really what to measure and how.’ My own take on this is that impact is a three legged stool – impact outputs, impact outcomes and impact communication. Charities who want to be effective, therefore need to report not only impact outputs, but stretch to reporting impact outcomes as well. And unless they are able to communicate impact back to donors and to potential donors, as well as their own staff & other stakeholders, then a significant portion of the value of impact measurement is lost. It follows that a charity won’t be perceived by donors/potential donors to be as effective (as it could be), if it manages what it cannot measure, if it prioritises what it cannot measure and if it bases its goals & strategies on something it cannot confidently measure. Perhaps some future charities will design their scope around being impact-led, but only where impact can be confidently measured.

Arguably, impact communication, like political speeches, is as much about reaching heads as reaching hearts.  Impact communication and impact outcome-reporting also needs to overcome two challenges. Firstly, of an extended value chain (where the charity donor or ‘principal’ providing the funding, perceives themselves as being too many steps removed from beneficiary results in the field). And secondly, of a concurrent value chain (in a disaster-relief setting, where multiple charities provide different forms of aid to the same beneficiaries, with multiple charities jointly saving lives and rebuild societies, but making discrete impact measurement more problematic).

New Philanthropy Capital, in the same interview stated that ‘charities have to work out ways that are proportionate to their size and resources.’ Mr McCullock’s response was that ‘it’s about measuring the thing that will best demonstrate your impact’ and that ‘new services are sometimes the best place to start.’  My take on this is that perhaps charities need to use leverage more routinely to avoid the constraints of their size and resources, to achieve the impact they seek. Does enough time get spent by charity senior management examining what and how leverage can be used to achieve charity goals? Furthermore, for an established charity, rather than measure impact on new services as they are developed, why not re-define all services in the context of what impact can be measured, since arguably impact is to charities what share price is to companies.

For substance-abuse charities, one aspect of leverage is examining how existing sufferers can help beneficiaries, since their credibility (deterrence and rehabilitation) is probably higher than for charity workers. Can sufferers help other sufferers, can early-onset sufferers help late-stage sufferers, can rehabilitated sufferers help early-onset sufferers? Perhaps impact is increased by using leverage, since rehabilitated and early-onset sufferers can gain new skills and strengthen their own lives as they help those less fortunate. The role for charity workers in the same scenario? Act as leaders and guides, supplying information and logistical help to the rehabilitated and early-onset sufferers helping others.

What about leverage in fundraising? Are charity resources best used by employing ‘chuggers’ to randomly collect small change from people on the streets? Why not instead invest on online business models to profile and solicit funding from wealthy individuals instead, linked to impact measurement and compelling storylines that target both head and heart?

What about exploiting charity leverage using a different business model – should small charities switch to mimicking SME start up business models and digital start up models, with light governance structures, global reach, low to medium upfront fixed costs and very low variable costs?

Lastly, what about exploiting charity leverage by revisiting incentive theory (principal-agent contracts)? Fundraising perhaps needs to create innovative contracts that recognise moral hazard (hidden action) and adverse selection (hidden information) issues for donors and potential donors. Such contracts could explicitly include impact reporting in the terms of the contract, in ways that reassure donors and increase total donor funding. In designing such contracts, charities would have to give more thought to which contracts are one-off or repeat game, which principals are risk adverse (and how), and what additional funding they could get from donors as information disclosure rents.