3 steps to effective benchmarking

Benchmarking your organization against set standards for productivity — and, yes, profitability — is a widely recognized method for boosting performance. Yet many nonprofits engage in the practice only sporadically, forfeiting some significant benefits. Make the process simple by following this three-step sequence.

  1. Overcome resistance

The staff and board of directors aren’t always “into” benchmarking. They may, for example, believe that the practice is more appropriate for profit-driven organizations than for mission-focused work. They might feel that mere numbers can’t capture the true impact of a program or an organization. Or they may think that every organization is unique, making useful comparisons impossible.

But other stakeholders take a different stance, and their opinions may help sway staff and the board. Funders, in particular, increasingly rely on benchmarks to assess effectiveness when making funding decisions. Moreover, benchmarking provides critical information when developing and executing strategic plans. It can help you identify strengths, weaknesses and opportunities. And benchmarking allows not-for-profits to keep a steady eye on their financial health.

  1. Focus on what’s important

When you’re ready to move ahead with benchmarking, select the right metrics — those that are vital to meeting your mission and most reflective of your operational effectiveness. They could relate to a variety of areas, from fundraising (for example, dollars raised or average gift amount) to online presence (number of followers or retweets).

Many nonprofits, though, begin by focusing on the following:

Program efficiency (program expenses / total expenses). Program efficiency is a popular metric because — rightly or wrongly — it garners attention from stakeholders, especially funders. It measures the amount you spend on your mission vs. administrative expenses. The ideal ratio is 1:1, but because this is so unlikely, benchmarking your score against your peers’ is necessary to truly evaluate your efficiency.

Organizational liquidity (expendable net assets / total expenses). This metric considers the percentage of your annual expenses that can be covered by your expendable equity (as opposed to reserves or restricted assets). Higher scores mean greater liquidity.

Operating reliance (unrestricted program revenue / total expenses). This calculation shows whether you could pay all your expenses solely from your program revenues. A figure close to 1:1 is very strong. But, again, comparing it with your peers’ ratios will tell you if you’re on solid ground.

Of course, you must be able to gather the requisite data, whichever metrics you end up using. That’s where nonprofit rating websites like Charity Navigator and GuideStar come in handy. You can scrutinize other organizations’ financial information, and the sites calculate scores for some of the most common metrics. You also might tap trade association and government databases (for example, the IRS’s Tax-Exempt Organization Search or those kept by state tax agencies and attorneys general) for information, including audited financial statements.

  1. Take action

There’s no point benchmarking if you aren’t going to take the final step of leveraging your newfound knowledge to bolster performance. Start by conducting a root-cause analysis of the areas with the lowest scores to get to the bottom of the problems. Then develop short- and long-term solutions.

Also consider arranging interviews or less formal discussions with representatives from peer or other organizations that boast high scores in areas where you fall short. You can use these to pick their brains for advice, short cuts or best practices that you can adapt for your own organization.

No time like the present

It’s easy to stall on seemingly non–mission-critical tasks like benchmarking, but knowing where you stand is the key to long-term sustainability. Your financial advisor can give you a hand choosing the right benchmarks, collecting data and developing improvement plans.