Friday, September 12, 2008

Measuring the Effect of Nonprofits

A looming question in the nonprofit world is how to measure the efforts of the mission-driven organization. Has the world become better since the organization was formed? Has the organization created value in other ways? Lately, nonprofits and NGSs have been challenged to measure their efforts.

Recently, MBA students at Harvard Business School were challenged to measure the efforts of two environmental organizations—Greenpeace and The World Wide Fund for Nature (WWF--formerly, the World Wildlife Fund) http://hbswk.hbs.edu/item/5797.html. Since Greenpeace and WWF’s goals are not linked to a profit-objective, the MBA class looked at how the organizations create value. In the very general sense of the word, the students concluded that both organizations call people’s attention to environmental issues, lobby business to change policies, and influence governments to put laws in place to improve environmental issues.

Looking at value from an economic point, the class compared willingness-to-pay (WTP) to cost as a measurement of the economic value of the organizations’ efforts. The students were asked, hypothetically, how much each of them was willing to contribute each year to protect the earth against degradation. If each student is willing to put $1 toward the protection of the earth, that equates to approximately $6 billion per year. If the top 5,000 global corporations were willing to pay $200,000 per company per year, there would be another $1 billion. In addition to these, governments might be willing to add another $1 billion. These amounts would add up to $8 billion. On the cost side, if Greenpeace and WWF have campaign costs of $677 million, there is a $7.2 million gap between WTP and cost. This might be one way to measure economic impact.

However, according to Professor Ramon Casadesus-Masanell, the case study showed that nearly all of the captured value of the two organizations is for the public good. This leads to the problem of free-riding, whereby people are able to enjoy the public good such as cleaner air and uncontaminated water without doing anything themselves. “The major challenge for both organizations is that they are dealing with a public good. Considering that a public good is non-excludable and non-rival, it is difficult to make people pay for it. People will free-ride since they can access the improved environment without paying.”

This cuts across governments, countries and societies, as well as individuals. If one country moves to stringent environmental policies, the other is better off by staying with lax policies because it will incur less cost and accrue more benefit. The class discussed some generic strategies to change this equilibrium, based on an example of improving the air quality by reducing CO2 emissions, i.e., the structure of the Kyoto Protocols: 1) Increase the cost of current policies. 2) Increase the benefit of a stringent policy. 3) Encourage governments and companies to move away from maximizing their own benefit and make them look at the greater good.

In the end, can any economic value be captured by studying the nonprofits’ efforts toward the public good? According to Casadesus-Masanell, Greenpeace and other similar NGOs have been formed to make sure that the public good is supplied by changing the payoffs of those who can supply it, but the value creation and the capture angle is but one perspective; most environmentalist (and social resource workers) would be quick to point out that the debate extends far beyond economics.

You can read the interview with Professor Casadesus-Masanell at: http://hbswk.hbs.edu/item/5797.html.

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