Charity selection

By Tris Lumley
Senior Research Analyst
New Philanthropy Capital

Charitable giving can change people's lives. For example, £1,000 can provide a long-term social network for a disabled child, 50 nights of accommodation for families of sick children, transport to allow 50 housebound older people to take part in community activities, or emotional health support for nine pupils for a year. When donors give to effective charities, the results can be rewarding for everyone involved.

But how can donors make sure they choose effective charities to support? On what grounds should they make their giving decisions? In this article we outline the factors that New Philanthropy Capital (NPC) considers most important - return (ie results) and risk. We believe that thinking about these factors can help inform a donor's decision-making.

NPC was founded on the premise that charities should produce results and that resources should be allocated to follow those results. We undertake research on particular social issues or sectors of charitable activity, to identify effective charities producing significant results. Through published research and tailored advice, we aim to increase both the quality and quantity of resources available to the charitable sector.

Reasons for giving

The reasons for giving to particular charities are as numerous and diverse as the fields in which charities work. Giving by individuals is often driven by a personal connection with a cause, geography or individual charity, or by the identification of a strong brand within a particular area of work. Giving by professional funders (eg, grant-making trusts and foundations and public sector funders) is generally based on funding guidelines or criteria that help focus their impact.

Whatever the reasons for giving, it is generally true that most charitable giving is not based on results. By results we mean the actual changes that occur in people's lives as a consequence of the charitable activity being funded. This is remarkable, given that (we assume) charitable giving takes place in order to effect changes in people's lives. There are many possible justifications for the lack of connection between the reasons for giving and results. NPC believes that the main cause is that data on results is generally not available to funders. Because results are hard to measure and articulate, most charities do not have the evidence to demonstrate what they really achieve.

So how can a donor incorporate results into their decisions? Whether or not evidence is readily available, we believe that a good first step is to get into the mindset of thinking about return.

Return and risk

NPC's approach to charitable giving focuses on investing to deliver results, or equivalently, to generate a social return on that investment. We believe that charities producing the best returns should attract more funding. Of course, funding any charity (or indeed any business) necessarily involves accepting some level of risk (ie the risk that expected results may not occur).

Return and risk are, therefore, the fundamental criteria that NPC believes donors should consider when analysing charities. We look for evidence that a charity's results (whether proven or projected) are significant, relative to others working in the same field, and that the risks of failure are mitigated as comprehensively as possible.

The implication of this approach is not that donors should consider only those charities offering high returns at a low level of risk. Different donors will have different appetites for accepting risk, and so will be interested in organisations at different stages of development, certainty of results, and operational approaches. It is worth mentioning that the relationship between return and risk is not necessarily the same as that seen in the commercial sector, where there is a functioning market for funding. Without adequate information flows on return and risk, there is nothing to drive a relationship between the two factors.

Delving into detail

Return and risk are broad concepts. NPC's analytical approach breaks them down into several factors that a prospective donor might consider:

Return: the results of a charity's work

• Depth: Not all results are of the same magnitude. For example, a project providing information via a website on benefits available to a pensioner is likely to have less significant results than one which also helps someone through face-to-face contact to identify and apply for all the benefits to which they are entitled.

• Breadth: Not all results affect the same number of people. For example, a project examining the provision of palliative care services in a given county can have more far-reaching results if it shares these findings nationally.

• Change: Not all results lead to fundamental change, in that they may address the symptoms rather than the causes of a social issue. To tackle root causes successfully, results generally need to be achieved across a number of levels of society - at the level of the individual, their community, the services available to them and policy governing them, and society itself. For example, a project supporting the parents of children with special educational needs is likely to achieve real transformation only if it also campaigns for policy change and awareness throughout the UK, based on its experience of the issues.

Risk: the risk that a charity's work will not deliver the expected return

• Strategy & Concept: An untried concept may be risky but have great potential results. Equally, an activity or charity may not deliver results because it has not been designed to take into account all the factors that could influence its success (see also 'External risk'). These risks can be controlled by developing a strong strategy and logical model showing how the work will deliver results.

• Management: A charity that lacks strong leadership, clarity of vision and management structure is risky. These risks can be controlled by establishing the style, strength and capacity of a charity's management.

• Operational: A charity lacking the operational capacity (ie processes, staff, systems) to deliver potential results is risky. These risks can be controlled by establishing a charity's capacity in detail in each of these areas.

• Financial: A charity can face many financial risks, such as the loss of a particular funding source. These risks can be controlled by actively managing funding sources, such as by diversifying funding sources and working to replace expiring funding sources well in advance of them coming to an end.

• External: A charity can face many external risks, based on factors that are beyond its direct control - such as other organisations or stakeholders, or social, economic or political factors. These risks can prevent a charity from delivering its planned results, regardless of the charity's operational success. For example, a charity may deliver high-quality training courses to get people into employment, but its clients may not be able to obtain jobs if the local economy suffers a downturn. These risks can be controlled by regularly monitoring external conditions and influences.

As well as analysing return and risk, NPC also assesses organisational capacity. Further details of our analytical framework are available online. This brief overview of NPC's approach to return and risk is expanded in our forthcoming report: Funding success.

What does this mean for donors?

Analysing all of the detail above when looking at the return and risk associated with a charity requires a significant investment of time and effort. We understand that some donors will be unable to reach this level of detail in their own decision-making, and we have outlined the factors here to provide food for thought.

Furthermore, NPC exists to bridge this gap, providing donors with advice based on research and rigorous analysis. Our published research includes reports on specific social issues (eg domestic violence) and sectors (eg older people), as well as charity recommendations which give our detailed analysis of specific charities focusing on these issues and sectors. We offer donors a balanced portfolio of charity recommendations in terms of risk, in each of the fields that we research.

New Philanthropy Capital (NPC) is a charity that advises donors and funders on how to give more effectively. It does this providing a combination of independent research and tailored advice. The research identifies charities that are achieving excellent results, and where funds can be effectively targeted, and can be downloaded from NPC's website, www.philanthropycapital.org.