Effective impact measurement for NFP boards

The Australian Institute of Company Directors (AICD) has developed a new guide to help boards understand impact measurement for NFP organisations. 

Impact measurement is increasingly recognised as a core requirement for good governance. This is especially true for the not-for-profit (or for- purpose) sector, where boards have a responsibility to report to funders, donors, clients and other stakeholders on the extent to which their organisation is achieving its stated mission or purpose. Measuring impact provides that assurance to funders.

Why measure impact

Board discussions can potentially have a disproportionately inward focus on the organisation and financial performance. Impact measurement changes this to an outward focus on outcomes created for clients, communities and systems. Performance information, at program and organisational levels, enables boards to assess, monitor and make decisions about the level of risk they are willing to take to create impact.

The trade-off between risks and returns is known as the risk-return equation. In a for-profit context, the risk-return equation relates to the level of risk an organisation is willing to take to create a financial return for shareholders, while managing reputational risk and compliance obligations.

Many NFP boards have a lower financial risk appetite for a variety of reasons. However, the risk of not taking action might mean not achieving impact.

Investing in new service design and implementation comes with risk, but without it, your impact may stagnate or go backwards. By measuring impact, your organisation reassures the board that progress aligns with the organisation’s purpose and demonstrates impact to a broad range of stakeholders. It also provides crucial performance information to assess and manage risks associated with future actions.

What boards should know

An understanding of the key concepts and purposes of impact measurement empowers the board to request evidence-based information, ask the right questions and make informed decisions focused on impact. In the same way that boards should receive, understand and respond to financial information about the organisation, the board should have a similar governance role regarding impact.

The AICD’s Impact measurement and governance guide outlines five principles of effective impact measurement:

1. Focus on the impact and work backwards

Many monitoring and evaluation frameworks focus too heavily on the activities of an organisation and not enough on what happens because of those activities. An impact measurement framework should begin with the benefits that the organisation wants to create for the clients and/or communities it serves. Boards or organisations can trace activities back from there as lead and lag indicators of that impact.

2. Measure only what matters

If you’re not going to use particular data to make decisions, do not collect it. Use insights gathered to tell an authentic and compelling story about how your activities create impact and inform strategic decisions.

3. Keep it simple

A complex measurement system will discourage people from capturing quality data and engaging with the framework, as well as being time- consuming and costly to manage.

4. Check materiality of findings

In impact reporting, question whether the outcomes achieved are material or significant compared to other programs for a similar cohort.

5. Embed impact measures into decision- making processes

If impact measurement is relegated to the annual report, it becomes a burden rather than a tool. As the organisation gains insights, respond to that information as soon as possible, for example by linking measurement reporting to a standing agenda item for board and executive meetings. The fundamentals of impact measurement include a problem statement about what your organisation seeks to address and it is important to identify the target cohort or the specific group that the organisation serves.

NFP organisations often have a diverse range of target groups that benefit from their activities. A target cohort can also include activities that impact, for example, the environment or animal welfare. Identifying potential results or outputs, and measuring to what extent they were achieved, as well as recognising and reporting outcomes, can help discover impact. Short, medium and long- term outcomes need to be considered and discussed.