Economic Impact: A New Approach for Proving Outcomes

Impact. Defining it is often difficult. Measuring it can be harder yet. And the final step—communicating impact—remains a formidable challenge for many organizations. 

Even in the midst of a climate primed for moderate economic growth, success in the nonprofit sector is elusive. Supporters, donors, and funding organizations comprise a limited pool of financial sustenance, which nonprofits of all shapes and sizes must continuously vie for with their messages to affirm the worthiness of their missions. 

It’s a competition rife with nuance and largely decided by how substantially nonprofits can prove the mission-focused impact of their work. For decades, they have relied on two dimensions—efficiency and effectiveness—to define and frame their success. But these approaches are limiting and in some cases even detrimental when proving outcomes. 

Luckily, nonprofits can supplement the shortcomings of these traditional means. There’s a more dynamic and tangible third dimension through which nonprofits can define, measure, and communicate their success: economic impact. 

Traditional Methods 

Maximizing output per unit of input is virtually always optimal, and like any organization, nonprofits must maintain efficient operations for their own financial survival. Still, efficiency doesn’t meaningfully translate to impact. 

The profit motive paradigm drives a for-profit’s efficiency and provides a clear frame for measurement, but this doesn’t transfer to the nonprofit realm, where organizations’ goals are diverse. Inconsistency and complexity lead to narrow definitions of nonprofits’ efficiency. 

Overhead ratios are a prime example. Even complex ratios accounting for specific expense allocations tell nothing about the benefits a nonprofit creates. Instead, they inwardly focus on an organization’s expenditures. Realistically, to reduce overhead and improve its ratios, a nonprofit can cut costs—without regard to the potential benefits lost. 

Where efficiency measures fall short in this regard, nonprofits often use storytelling to demonstrate the benefits of their work. Stakeholders crave proof points around outcomes, and stories provide tangible examples of impact that can be more compelling than recitations of an organization’s finances. 

As such, many nonprofits have been doubling down on their content marketing efforts to showcase real outcomes and galvanize stakeholders to amplify their support. But while these stories focus outwardly on outcomes, they tend to be narrow in scope and often lack the quantifiable proof—or “return on social investment”—that so many supporters now demand. 

Economic Impact

Enter the third dimension of impact: economic impact. At a high level, this is the quantifiable effect that an economic event has had or will have within a regional economy—be it the opening of a new hospital system, a change in policy or law, or a trade show. 

Through studying this effect, nonprofits can measure how spending from such an event flows through a regional economy using metrics such as spending, tax revenues, job creation, and labor income that can be linked to their organization. 

To quantify in terms of dollars, the economic effect of a nonprofit’s spending is divided into two components: direct spending and secondary spending. Direct spending is the money a nonprofit—or visitors in the regional economy due to the activity of the nonprofit—spends directly. It’s re-circulated throughout the regional economy, creating secondary spending. This encompasses subsequent rounds of spending in the regional economy and is divided into two parts: indirect and induced spending. 

Indirect spending represents gains in industries within the regional economy where the direct spending occurred. For example, when demand for services at a nonprofit hospital grows, patient payments increase (direct spending), and the hospital must increase its spending on supplies and personnel resources (indirect spending) to keep pace. Induced spending represents increases in regional spending due to increased income associated with direct spending. If the hospital’s employees work overtime to keep up with the increased demand, for example, the money they spend in the regional economy with their extra earnings is induced spending. 

Economists first gather information about direct spending associated with the nonprofit—often from the organization’s financial statements, surveys of people who benefit from the nonprofit, or analysis of macroeconomic information. They create estimates of secondary spending through input-output models that trace the spending through the regional economy by accounting for industry interactions. These interactions are the spending by each industry to acquire inputs (such as raw materials and labor), which are necessary to produce outputs (such as goods and services) used within the regional economy. The models also account for the various outflows from the region to the rest of the nation’s economy (commonly referred to as “leakages”). Finally, economists use estimates of direct spending and input-output models to calculate secondary spending—a frame they can also use to measure economic impact in terms of jobs. 

Notably, these studies can help nonprofits—charities, in particular—understand the economic impact for those that benefit from their services most directly. For instance, analyzing a food bank’s impact can shed light on how its services are contributing financially to the employment, health, and education of community members. When a nonprofit ameliorates food insecurity within a community, children achieve higher academic success and, ultimately, more gainful employment. Providing food also reduces illness, which minimizes parents’ time away from work and can lead to reductions in medical services. An economic impact study examines and quantifies all direct expenditures by the nonprofit to support the family, and then calculates the total economic impact within the community by estimating the secondary spending throughout the economy.

Given the diversity of nonprofits and their varying definitions of success, these studies provide a unique opportunity to pinpoint an organization’s direct economic contributions, and then contextualize this impact within their community. Each organization requires its own analysis, but the approach is entirely adaptable—regardless of a nonprofit’s size, structure, or focus.

Looking ahead, competition for funds and advocates will remain entrenched, prompting more nonprofits to reevaluate what they are communicating to those whose support they seek. Through shifting their lens outward and into the full scope of their economic contributions, nonprofits can better understand their impact and more successfully communicate their success to build on it moving forward. 

Read more stories by James D. Woods & Chris W. Johnson.