Organizational effectiveness is the concept of how effective an organization is in achieving the outcomes the organization intends to produce. The idea of organizational effectiveness is especially important for non-profit organizations as most people who donate money to nonprofit organizations and charities are interested in knowing whether the organization is effective in accomplishing its goals.
However, scholars of nonprofit organizational effectiveness acknowledge that the concept has multiple dimensions and multiple definitions. For example, while most nonprofit leaders define organizational effectiveness as 'outcome accountability,' or the extent to which an organization achieves specified levels of progress toward its own goals, a minority of nonprofit leaders define effectiveness as 'overhead minimization,' or the minimization of fundraising and administrative costs.
According to Richard et al. (2009) organizational effectiveness captures organizational performance plus the myriad internal performance outcomes normally associated with more efficient or effective operations and other external measures that relate to considerations that are broader than those simply associated with economic valuation (either by shareholders, managers, or customers), such as corporate social responsibility.
An organization's effectiveness is also dependent on its communicative competence and ethics. The relationship between these three are simultaneous. Ethics is a foundation found within organizational effectiveness. An organization must exemplify respect, honesty, integrity and equity to allow communicative competence with the participating members. Along with ethics and communicative competence, members in that particular group can finally achieve their intended goals.
Foundations and other sources of grants and other types of funds are interested in organizational effectiveness of those people who seek funds from the foundations. Foundations always have more requests for funds or funding proposals and treat funding as an investment using the same care as a venture capitalist would in picking a company in which to invest.
Organizational effectiveness is an abstract concept and is difficult for many organizations to directly measure. Instead of measuring organizational effectiveness directly, the organization selects proxy measures to represent effectiveness. Proxy measures may include such things as number of people served, types and sizes of population segments served, and the demand within those segments for the services the organization supplies.
For instance, a non-profit organization which supplies meals to house bound people may collect statistics such as the number of meals cooked and served, the number of volunteers delivering meals, the turnover and retention rates of volunteers, the demographics of the people served, the turnover and retention of consumers, the number of requests for meals turned down due to lack of capacity (amount of food, capacity of meal preparation facilities, and number of delivery volunteers), and amount of wastage. Since the organization has as its goal the preparation of meals and the delivery of those meals to house bound people, it measures its organizational effectiveness by trying to determine what actual activities the people in the organization do in order to generate the outcomes the organization wants to create.
Organizational effectiveness is typically evaluated within nonprofit organizations using logic models. Logic models are a management tool widely used in the nonprofit sector in program evaluation. Logic models are created for specific programs to link specific, measurable inputs to specific, measurable impacts. Typically, logic models specify how program inputs, such as money and staff time, produce activities and outputs, such as services delivered, which in turn lead to impacts, such as improved beneficiary health.
Activities such as administration, fundraising, and volunteer training are important inputs into organizational effectiveness because although they do not directly result in programmatic results, they provide the essential support functions needed for the organization to successfully finance and administer its programs. These other activities are overhead activities that indirectly assist the organization in achieving its desired outcomes.
However, some nonprofit watchdog agencies regard overhead spending not as indirect program spending but as in indication of organizational ineffectiveness or inefficiency since funds are not being spent directly on programs. Cost ratios such as overhead are much simpler to measure than actual programmatic results and can be easily calculated from publicly available information disclosed on nonprofit organizations' IRS Forms 990. Several nonprofit watchdog agencies provide ratings of nonprofit organizations using these data. However, this practice is widely criticized by scholars and practitioners. A nonprofit with low overhead may have ineffective programs that have no impact, while a nonprofit with relatively higher overhead may be significantly more effective in terms of achieving meaningful results. Some studies suggest that low overhead may actually reduce organizational effectiveness. Moreover, an organization with higher overhead is more efficient than one with lower overhead if the organization with higher overhead achieves the same results at a lower total cost.
The term Organizational Effectiveness is often used interchangeably with Organization Development, especially when used as the name of a department or a part of the Human Resources function within an organization.