Most nonprofit groups track their performance by metrics such as dollars raised, membership growth, number of visitors, people served, and overhead costs. These metrics are certainly important, but they don’t measure the real success of an organization in achieving its mission.

Of course, nonprofit missions are notoriously lofty and vague. The American Museum of Natural History, for example, is dedicated to "discovering, interpreting, and disseminating—through scientific research and education—knowledge about human cultures, the natural world, and the universe." But though the museum carefully counts its visitors, it doesn’t try to measure its success in discovering or interpreting knowledge. How could it? The pace of scientific discovery hardly depends on the activities of a museum—even one as prominent as this. Similarly, CARE USA exists "to affirm the dignity and worth of individuals and families living in some of the world’s poorest communities." Try to measure that.

Our research on 20 leading nonprofit organizations in the United States—as well as our firsthand experience with one of them, The Nature Conservancy—shows that this problem is not as intractable as it may seem. Although nonprofits will never resemble businesses that can measure their success in purely economic terms, we have found several pragmatic...