Can I apply Balanced Scorecard in my not-for-profit/public sector organisation?
In 100 Words
Although the Balanced Scorecard emerged from the commercial sector its use in the not-for-profit world since the early 1990s has been extensive. To be successfully implemented, one has to overcome some of the differences between a commercial and a not-for-profit organisation: changing definitions of ‘success’, more limited management accountability and selection of effective metrics.
These challenges can be overcome by using a Strategic Balanced Scorecard process such as the 3rd Generation Balanced Scorecard pioneered by 2GC. This starts with the consensus definition of future ‘success’ for the organisation using a Destination Statement and then subsequent setting of shorter-term goals, metrics and targets based on the consensus ‘future’.
The Balanced Scorecard framework was first developed within commercial organisations during the late 1980s. Firms wanted a more comprehensive view of organisational performance than provided by financial measures alone. As the framework was popularised through the 1990s, not-for-profit organisations began to apply the Balanced Scorecard. They concluded that a ‘balanced’ view of performance might also help them to better manage their organisations’ performance. Since then, thousands of not-for-profits have also adopted and adapted the Balanced Scorecard to their needs.
Several factors make not-for-profit Balanced Scorecards more complicated (and potentially more beneficial) than their commercial equivalent:
- the need to reflect a practical definition of what constitutes ‘success’;
- the need to accommodate the frequent changes in short and medium term organisation goals (and resources) that are typical in the not-for-profit sector;
- the need to define effective measures for results;
- the need to accommodate a culture of limited ‘accountability for results’;
- the need to modify the traditional framework to reflect the not-for-profit’s financial priorities.
This FAQ addresses these factors, and also provides links to some not-for-profit Balanced Scorecards.
Because Balanced Scorecards provide an overall view of organisational performance, not-for-profit Balanced Scorecards need to reflect success for the organisation in question. While the ‘people’ or ‘learning & development’, ‘process’ and the ‘customer’ or ‘citizen’ perspectives of for-profit Balanced Scorecards translate well into not-for-profits, the top-level ‘financial’ perspective does not. Not-For-Profits do, however, need to work within a ‘Resource’ constraint and this is largely a financial one (often a staff numbers/cost issue). They also need to satisfy external stakeholders (the equivalent of shareholders in the commercial world). Understanding these expectations and reflecting them in the not-for-profit Balanced Scorecard is essential.
For not-for-profits, these external stakeholders’ expectations are usually an extensive set of mostly non-financial objectives addressing social, political, and economic issues. As an added complication, the ‘customers’ of the organisation are often represented in the ‘stakeholder’ group (e.g. the customers of a government department are also the indirect funders of the department), and so are likely to present demands altogether more complex and open ended than those faced by a private company.
As a result, the process of strategy articulation (an essential input to a Balanced Scorecard design process) is both more important, but also more complex than for a typical commercial organisation. Because the overall goal of a for-profit organisation is usually simple financial return, it is often possible to construct workable Balanced Scorecards without explicitly stating this goal. However there is no common ‘default’ goal shared by all not-for-profit organisations, so how can the strategic goals of a not-for-profit be articulated?
An increasingly popular solution comes in the form of a Destination Statement, the first component of the 3rd Generation Balanced Scorecard framework. 2GC’s experience is that the creation of a Destination Statement helps clarify and make explicit the key stakeholders’ requirements, expectations and goals, so making it significantly easier for not-for-profit managers to agree the right organisational objectives to include in their Balanced Scorecard.
Changing definitions of success
Not-for-profit organisations operate in an environment where political agendas trigger regular changes to key stakeholders’ definition of ‘success’. As a result managers face a degree of variability not seen by their for-profit counterparts, for whom policy changes are normally economically rational. Changing stakeholder expectations can diminish or invalidate the importance of prior success criteria and action plans by introducing new, unplanned strategic goals. For example, an authority that is investing millions in a tax collection system is told that the tax system is to be fundamentally changed upon the election of a different political party.
To deal with changing priorities, not-for-profit managers have two options. One is to adopt very ‘abstract’ organisational goals – i.e. ones that remain ‘true’ independent of the changes in stakeholder demands. This approach has political advantages for managers because if goals are abstract, whatever happens can be construed as ‘success’. However, with vague goals, managers don’t know what to do to achieve them.
A second option is to acknowledge the need for ‘dynamic’ strategic planning – flexing how the strategy is defined and managed over time. Dynamic strategic management helps an organisation become more successful, because the goals are more clearly defined, staff can work out how to contribute to them. By challenging an organisation to both acknowledge and respond more effectively to regular changes in policy, it may also lead to beneficial changes, building a more responsive, adaptive and learning organisation.
Our experience is that the second option is a more effective basis for the designing of a performance management system. A key component of 3rd Generation Balanced Scorecards are that they can be easily and effectively updated by users to reflect changes in goals over time. Part of this comes from ensuring that the design itself conforms to best-practice guidelines, and part from ensuring the management team themselves are fully comfortable with the tool and the methods they can apply to make changes.
While financial and customer measures are defined and available in commercial organisations, the equivalent is less easily found in not-for-profits. For example, influencing the development of the not-for-profit ‘market’ (advocacy) is often a priority, but measuring the not-for-profit success with this is hard. In the private sector the relationship with customers is relatively straight-forward; not-for-profits have complex and varied relationships with other actors, each difficult to measure. For example, how do you objectively measure the effectiveness of your relationship with a regulator?
A good measure is one that management can significantly control. But a not-for-profit’s top-level goals are usually influenced by many powerful factors and actors beyond its influence. A development agency may seek to reduce child mortality and work to do so, but its contribution to falling (or rising) child mortality is difficult to gauge. Regulators seek to strengthen an industry, although actual industry performance is only partially attributable to the regulator’s efforts. So how do we find good top-level measures for the not-for-profit?
2GC recommends that not-for-profits manage these challenges pragmatically. Several things can be done:
- First, recognise that the strategic objective is more important than the measure and so manage the objective not the measure. Do not change objectives to align with inappropriate measures simply because these are available;
- Second, do not be afraid to use qualitative measures where good quantitative measures are not available. For example, self-evaluation on a well described 1 to 5 scale for ‘quality of relationship with regulator’ is imperfect, but nevertheless ensures the objective remains on the management agenda and in focus;
- Third, measure and manage the controllable ‘drivers’ of top-level performance; the things not-for-profit managers are doing to drive delivery of the results sought.
Managing the financial perspective on success
Commercial Balanced Scorecards traditionally have a financial goal at the top of any strategy map. For the not-for-profit, financial goals are not the end but rather part of the means. Traditional practice is to push the ‘finance’ perspective down to the bottom of the strategy map for not-for-profits, treating financials as an input to the strategic model. This could be problematic because other financially-oriented goals are sought by not-for-profits: ‘value for money’, ‘cost reduction’, or ‘funds raised’ – all are outcomes of some activity. From a process perspective, budget adherence, project funding spend, cash management and financial guideline adherence may also be important to the not-for-profit, and may need to be reflected in a Balanced Scorecard.
The ‘balance’ in a 3rd Generation Strategic Linkage Model (SLM) comes not only from a broad range of objectives but also from having only two main perspectives on ‘performance’: activity and outcome (input-output; cause-effect; means-end). This SLM structure is both logical and flexible. 3rd Generation Balanced Scorecards allow ‘threads’ or ‘themes’ to run vertically through the Strategic Linkage Model, thus a set of linked financially oriented objectives and measures can logically be incorporated within the not-for-profit’s Balanced Scorecard.
Accountability for success
The concept of ‘accountability’ has grown strongly across not-for-profits in the western world. However, it is particularly difficult to implement in the governmental not-for-profits. In non-meritocratic not-for-profits, senior managers (and some politicians!) may recognise the transparency brought by the Balanced Scorecard as a threat, and resist the process, undermining the Balanced Scorecard, potentially to the point of failure. Even in relatively well-governed not-for-profits, a culture of ‘accountability for measurable results’ is weak, partially as a result of the issue described above.
2GC recommends a transparent Balanced Scorecard design process involving all responsible managers, and in some instances shared with the ‘political’ decision-makers. By involving the key players in the discussions and decisions, potential resistors are more likely to commit to the decisions and resulting action. It is also harder for managers to visibly resist after participating in a ‘contracting’ process with peers on the subject of strategic objectives, targets and responsibilities. While it is true that a Balanced Scorecard is easier to implement in more transparent, better-governed organisations, the collaborative methods used to design 3rd Generation Balanced Scorecards help to build accountability into the process - for example, workshop discussions.
Management accountabilities towards various Balanced Scorecard objectives should be defined carefully and progressively, for example, initially, managers can be ‘accountable’ solely for ensuring the objective’s performance is reported (not the performance itself). Later, objective accountabilities can be strengthened to include ‘coordinating activities in support of the strategic objective’ and finally to ‘accountability for objective results’. Such a gradual approach may be more effective than an applying a strict definition of performance accountability at the beginning of the Balanced Scorecard implementation.
The Balanced Scorecard is a powerful framework for supporting the flexible implementation of strategic plans. When implemented well it effectively drives the communication of goals and the distribution of accountabilities within complex organisations. Balanced Scorecard, by design, reflects multiple financial and non-financial goals better than traditional strategic planning systems.
The challenges facing not-for-profits using Balanced Scorecards stem partially from the increased complexity of stakeholder demands and the variability of these demands over time. Other challenges exist around measuring success, integrating the financial view, and building a culture of accountability. Nevertheless, the large number of not-for-profit organisations using Balanced Scorecard (examples below) show that these challenges can be successfully met.
2GC’s’ experience implementing 3rd Generation Balanced Scorecards in not-for-profit organisations is extensive, here are some examples and also a link to a website which gives access to many other public examples many in the USA::
- UK Environment Agency: 2GC supported a major development of Balanced Scorecard based management tools within the UK Environment Agency. One of the most advanced strategic Balanced Scorecards implementations ever attempted, this successful project is described in an academic paper written jointly by 2GC and the Environment Agency;
- Development Organisation (International Committee of the Red Cross): 2GC worked closely with the in-house performance management team to review alternative approaches, and then with the organisation’s Senior Management agreed a set of measures and targets, and a reporting format to use;
- United Nations Agencies: 2GC worked with two of the Agencies involved in international development to build an executive Balanced Scorecard in line with the UN drive for greater accountability at the top;
- EU Directorate: 2GC worked with this Directorate General in 2009-10 to establish a Strategic Balanced Scorecard for the Directors to use in guiding the long term transformation of the organisation;
- UK Government Lottery Agency: 2GC worked with this UK government agency to design and implement up to date performance management processes and content and link these to the existing planning processes. A top level Balanced Scorecard was created and used to monitor the senior management’s delivery against its priorities;.
- UK Government Department and Delivery Agency: 2GC worked with this UK government department and its delivery arm to design and implement up to date performance management processes and content. A top level Balanced Scorecard was created and this was used to monitor the senior management’s delivery against its priorities. 2GC then worked with the delivery agency to embed a Balanced Scorecard for their executive team;
- The Balanced Scorecard Institute: An independent site specialising in providing information on Balanced Scorecard for not-for-profit organisations.