Why Nonprofits Need a Balanced Scorecard

Article Highlights:

• Demands for transparency and accountability are impacting nonprofit organizations.
• Nonprofits must invest in organizational capacity in order to demonstrate results.
• The Balanced Scorecard can be easily modified to meet the needs of a nonprofit agency.
• Using the Balanced Scorecard allows a nonprofit to demonstrate results, accountability, and attract scarce resources.

If ever there were a time for new and improved performance measurement systems, surely this is it. Whether yours is a nonprofit, public sector, or corporate entity the driving forces of change are swirling like never before. Consider the many corporate scandals that have recently erupted in the private sector. Calls for ever-greater disclosure have greeted these debacles, and, not surprisingly, the demands for transparency have extended to the  nonprofit and public sectors as well. In addition, all organizations face the considerable hurdle of effectively executing their strategies, and overcoming an almost exclusive reliance on financial measures of performance.

What is needed is a system that provides real insight into an organization’s operations, balances the historical accuracy of financial numbers with the drivers of future performance, and also assists us in implementing strategy. The Balanced Scorecard is the tool that answers all these challenges. Developed in the early 1990s by Robert Kaplan and David Norton, the Scorecard has been adopted by organizations around the globe in an effort to align employees with overall goals, create an unrelenting focus on strategy, and deliver breakthrough results.

Many nonprofits have recognized the inherent benefits of the Balanced Scorecard, but
have been reluctant to embrace the tool. Frequently this hesitance results from their struggle to invest in “organizational capacity.” The ultimate badge of honor for nonprofits has historically been an ability to direct the vast majority of funds raised towards the needs of their constituents. This is both a practical and noble effort, given the fact that nonprofits are indeed “mission-driven” organizations. However, the failure to invest in infrastructure and capacity ultimately limits the ability of a nonprofit to grow and effectively serve the needs of its constituents.

Interestingly, in the for-profit world organizational capacity is a significant driving force in the race for competitive success. It’s not the products and services corporations sell that ultimately determine their achievements, but their ability to constantly innovate, cleverly market, and continuously improve their offerings. In other words, it’s their commitment to investing in capacity. Nonprofits appear to view this investment choice as a zero-sum game in which anything invested in capacity is considered lost to direct service.i Ironically, that thinking may lead to decreased service delivery and, ultimately, reduced funding. Jeffrey Bradach, a consultant to nonprofits sums it up nicely: “Generally, they (nonprofits) are vastly undercapitalized, understaffed, and poorly managed. Most nonprofits use their limited resources to market themselves to the same donors and foundations year after year. There’s little if any investment in organizational infrastructure or staff development. Compared to the for-profit sector, the nonprofit world is back in the late 1970s and early 1980s, when Japan was beating up on American businesses…It’s only beginning to understand that if you want good outcomes, you have to invest in building strong organizations.” ii

Fortunately, a growing number of nonprofit organizations have chosen to implement the Balanced Scorecard, and are discovering a number of benefits resulting from the process. Chief among those is the ability to demonstrate accountability and generate results. This is a vital need, as Rick Pagsibigan of the Philadelphia Red Cross explains: “It used to be that people gave because it felt good, now they give to feel good, and look at their return on investment. To show them the outcomes we first have to
measure.”iii That’s where the Balanced Scorecard comes in. To be accountable and demonstrate results you need to accurately measure the true performance of your organization. Simply counting people served or dollars spent won’t cut it in today’s environment. You need to demonstrate advancement on the high-level, mission-based objectives that your constituents are requiring you to provide. The Balanced Scorecard with its focus on mission and strategy, and broad view of performance allows you to do just that.

The Balanced Scorecard also allows nonprofits to attract scarce resources, including both funding and employees. Competition for money and talent has never been more demanding. In the nonprofit sector, the race for donor dollars is increasingly intense. By developing a Balanced Scorecard, reporting progress on achieving your strategic objectives, and proving your efficiency and effectiveness you can ensure the migration of scarce resources to your organization, department or agency. The Broad Foundation of Los Angeles, California recently awarded a $195,000 grant to Detroit Public Schools District. Part of the rationale for the behest was the fact that Detroit Public Schools will be using the Balanced Scorecard. "The Detroit Public Schools are among the first K-12 districts to adopt the Balanced Scorecard process," said Geri Markley, Executive Director, Office of Continuous Improvement. "The Scorecard provides a balanced view of district-wide performance from four perspectives: students, funders, internal systems, and employees."iv

To thrive in the 21st century all organizations, nonprofits included, must focus relentlessly on the execution of their unique strategies. The Balanced Scorecard, embraced by thousands of organizations around the globe has demonstrated the unquestionable ability to do just that.

i Christine W. Letts, William P. Ryan, and Allen Grossman, High Performance Nonprofit Organizations (New York,
NY, John Wiley & Sons, 1999). P. 32
ii John A. Byrne, “The New Face of Philanthropy,” Business Week, December 2, 2002. pp 82-94.
iii From interview with Rick Pagsibigan, September 19, 2002.
iv U.S. Newswire, “Detroit Public Schools Awarded Grant by The Broad Foundation,” December 10, 2002.

QUOTE

“It used to be that people gave because it felt good, now they give to feel good, and look at their return on investment. To show them the outcomes we first have to measure.”

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About the author

Paul R. Niven is an author, management consultant, and noted speaker on the subject of the Balanced Scorecard. As both a practitioner and Consultant he has developed successful Balanced Scorecard systems for clients large and small in a wide variety of organizations, including Fortune 1000 companies, public sector agencies, and nonprofit organizations. The second edition of his very popular book “Balanced Scorecard Step by Step: Maximizing Performance and Maintaining Results” was released in September, 2006. The first edition has been translated into over a dozen languages. His two previous books are: “Balanced Scorecard Step by Step for Government and Nonprofit Agencies” released by John Wiley & Sons in June, 2003, and “Balanced Scorecard Diagnostics” which was released in April, 2005. He may be reached at 760.789.2449 or through his website at www.senalosa.com.

Copyright 2006 © Paul R. Niven, The Senalosa Group