Mastering the Balanced Scorecard

The “balanced scorecard” has been a corporate management buzzword for about a decade. Like many management movements before it, the balanced scorecard is migrating from corporate management into the offices of nonprofit management and development staffing.

Historically, organizations have measured performance primarily with measures derived from financial data. In the 1990s, a group of researchers and consultants from the Nolan Norton Institute began to study commonly used organizational performance measures. Its hypothesis was that organizations were being hindered by these measurement practices because the measurement focus was too narrow.

After working with a number of ideas, the researchers suggested that companies ought to balance self-assessment by looking at more than simply financial performance. For the best single summary of this research, get a copy of “The Balanced Scorecard: Translating Strategy Into Action” by Robert S. Kaplan and David P. Norton (Boston: Harvard Business School Press, 1996).

The original balanced-scorecard formulation, which has been carried forward formulaically by most companies that use it today, was organized around four perspectives: financial, customer, internal, and innovation and learning. To reinforce the idea of balance, the authors also promoted the use of lagging and leading indicators, and performance measures that were external as well as internal.

Another innovative idea emerging from this work was to tie performance measures closely to a company’s strategic plan. In short, start with planning; then create a measurement process to gauge how well you are executing against your plan. By doing this, the measures graduated from simply providing descriptive data to being the basis for a management tool.

Potential pitfalls
Rather than understanding what a balanced scorecard is supposed to accomplish, why and how, many managers simply implement a balanced scorecard as if it were a recipe. While the technique described in professional literature accumulates the wisdom and experience of many people and represents a form of best practice, it should not be copied blindly under the assumption that one size fits all. In particular, the four major dimensions (financial, customer, internal, and innovation and learning) should be modified to fit a specific organization — particularly when the organization is a nonprofit.

Another problem that organizations frequently make is jumping into measurement programs too fast and making the programs too complicated. Deriving meaningful measurements, gathering reliable data, developing useful analytical techniques and educating managers about how to use the data all are difficult steps. Doing all this at one time with a bucket full of 50 different measures is doomed to failure.

Understanding the nuances
The real trick behind any measurement program is to figure out first what you want to measure, and then to figure out how to measure it. Many times, managers who want to evaluate their work groups simply jump into collecting measures — not because the measures relate to organizational attributes in which they are interested, but more because the measures are simple and available.

That’s the reason managers build assessments based on measures such as attendance data, number of currently registered volunteers, production and fulfillment records, budget deviances, and computer system up-time. When you build an assessment program around the measures you have available, instead of building metrics around the concepts you need to measure, then you have a classic case of the tail wagging the dog.

You can tell what is important to measure by referring to your organization’s strategic plan, which lists your goals and the strategies by which you hope to achieve them.

Generally speaking, goals relate to outcomes, and strategies relate to procedures. Measures can and should relate to both. Process measures can be used to reflect how well your organization is executing its strategies. Outcome measures can be used to indicate how well your strategies actually accomplish their intended results.

For example, your organization’s leadership might have decided it is important to have a larger base of active donors. In your strategic plan, you might have set a goal of expanding your organization’s donor mailing list by 25 percent over the year. As one of your strategies, you planned to do aggressive acquisition mailings using several new rental lists you think will yield good results.

You can collect process measures indicating how many acquisition mailings you do and how many use the targeted prospecting lists. You can examine the resulting increase in the housefile as an outcome measure. These are excellent measures because they relate directly to what you intended to do and what you hoped to accomplish.

Your mail-list manager also might give you many statistics describing the demographics of your donors. What about using those data for a balanced scorecard? Sure, these measures are readily available, but do you need them? The question is not, “What statistics are available?” The questions are, “What have we planned to do this year and how have we planned to do it?” and then, “Does this statistic help us answer either of those questions?”

For a balanced scorecard, you only should use metrics that relate directly to your organization’s planned processes and targeted outcomes.

If you understand the ideas behind a balanced scorecard, you will be free to modify the classic formula so it becomes a better tool for your organization. In particular, I believe a nonprofit organization should make some fundamental changes to the four basic measurement perspectives. One approach, for example, is based on these six categories, which are clearly related to the four measurement categories in the original balanced scorecard formulation:

1. Revenue and funding. The goals and strategies around revenues are extremely important for any nonprofit organization. These are primarily external-facing, aimed at the question of how best to bring in monetary resources. For most organizations, this includes questions of fundraising and investment strategies, alternative funding sources, costs of fundraising, use of fundraising consultants, and so on.

2. Resource allocation. The second category relates to monetary and perhaps other nonfinancial resources from an internal perspective. An organization always starts the year with a spending plan (a budget), which should have been created in order to support its program plan, and reflect its policies and priorities for the upcoming year. Alas, every year brings with it unforeseen events, changes in priorities, emergency allocations and the like. Therefore, a complete budget plan also should include principles and practices for budgetary reviews and reallocations.

3. Product and service recipients. In a for-profit company, the goal is to satisfy the needs of customers, since customers are the primary source of revenue. So a balanced scorecard can simply focus on customers. The situation is more complex for nonprofits.

In a drug treatment facility, for example, the customer (i.e., the addict) not only does not pay for the treatment, but arguably his or her personal satisfaction with the facility’s treatment may be irrelevant to the most important measures of organizational performance. Nonetheless, even in this type of case, the nonprofit most likely is concerned about how it interacts with its service recipients and will want to measure that somehow.

4. Donors and board members. For nonprofits, donors and board members more often are treated as though they were the customers, even though they are not usually recipients of the nonprofit’s services or products. These are the people who contribute with dollars, labor and advice to support the nonprofit. It is their satisfaction, often more than that of direct-service recipients, that is crucial to keeping a nonprofit operation going. This is the basis for creating a planning category for donors and board members.

An alternative scheme I have used takes a slightly different view. It considers donors as one of the revenue sources within the planning category of revenue and funding. It recognizes board members not as people to be treated as customers, but rather for their roles as leaders. In this case, the nonprofit uses a different fourth planning category called “leadership.”

Within this category, the nonprofit can set goals and measure progress relating to leadership activities and accomplishments of both senior managers and board members.

5. Internal operations. For-profit organizations are concerned, of course, about the efficiencies of internal operations. Yet, they plan to operate with a margin of profit, which, in poorly performing years, can simply slim down or disappear to cover the effects of less-than-optimal performance.

In contrast, many nonprofits work on virtually no margin of error. A year of poor performance efficiency can result in dramatic cutbacks in staffing or programs, since many nonprofits have no safety buffers built into their budgets. While the category is the same for both types of organizations, it probably is a more critical management issue for nonprofits.

6. Staff development. The final category in the classical balancedscorecard scheme is innovation and learning. Where the preceeding measurement categories focus on an organization as it is today, the final category addresses the fact that organizations need to continuously grow, adapt and improve. For most companies, future development is tied to the organization’s staff. Within nonprofits, innovation is not usually the compelling market force that it is in the world of competitive, for-profit enterprise. For most nonprofits, developing the organization means, in a literal sense, developing its employees. In this spirit then, for nonprofits, it seems more straightforward to call this final category staff development.

Get ready, get set, implement!
Once you understand what a balanced scorecard is all about, you are ready to implement it. This is a multistep process that is not for the weak of heart or the short of patience. While it does, in theory and over time, lead an organization to more efficient and effective practices, the balanced scorecard requires substantial time, energy and talent up front to make it work well. Worse, if the balanced scorecard technique is not planned and implemented smartly, the result is likely to be a disappointing waste of that time, energy and talent.

If you are up for the challenge, here are your basic steps:

1. Get your board of directors and managers educated on the basics and committed to the effort.
2. Appoint someone on staff to be in charge of creating and maintaining the balanced scorecard.
3. Depending on your organization’s size and the knowledge of the person you have placed in charge, you may need to hire a consultant to assist in this effort.
4. Build your scorecard categories to match what is in your strategic plan. Or build your strategic plan around the categories you will use for the scorecard. Or modify your existing strategic plan so it matches the scorecard categories.
5. Derive the balanced-scorecard measures, metrics and analytical techniques, and implement them in test mode for two or three months.
6. Use the test experience to improve the balanced-scorecard measures and processes.
7. Begin to collect, analyze, report and archive scorecard measures on a regular (e.g., monthly or quarterly) basis.

For a balanced scorecard, as with all management buzzwords, the devil is in the details. The balanced scorecard concept is easy to understand and highly appealing in theory. In practice, it is a serious challenge to implment correctly. If you can do it, though, the benefits will be substantial and fully demonstrable. FS

Joel Zimmerman is the director of consulting services for the NonProfit Consulting division of Bowie, Md.-based CDR Fundraising Group.