Adapting Balanced Scorecards For Charities And Foundations
In the past two decades, numerous organisations have implemented a ‘Balanced Scorecard’ framework to measure their performance and help deliver their strategies. While the scorecard was initially built for organisations with purely commercial goals, many public sector bodies and third sector organisations have used and adapted scorecards to support their own strategies and plans. However, not all organisations have been successful in implementing a balanced scorecard framework, and the implementation process requires strong leadership and clear insights in order to yield positive results.
This article explores:
What the balanced scorecard is
How the balanced scorecard can be implemented successfully
How the scorecard should be adapted for successful implementation in charities and foundations
What is the Balanced Scorecard?
The Balanced Scorecard is a framework for businesses to link their strategic goals to measurements and action plans, and was first introduced to the business community in the early 1990’s by Norton and Kaplan. The framework empowers managers, equipping them with a set of tools that allows them to gauge company performance holistically, and moving beyond the limitations of purely financial metrics.
The Balanced Scorecard provides a template which assumes that an organisation’s performance can be viewed from four main perspectives: financial, customer, internal business process, and learning and growth (see above). These four perspectives are linked to the organisation’s strategy, and together they create a model that allows employees to understand how they can contribute to the company’s success.
This simple framework can be used to communicate, measure, and implement corporate strategy in three key steps:
A one page ‘strategy map’ (above) is designed to communicate the strategy. A clear map is a crucial step in helping employees to understand the strategy and become motivated to execute it.
A system of measurements is created to support the strategy. There should not be too many measurements, and those selected should be meaningful and relate directly to how effectively the company is executing its strategy.
Performance gaps are identified and action plans initiated to fill these gaps. These plans should be monitored on a continual basis.
How can the Balanced Scorecard be implemented successfully?
There is no ‘correct’ way to implement the scorecard – a ‘one size fits all’ approach does not work and the four perspectives should be tailored to fit a specific organisation.
Research by the European Centre for Best Practice Management used surveys, case studies and recent academic literature to identify the following best practices1:
Adopt the Balanced Scorecard across the organisation. This will provide a co-ordinated framework and a common approach for all organisational performance measurement efforts, as well as a common ‘language’ for understanding measurement results.
Utilise the Balanced Scorecard to provide objective data for business decisions. Data provided by the Balanced Scorecard can be used as a base for decisions ranging from allocation of available resources to the future direction of the organisation. For example, the Balanced Scorecard could support a business case for more resources.
Ensure commitment to and buy-in for the Balanced Scorecard at all organisational levels, especially at the top. Research clearly shows that strong leadership is paramount for nurturing performance improvements. Senior management should frequently review progress and results, and have frequent formal and informal meetings with employees and managers to show support for improvement efforts and implementation initiatives.
Focus on employee training. Comprehensive training should be provided to help employees to understand and implement the Balanced Scorecard. Training could include designing their own measures, understanding how measures affect organisational goals and strategy, and using improvement tools and techniques to action the outcomes for continuous improvement.
Align the reward and recognition system to scorecard measurements. Organisations should tie any reward and recognition system to performance improvements measured by the Balanced Scorecard. Thus, employee incentives will tend to reinforce the organisational objectives being measured.
Facilitate implementation by actively managing change. To overcome likely resistance to change from some employees, it is necessary to follow change management strategies. This should include open communication to explain the need for, uses, and benefits of the Balanced Scorecard, as well as the role that employees will play in its success. Another approach is to disseminate “success stories” that demonstrate the benefits of the Balanced Scorecard methodology.
Take one step at a time A fast, aggressive approach may overwhelm employees and result in a lack of ‘buy-in’, limiting the chances of success. However, too slow an approach may not be able to build enough organisational momentum to bring the Balanced Scorecard to fruition.
Move from performance measurement to performance management by integrating the Balanced Scorecard into the way the organisation does business. Incorporating performance measurement and improvement into the existing management structure, rather than treating it as a separate program, will greatly increase the Balanced Scorecard’s long-term viability.
Anecdotal evidence has shown that implementation of a balanced scorecard can have a mixed impact. Kaplan and Norton2 have identified two major sources of the failure of the Balanced Scorecard:
1. Process failures are the most common and often are caused by ineffective communication within an organisation. These include3:
Lack of senior management commitment
Keeping the scorecard at the top levels
Too few individuals involved
Too long a development process
Using the Balanced Scorecard as a one-time only measurement
Treating the Balanced Scorecard as a systems project
Introducing the Balanced Scorecard only for compensation
2. Poor design of a balanced scorecard. Some common reasons for poorly designed scorecards are4:
Selection of too few measures for each perspective: this can lead to a lack of balance between financial and non-financial indicators.
Selection of too many measures without identifying the key ones: in this case, the organisation will lose focus and be unable to find links between key measures.
Failure to find measures that accurately relate to the organisation’s strategy: this happens when an organisation tries to input all its Key Performance Indicators (KPIs) into each perspective instead of only those measures linked to its strategy.
How should the scorecard be adapted for successful implementation in charities and foundations?
The balanced scorecard methodology needs to be adapted when used in third sector organisations. The basic concept remains, but the four major perspectives (financial, customer, internal, and innovation and learning) need to be modified as the primary goal of the organisation is often customer or beneficiary driven, rather than financially driven.
Prioritise your mission: Kaplan suggests that charitable organisations consider placing a mission objective at the top of their scorecard as the mission represents the accountability between the organisation and society.5
Know your ‘customer’: Charitable organisations should expand the definition of who their ‘customer’ is.6 The customer perspective should not also include the service recipients, but donors, too, as donor satisfaction is vital to the success of the organisation. An appropriate scorecard should therefore separate out these two types of customer within an organisation’s strategic plan and within the balanced scorecard. Consequently, it is more appropriate to call the ‘customer perspective’ the ‘stakeholder perspective.’
Put your stakeholders first: While a commercial Balanced Scorecard usually starts with financial perspective, the stakeholder perspective normally comes first in charities and foundations. The mission is accomplished only when stakeholders are properly served, and although financial performance is important, it is usually not the reason the organisation exists. The financial perspective should therefore move from the top of the strategy map template and be replaced by the stakeholder perspective. Below is a basic illustration of how Aleron recommends implementing the Balanced Scorecard:
Aleron Case Study: How the Balanced Scorecard Can Be Applied to Charities and Foundations
In the above example, we place the financial perspective at the bottom of the scorecard as it fits the client organisational structure most appropriately. There are also a number of other options:
The financial perspective can be inserted right next to the stakeholder perspective at the top of the scorecard, giving equal importance to both financial and stakeholder perspectives. For example, increased training leads to the development of new and innovative processes, which will improve both stakeholder outcomes and financial objectives. The issue with this approach is that dual end objectives can be unclear, causing employee confusion and sub-optimal implementation.
The financial perspective can be placed in second position, right below the stakeholder perspective. Financial goals are seen as important but remain sub-ordinate to the stakeholder objectives. The problem with this option is that the causal logic is broken, which makes the strategy plan harder to be understood by employees.
An often used alternative is when the financial perspective is placed alongside all of the other perspectives. Finance has an important role across all three other objectives, while maintaining a causal logic that is depicted below.
Each charity or foundation has to consider the above design options before deciding which alternative is most appropriate for their organisational structure. Choosing the correct scorecard format is a critical pre-requisite to ensuring the successful implementation of a balanced scorecard strategy, and ultimately to measuring performance in a structured and holistic way.