Recently I was approached by an executive director of a nonprofit who asked me about the possibility of the Balanced Scorecard implementation in their organization. His biggest concern was about the financial perspective; and for sure, most standard financial indicators were not applicable in their case.
My answer was short:
“If you have a strategy and you want to execute it effectively, then you can design and implement a BSC for your nonprofit.”
Why do nonprofits need the Balanced Scorecard?
There are two reasons for this.
1. It helps to describe and execute strategy
First of all BSC helps to describe a strategy, focus actions on what matters, and finally execute the strategy successfully.
For sure, some nonprofits might face problems with an articulation of the strategy, and so following the Balanced Scorecard approach helps to frame thoughts about strategy in the right way.
2. It helps to talk in the same language with those who make donations
Many donations to the nonprofit organizations are made by for-profit companies. Executives from these companies use BSC for their strategic planning.
In this sense, non-profits that have a strategy described with a Balanced Scorecard have more chances to get funding, as they are talking with financial donors in the same business language.
Where should nonprofit place a Financial perspective?
The logic here is to put the most important long-term outcome (which, in the case of nonprofits, are not financial outcomes) on the top of the diagram.
- Robert S. Kaplan in his article recommends nonprofits putting long-term mission objectives (like “reduction in poverty, diseases, pollution”) on the top.
What’s goes next?
Managers in such organizations treat finance as a resource and don’t want to have it on the top. The problem with this approach is that it will be hard to track the cause-and-effect logic of such BSC.
Finance on the bottom:
These are two most popular approaches to the BSC diagrams for non profits. There are a number of others as well, like renaming “Finance” perspective into “Success” or “Stakeholder interests”, or putting it on the same level with Customer perspective.
- A test question that one need to ask in these cases is whether the cause-and-effect logic is still trackable on such strategy maps or not.
Who are the customers?
- Paying customers (customers that make donations)
- Receiving customers (those who benefit from the existence of nonprofit)
Also, there might be mixed cases. Let’s take any professional community as an example with an annual membership fee, its members are both paying and receiving customers at the same time.
An example of nonprofit scorecard
Now, let’s build a Nonprofit Balanced Scorecard that will take into account the nuances described above. I’ll use BSC Designer Online as an automation tool. You can re-use the template that I’ll create to build your own scorecard.
Adding strategic themes
For this purpose our team used a “strategic theme” function.
- Customers – Financial Donors (blue color on the map)
- Customers – Recipients (green color on the map)
Two other standard schemes – Operational Excellence and Product Leadership remained unchanged.
Preparing perspectives and nonprofit mission
On the top of the diagram there is a long-term mission objective (like reduction in poverty or pollution).
Objectives and cause-and-effect links between them
We have added some generic objectives to the strategy map. Each objective was assigned to a strategic theme, and cause-and-effect connections were specified.
Initiatives and KPIs
- An initiative “Balance income / expenses” was aligned with this objective (we chose to visualize this initiative on the map)
- A lagging indicator “Net amount of funds raised” was aligned with this objective (we chose gauge chart and progress bar as the visualization means for this indicator)
- A leading indicator “Financial donors” is the result of the connection of this goal with the “Financial donors” goal from the Customer perspective (the lagging part of the Financial donors goal contributes as a leading indicator to the “Stability and Growth” goal).
Check out this article to learn more about leading and lagging metrics.
I believe we have reviewed the most important nuances about nonprofit BSC – the rest is very similar to what we discussed talking about classical BSCs.
If you want to go ahead with your research, I’d recommend:
- A comprehensive guide by Paul Niven
- Check out more examples of Balanced Scorecards for different domains
- The article about BSC implementation might be helpful
Feel free to share your thoughts and ask your questions in the comments.
- ^ Strategic Performance Measurement and Management in Nonprofit Organizations Robert S. Kaplan, Jossey-Bass, A Publishing Unit of John Wiley & Sons, Inc. 2001
- ^ Financial Perspective of the Balanced Scorecard, Aleksey Savkin, 2014, BSC Designer
- ^ Implementing A Balanced Scorecard In A Not-For-Profit Organization, Michael Martello, John G. Watson, Michael J. Fischer, Journal of Business & Economics Research – September 2008 Volume 6, Number 9
- ^ Balanced Scorecard Step-by-Step for government and nonprofit agencies, Paul R. Niven, 2008, John Wiley & Sons, Inc.