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.”
In this article I’d like to show how government organization and other nonprofits can adapt the Balanced Scorecard approach, and what to do with the financial perspective of the BSC. As always, a good example will help to illustrate my points.
Why do nonprofits need the Balanced Scorecard?
There are two reasons for this.
- It is a great tool for strategy description and execution.
First of all BSC helps to describe a strategy, focus actions on what matters, and finally to execute the strategy successfully. For sure, some nonprofits might face the problems with an articulation of the strategy (according to our readers this article is helpful in this matter), but just trying BSC will help them to frame their thoughts about strategy in the right way.
- 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.
Here is a short video where Professor Robert S. Kaplan, co-author of the Balanced Scorecard concept, summarizes some key benefits of this framework for nonprofits:
Where should nonprofit place a Financial perspective?
In the most cases for-profit organizations agree about the order of the BSC’s perspectives: 1. Financial, 2. Customer, 3. Operational, 4. Learning. Within the nonprofits there is no such agreement yet. The logic here is to put on the top of the diagram the most important long-term outcome (which in the case of nonprofits is not profits).
- 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?
As it was explained above, for-profit business are those who frequently invest into the social programs of nonprofit organizations. They see financial indicators on their own scorecards, so they like to have a similar way to track the performance of their social investments in nonprofits. Probably for this very reason many nonprofits choose a standard order of their perspectives:
- Standard order: 1. Financial, 2. Customer, 3. Operational, 4. Learning.
In some scorecard I saw financial perspective was located on the bottom of BSC diagram. 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: 1. Customer, 2. Operational, 3. Learning, 4. Finance
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?
When we were talking about Customer perspective of the for-profit’s BSC, it was mentioned that customers are not only end-users of the product/service, but partners and other 3rd parties that work with a company. Such classification helps to define more specific goals for each group of the customers.
A nonprofit organization deals with at least two groups of 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.
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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 PRO as an automation tool.
If you are interested to “play” with this project, you can download a trial version of BSC Designer and then download the project file (see the links in the end of the article).
Adding strategic themes
Nonprofits deal with two type of customers – financial donors and recipients. On the respective strategy map we might need to distinguish goals related to these two groups. For this purpose our team used a “strategic theme” function. Instead of a one “Customer intimacy” theme we created two:
- 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 next step, we prepared four BSC perspectives with proper descriptions. 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
Finally we aligned some initiatives and metrics with business goals. Let’s take “Stability and Growth” objective from a financial perspective as an example to review:
- An initiative “Balance income / expenses” was aligned with this objective (we chose to visualize this initiative on the map)
- A “Net amount of funds raised” indicator was aligned with this objective as well (we chose gauge chart and progress bar as visualization means for this indicator)
Here is the strategy map that we had as a result:
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, and for sure keep browsing BSC Designer.com for more details. 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.