We live in a chaotic world, and our lives are often governed by Black Swan events, which are impossible to predict, but whose impact can be perfectly explained in hindsight. Minor decisions taken today can have unforeseen and disproportionately major consequences in the future. For a manager, this is scary, and the discipline of management has ultimately been all about improving decision making in a data deficient environment.
One way for-profit executives can theoretically make their life simpler is by looking at the decision-making process through a financial prism. This was the traditional approach, and it yielded results in the industrial era.
However, in the information age, this approach is increasingly resulting in diminishing returns, both for for-profits and also for non-profits. This is because with so many intangible factors at play, it’s not feasible to make well thought-out decisions based on a few variables.
The limitations of financial metrics in setting strategy
If you are a nonprofit looking to cut costs, it might be reasonable to have a marketing strategy that includes a token website and not invest in email outreach, social media or content creation. This will help in the short term, as precious resources and time can be invested in furthering the core mission.
But in the long term, you could lose out on attracting committed volunteers or funding opportunities, and your voice might carry little weight because you have not adequately documented your work or invested in building a supportive community.
For a for-profit, the same analogy can be made about improving customer service. Many companies ignore customer service quality and view it as a cost center, as a result the internet is proliferated with customer horror stories. But bad press can adversely impact bottom lines in the long run.
Furthermore, basing decisions solely on lagging metrics like financial numbers is not forward-thinking. They tell you what is happening right now, but offer you no clues on where to move the needle. It’s like trying to lose weight by simply tracking the numbers on the bathroom scale without paying any attention to diet or exercise.
Organizations in the 21st century need a system for management that helps them make decisions tied to organizational goals that are not driven by easily measured financial numbers, but takes a more holistic view, and incorporates signals from different sources.
One such system is the Balanced Scorecard.
With a balanced scorecard, you can incorporate hard data and intangibles like brand in a strategic plan
Balanced Scorecard—a brief history and prerequisites
In the 90s, David Kaplan and Robert Norton at Harvard developed a system called Balanced Scorecard to help companies make better decisions. Unlike most management systems that laid primacy on financial numbers, this system took into account other important perspectives like how a customer views the company, the operational preparedness and a culture of learning and knowledge.
Balanced scorecard has been used by many companies to fine tune their strategy implementation. At it’s most basic, a balanced scorecard looks like this:
This is a first generation balanced scorecard. Over the years, the model has undergone multiple iterations and a lot of companies have used the basic principles and customized the model according to their requirements.
Before you start implementing this system you need a few prerequisites in place, like:
- Top level business goals: You need to know what your top-level business goals are. Specifics might not be absolutely necessary at this point, but have something, like increasing profits, boosting sales or cutting costs.
- Specific value to customers: Find out who your ideal customers are, and what value would they get if you execute actions that fulfill your business goals. If customers get no direct value, your goals won’t be sustainable.
- Appropriate strategy: To address both these aspects, you need a strategy. You need to formulate a strategy, describe it so that it’s easily understood by all stakeholders, and chalk out an execution plan.
- Building business systems: Do you have the business systems and processes in place to convert strategy goals into visible results?
- Setting KPIs: Key Performance Indicators is a important piece of the Business Scorecard puzzle. KPIs keep you straight and true, and act as a signpost and marker. Because they are so critical, it’s important that you take care in choosing the right KPIs, for choosing the wrong ones can lull you and lead you astray.
Once you have completed these preparations, you can create the balanced scorecard by using the following perspectives:
- Financial: This is all about increasing shareholder value and improving the bottom line, typically by cutting costs and increasing revenue. For for-profit organizations, everything the organization does should contribute towards improving the financial numbers.
- Customer: This perspective is about how customers see the company. It helps an organization to define the type of customers they want to sell to and what would the customer value proposition be. Product, price, customer service etc all fall in the ambit of this section.
- Internal Business Process: This part is about putting systems and processes in place so that the financial and customer objectives can be met.
- Learning and Growth: No growth strategy can be formulated and executed without the contribution of skilled and experienced employees. This perspective helps the management develop a culture of learning that makes the setting and execution of goals simpler.
66% of organizations who used Balanced Scorecard reported profits.
Here is an example of a balanced scorecard in action. This shows how content marketing as a strategy can be used by a company to generate profits by improving revenue and cutting costs.
Balanced scorecard for nonprofits vs for-profits
In the context of nonprofits, the concept of balanced scorecard is a bit different from for-profit companies.
For a brief primer, check out this short video (< 3mins) by one of the inventors of the system, Prof. Robert Kaplan.
Prof Kaplan clearly underlines the social impact as the defining goal of a nonprofit, and talks about how a nonprofit used a balanced scorecard in action.
In a for-profit organization, like a manufacturer, the financial perspective sits at the top of the balanced scorecard, followed by other components which come lower on the totem pole. For a nonprofit, increasing revenue is not the end goal. In a nonprofit balanced scorecard the success factors are more nuanced.
For a nonprofit balanced scorecard, customer perspective is preeminent
Building a nonprofit balanced scorecard
In the case of a nonprofit ,the Customer perspective is usually the most important. For a non-profit, there are two types of customers
- External customers: Museum visitors, disadvantaged students, at-risk populations, endangered species etc.
- Internal customers: Donors, board of directors, funding agencies, volunteers etc.
The challenge for nonprofits is to serve the needs of these two audiences who have very different expectations and definitions of success.
The Financial perspective comes after the customer perspective in a nonprofit balanced scorecard. Nonprofits need to collect data about:
- Donors and other funding sources
- Cost of operations
This data is invaluable not only for monitoring the financial health of the organization, but also for informational purposes.
The Internal Process perspective is another critical segment. This perspective can be used by managers to:
- Evaluate the quality and reach of programs
- Determine which programs are meeting the needs of the target audience
- Estimate the cost-effectiveness of individual programs
The insights gleaned from this perspective helps nonprofits monitor and align current programs so that there is no wastage of valuable resources.
The Learning and Growth perspective helps nonprofits:
- Devise skill development and training programs for staff and volunteers who are critical to the success of the mission
- Bolster business skills around donor development, community outreach, marketing and branding, and usage of technology.
- Educate board members so that they can fully contribute to achieving the stated goals
Here is a quick and easy way to get a handle on creating a balanced scorecard:
In this table:
- Objectives are the high-level, bird’s eye type goals. They can be extracted from the mission and vision statements.
- Measures are KPIs that signify whether the goal has been reached. The measures remove all ambiguity and make the goals as clear and objective as possible.
- Targets are metrics which are hard data. Unless these targets are reached, the program would not be deemed to be successful
- Initiatives are ground level operational activities which are allotted to various members of the team. They should be achievable.
You have a plan, what’s next?
The success of a balanced scorecard plan or any plan is dependent on feedback loop, so it’s critically important that management monitors the progress and makes course correction where required. This will require that the plan is implemented and taken down to the level of operations. Where you are able to align your strategic plan to your operational plan with resource assignments and timelines, enabling you to measure and track the progress. This way, you are creating a culture of accountability and visibility which leads to happy, motivated employees. Strategy management software can help with effectively and efficiently manage this process, providing you with a living plan and allowing management to obtain real-time insight on the status of their plan. To learn more, be sure to book a free demo with one of our strategy experts.
Building a balanced scorecard takes significant upfront investment, as the organization has to do a thorough overhaul of both it’s internal and external business processes.
Supporting a balanced scorecard also necessitates a culture change in organizations where measurement and constant monitoring and course correction might not be the norm. But the upside of this management system is that it allows everyone in the organization to see how the impact of their activities affects the end goals, and it lets managers make complex decisions without having complete access to information and still give them the confidence that they are not shooting in the dark.