kaplan - strategic performance measurement and management in nonprofit organizations
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Performance measurementTRANSCRIPT
Strategic PerformanceMeasurement and
Management in NonprofitOrganizationsRobert S. Kaplan
The managers and constituents of nonprofits are increasinglyconcerned about measuring and managing organizationalperformance. Financial measures alone, or even supplementedwith a collection of ad hoc nonfinancial measures, are notsufficient to motivate and evaluate mission accomplishments.This article describes the adaptation of a new performancemeasurement and management approach, the BalancedScorecard, to the nonprofit sector. Several examples of actualimplementation are provided.
THE topic of accountability and performance measurement hasbecome urgent for nonprofit organizations as they encounterincreasing competition from a proliferating number of
agencies, all competing for scarce donor, foundation, and govern-ment funding. Yet the public performance reports and many internalperformance measurement systems of these organizations focus onlyon financial measures, such as donations, expenditures, and operat-ing expense ratios. Success for nonprofits should be measured byhow effectively and efficiently they meet the needs of theirconstituencies. Financial considerations can play an enabling orconstraining role but will rarely be the primary objective. At the moremicro, programmatic level, organizations may have myriad measuresto track and control local initiatives. These measures, however, donot relate to overall organizational mission and objectives.
NONPROFIT MANAGEMENT & LEADERSHIP, 11(3), Spring 2001 © Jossey-Bass, A Publishing Unit of John Wiley & Sons, Inc. 353
Note: I would like to acknowledge the indispensable collaboration of David P.Norton of the Balanced Scorecard Collaborative in developing and improvingthe Balanced Scorecard during the past ten years, and I also wish to thankEllen L. Kaplan, who facilitated the scorecard implementation in most of thenonprofit organizations described in this article.
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Even for-profit companies have recently recognized that finan-cial measurements by themselves are inadequate for measuring andmanaging their performance. Financial reports measure past perfor-mance but communicate little about long-term value creation.To remedy this deficiency, Kaplan and Norton (1992, 1996) intro-duced a new performance management system—called the BalancedScorecard—for private sector organizations. The new system retainedfinancial measurements but complemented these with measures fromthree other perspectives: that of the customer, the internal process,and learning and growth (see Figure 1).
The initial focus and application of the Balanced Scorecard wasin the for-profit (private) sector. But the opportunity for the score-card to improve the management of nonprofits should be evengreater. For profit-seeking corporations, the financial perspectiveprovides a clear long-run objective, but it provides a constraint ratherthan an objective for nonprofits. Although these organizations mustcertainly monitor their spending and comply with financial budgets,their success cannot be measured by how closely they keep spendingto budgeted amounts, or even if they restrain spending so that actualexpenses are kept well below budgeted amounts.
In this article, I describe the results from a multiyear actionresearch program to apply the Balanced Scorecard to several nonprofitorganizations. The next three sections contain a brief literaturereview, a description of the Balanced Scorecard, and a discussion ofmethodology. In the remainder of this article I present our observa-tions and actual case studies on applying the scorecard to the non-profit sector. These experiences have enabled me to draw somepreliminary conclusions about the benefits and the pitfalls of deploy-ing this new performance measurement and management system.
Literature ReviewThe subject of performance measurement for nonprofit organizationsis extensive but generally inconclusive (Forbes, 1998). Forbes notedthat nonprofit organizations lack the simple elegance of a financialmeasure—such as profitability or shareholder returns—used by for-profit organizations to assess their performance. Forbes also observedthat nonprofits have difficulty “developing surrogate quantitativemeasures of organizational performance . . . because [they] frequentlyhave goals that are amorphous and offer services that are intangible”(Forbes, 1998, p. 184). Herzlinger (1996) argues that nonprofitorganizations should disclose nonfinancial quantitative measures ofthe quantity and quality of services provided, but does not offerguidance about how organizations should select such measures.
The difficulty of clearly defining the metrics for organizationaleffectiveness, however, is not confined to nonprofit organiza-tions (Goodman and Pennings, 1977; Cameron and Whetten, 1983).In their final book chapter, Cameron and Whitten (1983) offer twoconclusions about organizational effectiveness: (1) “There cannot be
354 KA P L A N
Nonprofitorganizations
lack the simpleelegance of a
financialmeasure—such
as profitability orshareholder
returns—used byfor-profit
organizations toassess theirperformance
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Objectives Measures Targ
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one universal model of organizational effectiveness” (pp. 262–267);and (2) “It is more worthwhile to develop frameworks for assessingeffectiveness than to try to develop theories of effectiveness”(pp. 267–269).
Foreshadowing the development of the Balanced Scorecard,researchers in the 1980s (Cameron, 1981, 1982; Connolly, Conlon,and Deutsch, 1980) advocated that multidimensional approaches beused for measuring nonprofit effectiveness. In this way users couldaccess both the organization’s ability to acquire resources (that is,fundraising) and its ability to mobilize its resources to achieve desir-able outcomes. The multiple dimensions can also reflect the role ofthe multiple constituencies of many nonprofits.
Kanter and Summers (1987) reinforce the importance of reflectingthe outcomes for multiple constituencies and the need to have bothlong-term measures (outcomes) and short-term measures (processesand activities performed). The authors note that conflict often occursbetween external and internal constituencies, and they conclude that“a balanced approach would provide the data to help the organizationknow whether it is ‘doing well’ on any of the dimensions of perfor-mance with which an active constituency might be concerned.”
Sheehan (1996) studied philanthropic organizations andconcluded that although most had clear statements of mission, veryfew had developed performance measurement systems that revealedwhether the organization had an impact on its mission. In effect, theorganizations had no way to distinguish whether their strategy wassucceeding or failing.
Sawhill (in this issue) reports a powerful illustration of theproblems when performance measures are not linked to strategy.The Nature Conservancy has a mission to preserve plants and ani-mals by protecting the habitats that rare species need to survive. Foryears, the Conservancy operated with a pair of basic performancemeasures known as bucks and acres—indicating how much moneywas raised each year and how many acres of land were acquiredto be kept in their natural condition. These focused performancemeasures set the agenda for everyone, and the organizationwas apparently successful. During the 1990s, revenues grew atan 18 percent annual compounded rate and acres protected morethan doubled. Yet the management team reluctantly concluded thatsuccess in raising money and protecting acres might not becontributing to the agency’s fundamental mission of conservingbiodiversity. The gap between mission and measures eventually ledto the adoption of a much more balanced set of measures, betterlinked to its organizational mission.
Normally, one would expect that funders closest to an organiza-tion would be most likely to ask for measures of effectiveness. ButLetts, Ryan, and Grossman (1999) conclude that “unfortunately,the big picture at foundations rarely includes concerns about orga-nizational capacity and performance. Even worse, the day-to-day
356 KA P L A N
Since theintroduction ofthe BalancedScorecard,
companies usingit have been ableto implement newstrategies rapidly
and effectively,leading todramatic
performanceimprovements
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grantmaking practices of many foundations actually undermine theability of nonprofits to develop the capacity for sustained high perfor-mance” (pp. 169–170, emphasis in original).
Thus, the literature concurs with the need to articulate a multi-dimensional framework for measuring and managing nonprofiteffectiveness. This scorecard would seem to provide just such aframework.
The Balanced ScorecardThe Balanced Scorecard (see Figure 1) was developed for the privatesector to overcome deficiencies in the financial accounting model,which fails to signal changes in the company’s economic value as anorganization makes substantial investments (or depletes past invest-ments) in intangible assets, such as the skills, motivation, andcapabilities of its employees, customer acquisition and retention,innovative products and services, and information technology. Sincethe introduction of the Balanced Scorecard, companies using it havebeen able to implement new strategies rapidly and effectively, leadingto dramatic performance improvements (Kaplan and Norton,forthcoming).
The scorecard’s customer perspective measures the entity’sperformance with targeted customer and market segments by usingsuch outcome measures as market share, customer retention, new cus-tomer acquisition, and customer profitability. This perspective shouldalso measure the value proposition—how the organization creates valuefor its targeted customers. The internal process perspective includesmeasures of operating performance (cost, quality, and cycle times) ofcritical processes that deliver value to customers and reduce operat-ing expenses. In addition, the internal perspective can include mea-sures of innovation processes that create entirely new products andservices. Organizational learning and growth arise from such sourcesas people and systems. Typical measures for the learning and growthperspective include employee motivation, retention, capabilities, andalignment, as well as information system capabilities.
Research MethodThe research agenda on the applicability of the Balanced Scorecardto the nonprofit sector was launched in 1996, shortly after the found-ing of the Social Enterprise program at Harvard Business School. Theprogram conducted a survey and learned that executives and boardmembers of nonprofits consistently rated performance measurementas one of their top three management concerns. Although severalnonprofit organizations in 1996 may have had multidimensionalmeasurement systems, none explicitly derived their measures fromstrategy and mission or organized their measures using the multipleBalanced Scorecard perspectives.
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Strategy andperformancemeasurement
should focus onwhat output and
outcomes theorganization
intends toachieve, not what
programs andinitiatives are
beingimplemented
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Rather than wait to study organizations that have adopted theBalanced Scorecard on their own timetable and agenda, I pursued anexplicit action research program (Kaplan, 1998). I approached UnitedWay of America and United Way of Southeastern New England andgained their agreement to coach them to become pilot sites forapplying the Balanced Scorecard. Subsequently, I worked in the sameway with several other organizations, including an international relieforganization, a social service organization, and an innovative venturephilanthropy start-up. Many of the observations and conclusions inthis article have arisen from my active involvement in the scorecarddevelopment of these organizations, though other organizations, suchas Duke Children’s Hospital, implemented the Balanced Scorecardwithout outside assistance.
Role for Strategy in a NonprofitBalanced Scorecard
In my experience, nonprofits have considerable difficulty in clearlydefining their strategy. I have seen “strategy” documents that runupwards of fifty pages. And most of the documents, once the missionand vision are articulated, consist of lists of programs and initiativesrather than the outcomes the organization is trying to achieve. Suchorganizations, when implementing a performance measurementsystem, typically measure progress in achieving milestones on theirinitiatives. This is backwards. Initiatives should exist to help theorganization achieve its strategic objectives. They are means,not ends. Strategy and performance measurement should focus onwhat output and outcomes the organization intends to achieve,not what programs and initiatives are being implemented.
Another problem is that many strategy documents represent acombined wish list from all the participants invited to engage in thestrategy-setting process. Nonprofit organizations, in particular, valueemployee participation. But often they have difficulty channelingsuggestions into a few coherent themes. Accustomed to reachingconclusions by consensus, they fail to accept some suggestions whilerejecting others. Such organizations have to understand MichaelPorter’s admonition (Porter, 1996) that strategy is not only what theorganization intends to do, but also what it decides not to do, amessage that is particularly relevant for nonprofits.
Achieving focus and alignment, however, may be particularlydifficult for nonprofit organizations. Many people who becomeemployees of these organizations voluntarily accept below-marketcompensation because they believe in the mission of the agency.Their personal values motivate them to do good and to contribute tosociety through the agency’s programs. This is wonderful and agreat source of strength for the nonprofit sector. But it is also a dan-ger. Such motivated individuals come to the agency already equippedwith a clear, albeit personal, idea about how to accomplish the
358 KA P L A N
Strategy is notonly what theorganization
intends to do, butalso what it
decides not to do,a message that is
particularlyrelevant fornonprofits
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organization’s goals. And they often encounter a nurturing environ-ment in which all opinions are valued and listened to. This is anengine for diffusing organizational energy.
One example illustrates this pathology. I worked with an inter-national relief agency, helping it to translate its strategy into a set ofmeasurable Balanced Scorecard objectives. I read and interpreted theirstrategy statement and then consulted with their senior planningmanagers. Two full days of work ensued to develop a prototype,straw-model Balanced Scorecard for the agency. But as the managersprepared to depart, one of them remarked, “This has been a goodexercise but the scorecard is not complete. It doesn’t have anythingon our land mine program.” After a stunned silence, I responded thata land mine program had not been mentioned in any strategy docu-ment or at any time during the sixteen hours of discussion just con-cluded. The manager responded that there was a lot of interest andfunding in the world to eliminate land mines and alleviate the suf-fering they caused. Several people in the organization and on theboard had been encouraging the agency to address this issue.
This agency had wandered into a new initiative without anysense about whether the initiative fell within its mission and strat-egy, how the initiative fit with its core capabilities and competencies,or whether the agency was particularly well qualified, relative toalternative providers, to make a substantial, cost-effective contribu-tion to land mine relief. Nonprofits, like their private sector coun-terparts, have to focus their limited resources on a limited set ofobjectives and constituents. Attempting to be everything for every-one virtually guarantees organizational ineffectiveness.
At United Way of Southeastern New England (UWSENE), thechief professional officer framed the strategic options faced by hisorganization: “Local United Ways have three primary choices. Theycan be donor-focused, agency-focused, or community-focused. Eachof the three strategies is good, with the potential to yield positive endresults. But each entails considerable downside risk. Many UnitedWays switch strategies, say, to meet specific community needs, forvery good reasons, but then are surprised when their agencies anddonors get upset. UWSENE has definitely become a donor-focusedorganization, believing that if the donors are satisfied, then agencieswill be provided for” (Kaplan and Kaplan, 1997, p. 4).
With a clear focus on the strategy and the key constituent group,UWSENE could subsequently develop its Balanced Scorecard in astraightforward manner.
At Duke Children’s Hospital, Jon Meliones (Meliones, 2000) wasattempting to transform an organization that had a $50 millionoperating loss in 1995. The length of stay of its patients was 15 per-cent over target. Meliones believed that a new strategy based onbetter communication with patients and physicians, as well aspatient-focused process improvements, would lead to cost reductions,revenue enhancements, and better patient care. He used the Balanced
ST R AT E G I C PE R F O R M A N C E ME A S U R E M E N T A N D MA N A G E M E N T 359
Attempting to beeverything for
everyonevirtually
guaranteesorganizationalineffectiveness
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Scorecard to communicate and monitor the interrelationships fromthe new strategy.
The start of any performance measurement system has to be aclear strategy statement. Otherwise, performance measures focus onlocal operational improvements rather than on whether the strategyis being achieved. But strategy statements can still lead to diversityin how individuals interpret them for their everyday jobs. Organiza-tional goals, in general terms, often mask real disagreement aboutwhat the organization is trying to accomplish. By quantifying andmeasuring the strategy, organizations reduce and even eliminateambiguity and confusion about objectives and methods. They gaincoherence and focus in pursuit of their mission.
Elevating the Role of CustomersMost nonprofits had difficulty with the original architecture of theBalanced Scorecard, which placed the financial perspective at the topof the hierarchy. This is a proper concern. I have stated earlier in thisarticle that achieving financial success is not the primary objectivefor a nonprofit. Many nonprofit organizations have rearranged thegeography of their Balanced Scorecard to place the customer per-spective at the top. For example, United Way of America initiallyfollowed the private sector tradition by having the financialperspective at the pinnacle of their scorecard. They finally decidedthat their customer perspective belonged at the top, and that thefinancial perspective should be at the bottom.
In fact, nonprofit agencies should consider placing an overarch-ing mission objective at the top of their scorecard. The missionreflects the agency’s long-term objective, such as a reduction inpoverty, illiteracy, malnutrition, homelessness, disease, pollution, ordiscrimination. Then the objectives within the scorecard can beoriented toward improving such a high-level objective. For a privatesector company, financial measures provide the accountabilitymeasure between it and its owners, the shareholders. That is why thefinancial perspective was placed at the top of the Balanced Scorecardhierarchy. For a nonprofit, however, the agency’s mission representsthe accountability between it and society—the rationale for itsexistence. The mission should therefore be featured and measured atthe highest level of its scorecard. Such an objective may only showprogress with long lags, which is why the measures in the four mainperspectives of the Balanced Scorecard will provide the short- tointermediate-term targets and feedback.
As another modification of the private sector scorecard frame-work, nonprofits need to expand the definition of who their customeris. In a private sector transaction, customers both pay for the serviceand receive the service. The two roles are so complementary thatmost people don’t even think about them separately. But in anonprofit organization, donors provide the financial resources—they
360 KA P L A N
By quantifyingand measuringthe strategy,
organizationsreduce and even
eliminateambiguity and
confusion aboutobjectives and
methods
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pay for the service, whereas another group, the constituents, receivesthe service. Who is the customer, the one paying or the one receiv-ing? Rather than making such a decision, organizations have placedthe donor perspective and the recipient perspective in parallel, at thetop of their Balanced Scorecards (see Figure 2).
I now illustrate the Balanced Scorecards developed at severalnonprofit organizations: United Way of Southeastern New England,Duke Children’s Hospital, and New Profit Inc.
United Way of Southeastern New EnglandAs mentioned earlier, UWSENE’s strategy featured its financial inter-mediary role of collecting funds from a broad population of donorsand disbursing the funds to community-based agencies. Therefore,the UWSENE project team retained the financial perspective at thetop of the scorecard.
The UWSENE team discussed whether the four perspectives ofa for-profit Balanced Scorecard were adequate and appropriate for itsscorecard. Some suggested adding additional perspectives, say, foragencies and for volunteers. Agencies, using United Way funds, sup-plied needed services to communities. Volunteers, through theirboard service and extensive participation in the annual campaign,provided substantial personnel resources to UWSENE. The seniorexecutive, however, felt that the four basic perspectives had sufficientflexibility to include objectives that would address the organization’srelationship with agencies and volunteers. This choice did bothersome in the organization who felt that the agencies were so criticalto the mission of UWSENE that they would have liked them to befeatured with a separate perspective.
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A nonprofitagency’s missionrepresents theaccountabilitybetween it andsociety—the
rationale for itsexistence. Themission should
therefore befeatured and
measured at thehighest level of
its scorecard
Figure 2. Adapting the Balanced Scorecard Framework toNonprofit Organizations
“To achieve our vision,how must we look to ourcustomers/recipients?”
“To achieve our vision, how mustour people learn, communicate,
and work together?”
The Mission rather than the financial/shareholder objectives drives the organization’s strategy.
“To satisfy our customers,financial donors, and mission,
at which businessprocesses must we excel?”
The Mission
“If we succeed, howwill we look to ourfinancial donors?”
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UWSENE Balanced ScorecardThe team, after several months, produced the scorecard shown inTable 1. Reactions to the scorecard were favorable. One middle man-ager noted, “You can see how you contribute to the customer orfinancial needs of the organization, and to staff advancement. It’s niceto feel that what you’re doing is worthwhile, that it relates to the bigpicture.”
A member of the project team expressed the enthusiasm amongthe staff for the Balanced Scorecard: “In the past, if you raised moremoney than the previous year, you felt that you had done a good job.But those departments not involved with fundraising didn’t get anyrecognition for the success of the organization. Now we will look toall the Balanced Scorecard measures to assess our success in reach-ing our goals. Each employee can be seen as making an importantcontribution.”
The UWSENE experience highlighted the impact of communi-cating the Balanced Scorecard down to all employees. The chief
362 KA P L A N
Table 1. United Way of Southeastern New England
Outcomes Strategic Objectives
Financial External growth Increase net amount of funds raised
Internal stability Balance internal income and expenses to maintain our100 percent guarantee to others
Community building Increase amount of funds that go to services
Increase amount of funds that go to proprietary products
Customer Customer satisfaction Recognition
Ease of giving
Market growth Products that customers care about and thatwill improve the community
Customer retention Information on results
Quality, timely service
Internal Key internal business processes Improve key internal processes in thebased on quality following areas:
• Fundraising• Fund distribution• Community building• Information processing/communications• Pledge processing• Product development• Volunteer/staff development• Customer service• Interdepartmental communications
Innovative products Develop a research and development processto come up with new, innovative products
Viable product line Develop a consistent process for evaluatingexisting products and services
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financial officer (CFO) went to talk to the building’s custodian. Thecustodian told him that strategy was something that people at the topfloor did, not him. His job included sweeping the floor, paintingwalls, and removing trash, and he didn’t feel that these had any-thing to do with strategy or mission. The CFO used the scorecardto explain that the custodian’s efforts were central to UWSENE’sstrategy: “The tenants in the building generate considerable rentalincome for us. By maintaining the property well, tenants and UnitedWay employees will be pleased to work in the facility. That will helpus generate more rental income that helps us fulfill our 100 percentguarantee to donors, and also to attract, retain, and motivate ouremployees. In addition, donors and volunteers who visit our build-ing will value a clean building, attractive landscaping, and streetsfrom which the snow has been removed. I could see the light ofrecognition cross his face. He said, ‘You’re right. I can see now howwhat I do is important.’”
By communicating the top-level and departmental scorecardsthroughout the organization, individuals in every department couldalign their day-to-day actions with helping the organization achieveits strategic objectives.
Duke Children’s HospitalDuke Children’s Hospital (DCH), a 138-bed in-patient facility,included a neonatal intensive care unit, a pediatric intensive care unit(PICU), and beds for bone marrow transplant and intermediate-carepatients. Its cost per case had increased by 35 percent from 1994 to1995 and its 8.0-day average length of stay was 15 percent over tar-get. It was losing money, staff members were dissatisfied, and recentprocess improvement initiatives had been unsuccessful. Yet DCHneeded $40 million for expansion programs. Jon Meliones, head ofthe PICU, identified several burning platform issues:
• The organization was confused about which services were the mostimportant to provide.
• There was no shared purpose between administrators, staffmembers, and physicians.
• The quality of communication and coordination with referringpediatricians was poor.
• There were competitive threats to the organization’s marketposition.
• There was great difficulty in balancing quality care, patientsatisfaction, staff satisfaction, education, and research with financialobjectives (Meliones and others, 1999).
Meliones led a pilot Balanced Scorecard program in the PICU(Meliones and others, 1999). Based on success there, he helped toextend it throughout all of DCH’s pediatric facilities, including two
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Bycommunicating
the top-level anddepartmental
scorecardsthroughout theorganization,individuals in
every departmentcould align their
day-to-dayactions withhelping the
organizationachieve itsstrategicobjectives
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large hospitals in the region that were acquired as the program wasrolling out. The project started with the leadership team developinga mission and vision statement “to provide patients, families, andprimary care physicians with the best, most compassionate carepossible, and excel at communication.” The strategy hypothesizedthat with better communication and care, referrals and revenueswould increase. In addition, DCH’s new strategy would focus onreducing costs and length of stay to restore financial viability.
A multidisciplinary team developed the scorecard for the strategy(see Table 2). The team renamed the learning and growth perspec-tive “Research, Education and Teaching” to reflect its role in anacademic medical center.
Meliones used the scorecard to screen initiatives so that onlyhigh-impact ones were considered (Meliones and others, 1999). Thestaff implemented many new internal processes; for example,care providers discussed each patient to be discharged, theyinformed the family about treatments before a patient was released,and they informed the primary care physician about inpatient treat-ment and recommended treatment after discharge. DCH supplied itsphysicians with monthly cost and case statistics as well as patientand referring physician satisfaction scores, benchmarked against thetotal physician population. Staff physicians could now comparethemselves against their colleagues and peers and search for ways toimprove.
364 KA P L A N
CustomerPerspective
Learning andGrowth Perspective
InternalPerspective
FinancialPerspective
Satisfied consumers,families, andfunders
Agencywideadherence toperformanceimprovement viaPDCA methods
Effective,comprehensiveinformation systems(external andinternalcommunications)
Achieve continuedimprovement in netasset and liquidityto support newservicedevelopment
Recognized as aleader in conduct-ing and disseminat-ing research
Access to careerdevelopment andmentoring forall staff
Effective,comprehensive, andcost-effective carefor consumers
Effectively linkclinical andfinancial datasystems anddecisions
Optimizes qualityof life
Strategic jobcoverage at alllevels
Safeguard rights,responsibilities, andethics via corporatecompliance office
Effectively link staffcompensation,performance, andservice delivery
Recognized as aleader in the mediaand by legislators
Diverse staff work-ing productively—guided by theagency’s balancedscorecard
Effective collabora-tion and partneringwith otheragencies/providers
Sufficient fundingsupport for allprograms/services
Table 2. Duke Children’s Hospital Balanced Scorecard
Our Mission Excellence in Service, Training, and Research
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The near-term results from the scorecard, initiatives, and processimprovements were dramatic. Cost per case dropped by 25 percentin three years, despite an increase in case mix complexity.
Average length of stay also dropped by 25 percent (from eight tosix days) in two years. Revenues and margins increased, transform-ing a loss operation of more than $40 million into a positive marginof about $10 million. Most important, the cost and length-of-stayreductions were not accomplished at the cost of patient care. Aware-ness of the recommended medical plan jumped from 47 to 94 per-cent, the rate of readmission to the PICU dropped from 11 to 4percent, and the rate of readmission to the intermediate warddropped from 11 to 7 percent.
Family satisfaction scores increased by 9 percent (from 4.3 to 4.7on a 1–5 scale) and were now the highest among the twenty-eightinstitutions surveyed by the outside research firm. The score onwhether families would recommend DCH to others jumped by 8 per-cent (from 4.3 to 4.7) and was also the highest among the twenty-eight institutions surveyed. Patient discharges by 1:00 P.M. increasedfrom 20 to 60 percent, and complaints about the admission anddischarge process decreased by 15 percent within six months. Pri-mary care physicians also reported their increased satisfaction withthe communication they received from DCH.
Through the use of the Balanced Scorecard to focus and align theclinical, academic, and administrative staff to a new strategy, DCHhad improved patient and physician satisfaction and achieveddramatic financial and operational improvements over a period oftwo to three years.
New Profit Inc.A novel Balanced Scorecard application occurred at New Profit Inc.(NPI), a Boston-based venture capital philanthropic fund (Kaplanand Elias, 1999). NPI represented a new model for overcomingthe nonprofit sector’s lack of an efficient and active capital market.NPI founder Vanessa Kirsch (in Kaplan and Elias, 1999, p. 3) artic-ulated three principles to guide the fund’s investment strategy:
• Choose scalable organizations. The fund would seek out socialentrepreneurs who had proven track records and were seeking togrow their organizations.
• Use a performance-based design. Both NPI and the organizations itsupported would be made accountable by reference to mutuallyagreed-upon benchmarks based on measurable performancecriteria. Fund dispersal would depend on organizations reachingtheir goals.
• Employ active life cycle investing and monitoring. The fund wouldcommit to multiyear investments. In addition to funding, NPIwould provide management and technical assistance to help the
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organization become more effective and grow. NPI would beexpected to take board seats on its portfolio organizations.
NPI used the Balanced Scorecard to evaluate the performance ofits portfolio organizations. Unlike the previously cited literature(Cameron, 1982; Kanter and Summers, 1987), which expressed con-cern about the inherent conflicts among a nonprofit’s multipleconstituents, NPI’s general partner, Kelly Fitzsimmons (Kaplan andElias, 1999, pp. 8–9) stated that the scorecard provides a commonreference point for its stakeholders: “The scorecard aligns all ourstakeholders for creating social innovation and social returns. Thatmeans the boards, investors, fund managers, foundations, and socialentrepreneurs can bring all their resources to bear in the right ways tostrategic applications.”
NPI, being a financial intermediary like UWSENE, retains thefinancial perspective for its high-level objective, which is to raise ade-quate capital and operating funds and then use them in an efficientand sustainable manner. NPI identified fund investors as the primarycustomers and highlighted investor satisfaction as an outcome objec-tive for its customer perspective.
Like the UWSENE debate about the role of agencies, the NPIteam debated whether its portfolio organizations were customers orwhether they were part of the internal business processes that neededto be managed. The team finally decided that portfolio organizationsare so critical to the success of NPI that they warrant their own per-spective. The success of the portfolio organizations would be animportant driver of the investor satisfaction objective. Extending thisprinciple, the team proposed that the scorecards from the portfolioorganizations should include a perspective to represent their contri-bution to NPI’s strategic objectives. The scorecard approved for initialuse at NPI is shown in Table 3.
NPI also demanded that its portfolio organizations also developtheir own Balanced Scorecards to demonstrate how they contributeto NPI’s mission for growth, scalability, and social impact.
Kirsch (in Kaplan and Elias, 1999) also used the scorecard as theprimary communication tool to the board of directors and funders.One board member commented: “The Balanced Scorecard allows theboard to be updated in a brisk way about what is happening acrossthe organization, factoring in a breadth of issues ranging from thoseof the balance sheet to the softer aspects involving people and theirknowledge. Discussions don’t become monolithically focused on howmuch money was raised if no one is paying attention to how themoney will be spent.”
Finally, NPI used the Balanced Scorecard to offer a highly attrac-tive product-leadership value proposition to potential investors: aunique performance management system for accountability todonors, a system that would help fund managers search out the bestopportunities for investing, and a mechanism for active management
366 KA P L A N
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Tab
le 3
.N
ew P
rofi
le I
nc.
Bal
ance
d S
core
card
Foc
usSt
rate
gic
Obj
ecti
ves
Mea
sure
s
Fun
d ca
pita
liza
tion
—Se
cure
$5m
in f
un
d co
mm
itm
ents
fro
m in
vest
ors
usi
ng
pyra
mid
str
ateg
y.
Ope
rati
ng r
even
ues—
Secu
re 5
00k
oper
atin
g fu
nds
fro
m f
oun
dati
ons
and
frie
nds
for
FY
99 &
FY
00.
Sust
aina
bili
ty—
Man
age
cash
flow
to
mai
nta
in a
n o
pera
tin
g su
rplu
s w
ith
3 m
onth
s’ c
ash
on
han
d.E
ffici
ency
—M
ain
tain
rat
io o
f 1:
4 st
aff
$/pr
o bo
no
$, o
ptim
ize
pro
bon
o an
d vo
lun
teer
res
ourc
es.
Inve
stor
com
mun
ity—
Clo
se t
arge
t in
vest
ors
and
enga
ge t
hem
in k
ey a
spec
ts o
f N
PI
net
wor
k th
rou
gh e
ven
ts,
form
al r
oles
, an
d so
on
; dev
elop
rep
orts
to
info
rm in
vest
ors
of p
erfo
rman
ce.
Inve
stor
sat
isfa
ctio
n—U
se s
atis
fact
ion
su
rvey
an
d on
e-on
-on
e in
terv
iew
s to
sol
icit
fee
dbac
k.F
ocus
ed in
vest
or s
trat
egy—
Dev
elop
inve
stor
seg
men
tati
on, p
rofi
les,
an
d m
arke
tin
g st
rate
gy t
o op
tim
ize
size
an
dsc
ope
of f
un
din
g ba
se.
Gro
wth
—Se
t an
d re
ach
spe
cifi
c gr
owth
tar
gets
(su
ch a
s in
crea
sed
reve
nu
e, e
xpan
sion
to
new
sit
es)
wit
h p
ort-
foli
o or
gan
izat
ion
s fo
r th
e li
fe o
f fu
nd
(5 y
ears
).So
cial
impa
ct—
Set
and
reac
h s
peci
fic
targ
ets
for
incr
easi
ng
the
scop
e of
por
tfol
io o
rgan
izat
ion
’s s
ocia
l im
pact
(su
ch a
s n
um
ber
of c
ust
omer
s/cl
ien
ts s
erve
d) f
or t
he
life
of
fun
d (5
yea
rs).
Bal
ance
d sc
orec
ard
perf
orm
ance
—B
uil
d an
d im
plem
ent
firs
t sc
orec
ards
for
eac
h p
ortf
olio
org
aniz
atio
n.
Sati
sfac
tion
wit
h fu
nd s
ervi
ces—
Soli
cit
sati
sfac
tion
an
d fe
edba
ck f
rom
por
tfol
io o
rgan
izat
ion
s re
gard
ing
NP
I an
dm
onit
or r
esou
rces
; use
su
rvey
on
fu
nd
lau
nch
, im
plem
ent
feed
back
.B
est p
ract
ices
—Sh
are
best
pra
ctic
es a
cros
s po
rtfo
lio
orga
niz
atio
ns.
Port
foli
o m
anag
emen
t—Q
3: S
et t
erm
s w
ith
por
tfol
io o
rgan
izat
ion
s, im
plem
ent
perf
orm
ance
man
agem
ent
syst
em; Q
4: d
eplo
y m
onit
or a
nd
NP
I re
sou
rces
, con
tin
ue
pipe
lin
e de
velo
pmen
t, a
nd
deve
lop
repo
rtin
gin
fras
tru
ctu
re.
Defi
ne le
ader
ship
pos
itio
n—Q
3: E
stab
lish
col
labo
rati
ve r
elat
ion
ship
s w
ith
inte
llec
tual
par
tner
s (s
uch
as
secu
reF
idel
ity
rela
tion
ship
, ori
ent
key
play
ers
and
larg
er m
onit
or c
omm
un
ity)
, est
abli
sh m
arke
tin
g an
d ex
tern
alco
mm
un
ity
rela
tion
s, la
un
ch p
ubl
ic r
elat
ion
s, p
osit
ion
ing
stra
tegy
, mar
ket
rese
arch
, an
d fo
cus
grou
ps; Q
4:es
tabl
ish
bes
t pr
acti
ces
for
perf
orm
ance
-bas
ed f
un
din
g, b
ecom
e po
licy
spo
kesp
erso
n o
n p
hil
anth
ropi
c is
sues
(su
ch a
s n
um
ber
of c
onfe
ren
ces
invi
ted
to a
tten
d, n
um
ber
of p
ress
hit
s, in
vita
tion
s to
spe
ak).
Boa
rd a
nd g
over
nanc
e—Q
3: D
efin
e ro
le o
f bo
ard;
Q4:
Exp
and
and
deve
lop
nat
ion
al b
oard
an
d de
velo
pac
adem
ic b
oard
.Pl
an N
PI I
nsti
tute
—Q
4: P
lan
for
inst
itu
te; d
eter
min
e re
sou
rces
(h
um
an a
nd
capi
tal)
nec
essa
ry f
or in
trod
uct
ion
;fo
rmal
ize
lead
ersh
ip p
osit
ion
an
d le
arn
ing
focu
s.
Fil
l str
ateg
ic p
osit
ions
—H
ire
fun
drai
ser,
des
ign
str
ateg
y fo
r at
trac
tin
g an
d re
tain
ing
tale
nte
d st
aff.
Tec
hnol
ogy—
Q3:
Ide
nti
fy t
ech
nol
ogy
nee
ds a
nd
plan
for
pro
cure
men
t.K
now
ledg
e m
anag
emen
t—Q
4: D
evel
op li
mit
ed b
ut
targ
eted
sys
tem
for
impr
ovem
ent
and
lear
nin
g re
late
d to
key
proc
esse
s (d
ue
dili
gen
ce, t
erm
s se
ttin
g, B
SC);
dev
elop
tem
plat
e fo
r pr
oces
s im
prov
emen
t.A
lign
men
t—E
nsu
re t
hat
ope
n li
nes
of
com
mu
nic
atio
n e
xist
bet
wee
n in
vest
ors,
NP
I, a
nd
port
foli
o or
gan
izat
ion
sth
rou
gh c
ult
ure
bu
ildi
ng,
eve
nts
, rep
orti
ng,
an
d fo
cus
grou
ps.
Fin
anci
al
Inve
stor
Perf
orm
ance
ofPo
rtfo
lio
Org
aniz
atio
n
Inte
rnal
Bus
ines
sPr
oces
ses
Lear
ning
and
Gro
wth
Rai
se $
4.5
mil
lion
.M
ain
tain
ope
rati
ng
cash
flow
wit
h3-
mon
th s
urp
lus.
Clo
se 3
fou
ndi
ng
and
3 le
ad in
vest
ors.
Ach
ieve
80%
sat
isfa
ctio
n.
Cre
ate
fou
r sc
orec
ards
wit
h s
peci
fic
targ
ets.
Ach
ieve
a m
inim
um
of
80%
per
form
ance
for
port
foli
o or
gan
izat
ion
s.C
oun
t sh
ared
lear
nin
g an
d co
llab
orat
ion
even
ts b
etw
een
por
tfol
io o
rgan
izat
ion
s.
Fin
aliz
e te
rms
proc
ess
wit
h p
ortf
olio
orga
niz
atio
ns.
Mee
t ta
rget
s fo
r pr
ess
hit
s an
d in
vita
tion
sto
spe
ak.
Secu
re r
elat
ion
ship
s w
ith
100
% o
fpo
ten
tial
inte
llec
tual
par
tner
s.
Fil
l 100
% o
f n
eces
sary
str
ateg
ic p
osit
ion
s.F
inal
ize
HR
str
ateg
ies
for
attr
acti
ng
and
reta
inin
g st
aff.
nml11308.qxp 1/24/01 1:27 PM Page 367
of portfolio organizations to improve their performance againststated objectives.
Some FailuresThe Balanced Scorecard management systems at most of the organi-zations studied have been sustained and are being extended at thetime of this writing. Participants considered the innovation to be agreat success and central to their ability to improve the performanceand accountability of their organizations. The Balanced Scorecardsat United Way of Southeastern New England and United Way ofAmerica, however, did not survive changes in leadership. We knewthat the chief professional officer (CPO) of UWSENE would retirefrom the organization within six months. We went ahead anyway toget the experience from an early implementation. During the project,the CPO did not actively involve his board in developing thescorecard, believing that the board should monitor the strategy butnot participate in its formulation.
The consequences from not involving the board in the develop-ment of the Balanced Scorecard soon became apparent. In the searchprocess for a new CPO, the board did not place high weight on findinga new leader who would be committed to the new strategic perfor-mance management system. The board selected a retired bank execu-tive who felt that his immediate priorities would be to deal with someoperational issues left by his predecessor and to ensure that each posi-tion had a complete job description. The Balanced Scorecard was newto him, he had no commitment to it, and he discontinued its use atUWSENE, much to the disappointment of several managers who hadinvested much time and energy in the project. The board, given its lackof involvement with the Balanced Scorecard, did not press the issue.
At United Way of America (UWA), the CEO resigned unexpect-edly during the project. The new CEO, hired from outside UWA,arrived with her own management style and highly formalized plan-ning process. The Balanced Scorecard did not fit within her planningprocess and therefore did not survive the transition.
These implementation experiences match the lessons fromthe private sector. For a new performance-oriented managementsystem to succeed, the executive leadership team must be deeplycommitted to—not just supportive of—a new way of managing theirorganization. The new way places strategy, not job descriptions, atthe center of the management system. It emphasizes the valueof communicating to all units and individuals, aligning them tothe strategy, and encouraging them to find innovative ways to achievestrategic outcomes in their daily operations.
SummaryDuring the past five years, nonprofit organizations have adopted andadapted the private sector Balanced Scorecard to their situations. Sev-eral have elevated the role of mission and customer to the top of the
368 KA P L A N
The BalancedScorecard
managementsystems at most
of theorganizations
studied areconsidered to be agreat success and
central toparticipants’
ability to improvethe performance
andaccountability
of theirorganization
nml11308.qxp 1/24/01 1:27 PM Page 368
hierarchy of perspectives, recognizing that nonprofits should beaccountable for how well they meet a need in society rather than howwell they raise funds or control expenses. Also, as the individuals orgroups that provide financial support to nonprofits are usually dif-ferent from those who are the direct beneficiaries of the services pro-vided, many nonprofits recognize donors or funders, as well asrecipients, as their customers.
The Balanced Scorecard has enabled the nonprofit organizationsto bridge the gap between vague mission and strategy statements andday-to-day operational actions. It has facilitated a process by whichan organization can achieve strategic focus, avoiding the pathologyof attempting to be everything to everyone. The measurement sys-tem has shifted the organization’s focus from programs and initiativesto the outcomes the programs and initiatives are supposed to accom-plish. It has helped organizations avoid the illusion that they have astrategy because they are managing a diverse and noncumulative setof programs and initiatives. It has enabled them to align initiatives,departments, and individuals to work in ways that reinforce eachother so that dramatic performance improvements can be achieved.Used in this way, all organizational resources—the senior leadershipteam, technology resources, initiatives, change programs, financialresources, and human resources—become aligned to accomplishingorganizational objectives.
ROBERT S. KAPLAN is professor at Harvard Business School and chair ofthe Balanced Scorecard Collaborative. Since arriving at Harvard in 1983,he has focused on linking cost and performance measurement systems tostrategy implementation and operational excellence.
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