Balanced Scorecard Flexibility in Nonprofit Organizations

Introduction to the Balanced Scorecard in Nonprofit Contexts

The Balanced Scorecard framework was first developed within for-profit organizations during the late 1980s. These firms wanted a more comprehensive view of organizational performance than was provided by financial measures alone. As the framework was popularized through the 1990s, nonprofit organizations began to apply the Balanced Scorecard, concluding that a balanced view of performance might also help them better manage their organizations' performance (Can I apply Balanced Scorecard in a non-profit organization?, 2008).

The move of the Balanced Scorecard idea from for-profit to nonprofit organizations is not always an easy one. The basic concepts behind creating a Balanced Scorecard are as suitable for nonprofits as they are for commercial businesses, but the execution must be modified to make it work effectively (Zimmerman, 2004). Because Balanced Scorecards provide a balanced view of organizational performance, nonprofit Balanced Scorecards need to reflect what success means for the organization in question. While the people, process, and—to some extent—customer perspectives of for-profit Balanced Scorecards translate well into nonprofits, the top-level financial perspective does not; by definition, nonprofits do not have financial performance as a primary goal. Nonprofits must assure external stakeholders, who are the counterpart of shareholders in the for-profit world. Understanding these dynamics and reflecting them in the nonprofit Balanced Scorecard is essential (Can I apply Balanced Scorecard in a non-profit organization?, 2008).

Stakeholder Complexity and Non-Financial Objectives

For nonprofits, external stakeholders' expectations are usually a broad set of mostly non-financial objectives addressing social, political, and economic issues. Stakeholders from political and social communities are not likely to be exclusively interested in the financial performance of the organization. As an added complication, the customers of the organization are often represented within the stakeholder group. For example, the customers of a government department are also indirect funders of that department, and are therefore likely to present demands to the nonprofit that are far more complex and open-ended than those faced by a private company (Can I apply Balanced Scorecard in a non-profit organization?, 2008).

Nonprofits function in an environment where political agendas drive regular changes to key stakeholders' definitions of success. Because of this, nonprofit managers face a degree of variability not experienced by their for-profit counterparts, for whom policy changes are normally grounded in economics. Shifting stakeholder expectations can diminish or cancel the importance of prior success criteria and action plans by introducing new, unplanned strategic objectives (Can I apply Balanced Scorecard in a non-profit organization?, 2008).

One benefit of viewing an organization through the four Balanced Scorecard perspectives is that this approach reduces information overload by condensing the critical data needed for decision-making. The Balanced Scorecard also meets managerial requirements by bringing varied, unrelated measures from multiple areas of the organization into a single report, ensuring that managers examine all measures across the operation. This approach also provides the safeguard that one measure is not improved at the expense of another. Developing organizational strategy through the Balanced Scorecard minimizes participants' subjectivity during the strategy-setting process and enhances managers' ability to evaluate all programs for strategic impact without bias (Ronchetti, n.d.).

Adapting the Financial Perspective for Nonprofits

While financial and customer metrics are clearly defined and readily available in commercial organizations, the corresponding measures are less easily identified in nonprofits. A good measure is one that management can meaningfully influence. Nonprofit organizations' goals are typically shaped by many influential factors and actors beyond their direct control. Commercial Balanced Scorecards normally place the financial perspective at the top of the strategic map. For nonprofits, however, financial goals are not the end objective; they are part of the means. Standard practice is to move the financial perspective to the bottom of the strategy map for nonprofits, treating financials as an input to the strategic model rather than its primary output (Can I apply Balanced Scorecard in a non-profit organization?, 2008).

This repositioning is not without difficulty, because financially oriented goals are also pursued by nonprofits. Consider value for money, cost reduction, or funds raised—all are outcomes of specific activities. From a process standpoint, budget adherence, project funding expenditure, cash management, and compliance with financial guidelines may also be important to the nonprofit and may need to be reflected in a Balanced Scorecard (Can I apply Balanced Scorecard in a non-profit organization?, 2008).

Conclusion

The Balanced Scorecard offers nonprofit organizations a powerful tool for managing performance across multiple dimensions, but its application requires deliberate modification. Financial goals, stakeholder relationships, and innovation imperatives all function differently outside the for-profit world. By repositioning the financial perspective, broadening the stakeholder lens, and reframing innovation as employee development, nonprofits can adapt the Balanced Scorecard into a framework that genuinely reflects their mission and operating environment. Recognizing these distinctions is essential for nonprofit managers seeking to leverage this strategic tool effectively.

References

Can I apply Balanced Scorecard in a non-profit organization? (2008). Retrieved August 9, 2010, from http://www.2gc.co.uk/pdf/2GC-FAQ08-090216.pdf

Ronchetti, J. L. (n.d.). An integrated Balanced Scorecard strategic planning model for nonprofit organizations. Retrieved August 9, 2010, from http://www.regent.edu/acad/global/publications/jpc/vol1iss1/ronchetti/ronchetti.pdf

Zimmerman, J. (2004). Using a Balanced Scorecard in a nonprofit organization. Retrieved August 9, 2010, from http://www.npcdivision.com/downloads/BalancedScorecard.pdf