Kaplan - Strategic Performance Measurement and Management in Nonprofit Organizations

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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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.

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 357

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


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.


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


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

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Tab

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Bal

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d S

core

card

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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.

References

Cameron, K. S. “Domains of Organizational Effectiveness in Institu-tions of Higher Education.” Academy of Management Journal, 1981,24, 25–47.

Cameron, K. S. “The Relationship Between Faculty Unionism andOrganizational Effectiveness.” Academy of Management Journal,1982, 25, 6–24.

Cameron, K. S., and Whetten, D. A. (eds.). Organizational Effective-ness: A Comparison of Multiple Models. New York: Academic Press,1983.

Connolly, T., Conlon, E., and Deutsch, S. “Organizational Effective-ness: A Multiple-Constituency Approach.” Academy of ManagementReview, 1980, 5, 211–217.

Forbes, D. P. “Measuring the Unmeasurable: Empirical Stud-ies of Nonprofit Organization Effectiveness from 1977 to 1997.”Nonprofit and Voluntary Sector Quarterly, 1998, 27 (2), 183–202.

Goodman, P. S., and Pennings, J. M. New Perspectives on Organiza-tional Effectiveness. San Francisco: Jossey-Bass, 1977.


The new wayemphasizes the

value ofcommunicating to

all units andindividuals,

aligning them tothe strategy, andencouraging themto find innovativeways to achieve

strategicoutcomes in theirdaily operations

nml11308.qxp 1/24/01 1:27 PM Page 369

Herzlinger, R. E. “Can Public Trust in Nonprofits and Govern-ments Be Restored?” Harvard Business Review, Mar.–Apr. 1996,pp. 97–107.

Kanter, R. S., and Summers, D. V. “Doing Well While Doing Good:Dilemmas of Performance Measurement in Nonprofit Organiza-tion and the Need for a Multiple-Constituency Approach.” InW. W. Powell (ed.), The Nonprofit Sector: A Research Handbook.New Haven, Conn.: Yale University Press, 1987.

Kaplan, R. S. “Innovation Action Research: Creating New Manage-ment Theory and Practice.” Journal of Management AccountingResearch, 1998, pp. 89–118.

Kaplan, R. S., and Elias, J. “New Profit Inc.” Boston: Harvard BusinessSchool, 1999. Case 9–100–052.

Kaplan, R. S., and Kaplan, E. L. “United Way of SoutheasternNew England.” Boston: Harvard Business School, 1997. Case9–197–036.

Kaplan, R. S., and Norton, D. P. “The Balanced Scorecard: MeasuresThat Drive Performance.” Harvard Business Review, Jan.–Feb. 1992,71–79.

Kaplan, R. S., and Norton, D. P. The Balanced Scorecard: TranslatingStrategy into Action. Boston: Harvard Business School Press, 1996.

Kaplan, R. S., and Norton, D. P. Strategy-Focused Organizations: HowBalanced Scorecard Companies Thrive in the New Business Environ-ment. Boston: Harvard Business School Press, forthcoming.

Letts, C. W., Ryan, W. P., and Grossman, A. High PerformanceNonprofit Organizations: Managing Upstream for Greater Impact.New York: Wiley, 1999.

Meliones, J. “Saving Money, Saving Lives.” Harvard Business Review,Nov.–Dec. 2000, pp. 57–67.

Meliones, J., and others. “A Three-Year Experience Using a BalancedScorecard to Practice Smarter.” Working Paper. Durham, N.C.:Duke Children’s Hospital, 1999.

Porter, M. “What Is Strategy?” Harvard Business Review, Nov.–Dec.1996, pp. 61–78.

Sheehan, R. “Mission Accomplishment as Philanthropic Organiza-tion Effectiveness: Key Findings from the Excellence in Philan-thropy Project.” Nonprofit and Voluntary Sector Quarterly, 1996, 25,110–123.

370 KA P L A N

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