Developing Performance Measurement Systems - Essay Example

How do the challenges faced by non-profit organisations in developing performance measurement systems differ from those in for-profit organisations? July 19, 2014 Table of Contents How do the challenges faced by non-profit organisations in developing performance measurement systems differ from those in for-profit organisations? 1 July 19, 2014 1 1. Introduction 4 2. Critical Review of PMS 5 3. Conclusions 14 References 15 List of Figures Figure 2.1. The Balanced Scorecard framework (Kaplan and Norton, 1996, p. 36) 8 Figure 2.2. The Baldridge Model (Baldridge, 2014) 10 Figure 2.3. Example of BSC for NPO, abused women with children (Epstein, M. J. and Buhovac, 2010, p. 12) 12 Figure 2.4. Categories of measures and their indicators (Epstein, M. J. and Buhovac, 2010, p. 45) 13 1. Introduction Performance management system (PMS) is a management practice, which includes the set of processes, metrics, tool, methods, and software applications, that help to gather data on organisational performance, and provides the means to analyse the performance, against predefined benchmarks (Leonard, et al, 2007). Organisations use PMS to evaluate organisational processes, and to help them understand if the output is in line with accepted metrics. Implementing PMS in for profit organisations is relatively simple, since the organisation objectives are to make profits, and the metrics that measure the efficiency, such as revenue, productivity, rejection, manpower costs, and marketing costs are known and measuring these parameters is possible (Emerson, 2009). Non-profit organisations (NPOs) are organisations that have a social impact mission; they take up charity work, and some are cooperatives, created for the mutual benefit of a community. Such organisations may earn profits from their activities, but these profits are redistributed among people they serve (Drucker, 2005). In the case of NPOs, implementing PMS is different since the objectives are not to make profits but to increase social benefits or help community members, served by the NPO. Implementing PMS in NPOs therefore becomes a challenge since the standard metrics of revenue, cost, market share, productivity, etc., have different values (Poister, 2003). This paper critically reviews the literature on effective PMS, examines the differences in PMS requirements of for profit and NPOs and discusses the implications to ensure that PMS are made effective for NPOs. 2. Critical Review of PMS An important aspect of NPOs is that they need to be efficient, since they operate with a limited budget, and many of them hire people, who must be paid wages. Performance management systems are different for profit oriented and NPOs, and the systems depend on products, and markets addressed, objectives of the organisation, and nature of operations. However, certain common elements are observed in both types of organisations. Differences are seen in the manner in which metrics are identified and evaluated (Bradach, et al, 2008). This section critically examines the literature on PMS and tools used to implement the practice. 2.1. What makes a performance measurement system effective? While the objectives of for profit and NPOs are different, both must be effective, utilise resources efficiently and meet their goals. A very important aspect of PMS is that it is a comparative tool, and this means that performance is measured with reference to a benchmark; else, the metric does not have any meaning. As an example, merely indicating that productivity is 0.80 percent, has no relevance, unless a benchmark value of say 0.90 percent is used as a comparison. The benchmark figure is set by the senior management, or obtained from rival firms, which are leaders in their sector (Foster and Bradach, 2005; Burns, 1992). Some common requirements of PMS are discussed in this section. Use balanced measures: It is important that the metrics must be made of financial and non-financial data. Financial data is easier to gather and analyse, however, non-financial data such as customer satisfaction, problems addressed, support activities initiated, and others, become equally important. Measure process and outcome data: It is important to measure the inputs and resources used for organisation processes and the outcomes obtained. The metrics must cover internal and external activities, and help to verify if the processes meet the organisation goals. PMS must have a longitudinal nature: Metrics used must cover all activities over the financial year. This approach helps to understand the efficiency over the project life cycle, and to reduce the idle stages of planning, and project design. PMS must be dynamic: It is possible that certain lag and spurts occur in the processes and activities. Hence, it is important that dynamic metrics, that measure changing data should be used. PMS must be interconnected: When multiple activities and processes are measured, the metrics must be interconnected. Such a system helps to understand the impact that one process has on another. Number of metrics must be limited but provide a holistic view: Having too many measures creates a clutter and confusion. Hence, only important metrics that provide a holistic view must be used. Objective must be to strategise improvement: Any metrics and PMS implemented must focus on improving the strategy and processes, and not find fault or find scapegoats for poor performance. The acceptability of PMS is higher when such objectives are framed. Two tools used in PMS are reviewed in the next section. These include the balanced score card and the Baldridge model. 2.1.1. The Balanced Scorecard The Balanced Scorecard (BSC) is one of the important tools used to measure actual performance of financial and non-financial, performance indicators. Both for profit and NPOs organisations use this tool. Central to BSC is the organisation objective and the tool uses four perspectives, which are designed to measure the processes, used to meet the objective. The objective defined can include a simple statement such as increasing productivity of the organisation. The four perspective framed are, financial, customer, internal business processes, and learning. Indicators are used to measure each of the four perspectives. Rather than have too many perspectives and indicators, it is better to use a limited number of metrics (Kaplan and Norton, 1996). Figure 2.1. The Balanced Scorecard framework (Kaplan and Norton, 1996, p. 36) As seen in the above figure, each perspective has a matrix where objectives, the measures, targets to be achieved, and the initiatives to meet the objectives are entered. The four perspectives are briefly described as follows (Kaplan and Norton, 2000). Financial: This perspective measures the financial performance of the organisation, and the metrics are available from quarterly financial statements and balance sheets. Some of the indicators used are revenue and cash flows, return on equity, profitability, return on sales, etc. Customer: This perspective measures customer satisfaction and their perception of the organisation. Some of the indicators used are on time delivery, percent of new sales, share of the wallet for each customer or percent of customer purchase from an organisation, etc. Internal business processes: This perspective identifies organisation processes that examine the efficiency of the organisation. Some of the indicators used are, cost of production, new product development, opportunities identified and met, and cycle time. Learning: This perspective measures the manner in which the organisation learns, innovates and continues to improve. Some examples are training, time to market, life cycle, new technologies, and processes implemented. 2.1.2. The Baldridge model The model measures performance for six systems and it includes criteria for 44 parameters. The six systems measured are leadership, operation focus, strategic planning, workforce engagement, customer management, and knowledge management. The model uses a questionnaire with 985 criteria and these must be answered through organisation data. The model places stringent requirements and while it helps to measure performance very effectively, the problem is in the complexity and huge number of criteria to be measured. However, organisations can omit the systems that are not relevant to their objectives (Baldridge, 2014). Please refer to the following figure, which illustrates the model. Figure 2.2. The Baldridge Model (Baldridge, 2014) 2.2. How do NPOs differ from for-profit organisations? A number of important differences are evident in for profit and NPOs. Some of the differences are briefly examined as follows. NPOs, cannot distribute income to shareholders in the form of dividends. Funds are obtained mainly through donations and from sale of small promotional items, made by community members. Any income obtained is used to pay reasonable salaries to employees, to meet expenses and to carry out the targeted campaings. Income obtained does not benefit any individual or the board. There is no owner of the organisation, but only a promoter, who manages the daily operations. However, the NPO can have a number of non participating directors who take up promotional or fund raising activities (Letts, et al, 1997). Another important difference is that NPOs evaluate their performance based on the number of people served and causes covered, without concern about any financial returns obtained from them. NPOs usually qualify for tax exception and while they do not have to provide a balance sheet, they need to file a formal summary of income and expense statement, with the regulatory authorities (Wei-Skillern and Marciano, 2008). 2.2.1. Implications on ensuring PMS are effective for NPOs The previous sections discussed important aspects of PMS and tools used to implement such systems and a review was also presented about the differences between NPOs and for profit organisations. It is obvious that NPOs do not have to worry about profit or returns on investment. These observations do not imply that NPOs can be run efficiently or waste their resources. On the other hand, since funding is limited, NPOs must deploy the funds and resources so that the maximum benefits are realised for the causes they serve (Drucker, 2005). While NPOs do not offer high wages, they employ staff that must be paid. There are additional expenses such as office rent, utilities, and travel and organisational expenses, and these must be paid through the donations they raise. While NPOs do not offer dividends to the board members or file income tax returns, the implication is that donors and board members must obtain a sense of self-satisfaction that the funds are not wasted, but deployed in a meaningful manner (Foster and Bradach, 2005). 2.2.2. The Balanced scorecard for NPOs Continuing the discussion from the previous section, it becomes apparent that NPOs should be efficient, remain transparent in their activity, and provide the maximum returns that satisfy the philanthropic intentions of the donors (Hartnett and Matan, 2011). While each NPO has its own objectives and goals, a generic illustration of the BSC for NPO, which provides help to abused women with children, is illustrated in the following figure. Figure 2.3. Example of BSC for NPO, abused women with children (Epstein, M. J. and Buhovac, 2010, p. 12) As seen in the above figure, the perspectives used in the BSC are financial, client/ economic, client social and client spiritual, listed in the first column. These perspectives in turn, have a number of performance measures that are indicated in the second column. The objectives of the NPO are to assist abused women with children, provide them with training and learning opportunities, and help them to obtain financial stability. Each performance measure is calculated every quarter and at the end of the financial year to understand the effectiveness of the projects. Obtaining data for the BSC is a challenge, since the targets are spread over a number of communities (Zimmerman, 2004). Following figure indicates the various categories, through which data is obtained, and the performance measures used for each. Figure 2.4. Categories of measures and their indicators (Epstein, M. J. and Buhovac, 2010, p. 45) As seen in the above figure, various categories are used to obtain data for the performance measures. The categories include inputs, activities taken up, the outputs obtained, the outcomes, and the impact from the project. NPOs are interested in the outcome of their efforts and while costs are important, the outcomes must meet the organisation objectives. 3. Conclusions The paper discussed the importance of performance management systems, with reference to NPOs and discussed important issues related to implementing BSC for NPOs and the differences between for profit and NPOs. The review indicates that NPOs also need to implement PMS, and while the focus is not to increase profits, the objectives are to maximise donations and ensure that the resources are deployed effectively. The BSC, used by for profit firms, is equally useful to help NPOs understand their operations and improve the efficiency. Some differences were noted between the two and these differences become evident when designing the BSC for NPOs. The financial perspective measures were designed to measure the effectiveness of social welfare measures undertaken by the NPO. Other perspectives of BSC focussed on the effectiveness of the charity services provided by them. One of the most important perspective was the outcome from the activities, and the outcome was aligned with the social objectives of the NPO. It becomes evident from the discussions that performance measurement systems are important for NPOs, since PMS bring transparency in their operations, helps them to focus on the goals, and presents results that meet the philanthropic needs of the donors, who have achieve a sense of satisfaction that their donations have helped in a social cause. References Baldridge, 2014. The Baldrige Business Model. Available through Balrdidge LLC. [Accessed 19 June 2014] Bradach, J. L., Tierney, T. J. and Stone, N., 2008. Delivering on the Promise of Nonprofits. Harvard Business Review, December, pp. 88-97 Burns, W. J., 1992. Performance measurement, evaluation and incentives. Boston, Massachusetts, Harvard Business School Press Drucker, P. F. 2005. Managing the Nonprofit Organization: Principles and Practices. New York: HarperCollins Publishers Emerson, J., 2009. But Does It Work? How to Assess Program Performance. Stanford Social Innovation Review, Winter, pp. 29-30 Epstein, M. J. and Buhovac, A. R., 2010. Performance Measurement of Not-For-Profit Organizations. American Institute of Certified Public Accountants, NY Foster, W. and Bradach, J., 2005. Should Nonprofits Seek Profits? Harvard Business Review, Feb, pp. 1-8. Hartnett, B. and Matan, R., 2011. The Balanced Scorecard: A Strategic Tool for the Non-profit Sector. Research Paper, Sobel & Co. LLC., London Kaplan, R. S. and Norton, D. P. 1996. The Balanced Scorecard. Boston: Harvard Business School Press. Kaplan, R. S. and Norton, D. P. 2000. The Strategy-Focused Organization: How Balanced Scorecard Companies Thrive in the New Business Environment. Boston: Harvard Business School Press Letts, C. W., Ryan, W. P., and Grossman, A., 1999. 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