Nonprofit Research Papers
Suffolk University
Sawyer Business School
PAD 713AE: Budgeting and Financial Management
Research Paper
Performance Management in Non-Profit Organizations
Ruy N (Ryan) Ribeiro
05/01/2010
Introduction
Non-Profit organizations are trusted to address some the most challenging issues affecting society: ending violence in inner-city communities, educating disadvantaged children, diminishing health disparities and empowering disfranchised populations to bring about change are just a few of these very difficult tasks non-profits take on. Considering the importance of that work and the pivotal role these organizations play in alleviating the burden of those issues to society, it is fair to say that non-profits …show more content…
are held against high expectations and consequently need to show stellar performance to live up to the magnitude of the scope of the work they were trusted upon. It is also fair to say that their performance will not only affect their bottom lines, but also the welfare of the communities they serve.
Public and nonprofit organizations significantly affect, and have great potential to improve, the lives of citizens and communities in such areas as public safety, transportation, parks and recreation, economic development, education, housing, public health, environmental management, space exploration, social services, and more. In each of these areas there is interest, and sometimes very great interest, in ensuring that public and nonprofit organizations perform well and help society to move forward. (Berman, 2005)
Looking at nonprofits from that viewpoint and understanding the impact their performance has on society, one would think that these organizations are usually driven by results and have efficient performance management systems in place. The truth is that it is not the case, non-profits are known to be mission-driven and the notion of performance-based management is somewhat new to most of those organizations. Non-profit organizations are of increasing importance in modern economies, not only as providers of goods and services but also as employers (Speckbecker, 2003). Moreover, there seems to be a growing awareness that nonprofits need management just as for-profit organizations do. As Speckbecker says: “Twenty years ago, management was a dirty word for those involved in nonprofit organizations” (Speckbecker, 2003). It meant business, and nonprofits prided themselves on being free of the taint of commercialism and above such sordid considerations as the bottom line. Now most of them have learned that nonprofits need management even more than business does, precisely because they lack the discipline of the bottom line.” (Speckbecker, 2003).
In the business world, market forces serve as feedback mechanisms. Companies that perform well are rewarded by customers and investors; underperformers are penalized. Performance is relatively easy to quantify through quarterly earnings, ROI, customer loyalty scores, and the like. Moreover, such metrics can be calibrated and compared, ensuring that the companies producing the best results will attract capital and talent. Managers are encouraged to invest in the people, systems, and infrastructure needed to continue delivering superior performance. And internal feedback mechanisms, from up-to-the-minute operating data to performance reviews, keep everyone focused on critical activities and goals. In the nonprofit world, missions, not markets, are the primary magnets attracting essential resources, from donors inspired by organizations’ audacious goals; from board members, who not only volunteer their time and expertise but also often serve as major funders; and from employees, who accept modest paychecks to do work they care passionately about. (Bradach, 2005)
There are many opportunities for performance improvement in the Non-profit field and there are many organizations that have successfully used performance measurement methods. This paper looks at some areas in which improvement has often been recognized and sought in recent years in order to better serving external stakeholders’ needs, improving organizational effectiveness and using resources efficiently, improving project management, and increasing productivity through people. Modern performance improvements efforts often raise the bar in these areas, and managers are increasingly expected to be familiar with the strategies and standards that they involve. These areas offer important opportunities for increasing performance and productivity.
When it comes to performance management in nonprofit, the first issue that comes to play is how to define performance.
When dealing with a segment whose products are not tangible, how can one define the effectiveness of that kind of work? At the same time, the expectations being placed on these organizations to show results by their staff members, their boards, and public and private donors are rising. Nonprofit leaders are put in a difficult position where they need to demonstrate accountability and quantify the goals they want to achieve. For that reason, most of them have resorted to a set of commonly used performance measures to ensure they are being much more explicit about the results they intend to deliver and the strategies they’ll apply to achieve them. This paper will discuss some of the performance measures used in the non-profit …show more content…
sector.
Performance Measurement
Performance measurement is the activity of documenting the activities and accomplishments of programs. (Thomas J. Tierney and Nan Stone, 2005). The performance of a nonprofit can be measured by quantifying outcomes and outputs that have been achieved through the services they deliver. For example, by showing how well students in a certain school district are doing with standard testing scores, reduction in communicable disease rates and how many inmates were connected with housing and jobs after discharge. It is about measuring what programs are really achieving and letting people know how resources are being translated into results. Performance measurement systems provide considerable detail about programs. It can be argued that performance measurement by itself does not constitute performance improvement; it is an information-gathering strategy. However, the purposes to which this information is put are clearly associated with improving performance (Berry, 2003).
Coming from the point of view that performance is in the eye of the beholder and again revisiting the issue that nonprofits deal with issues that may not be tangible and are hard to quantify, the first question one can ask is who is watching non-profits to make sure they are doing a good job? Moreover, what qualifies as a good job for an organization such as AIDS Action? A cure for AIDS has not been found yet; does it mean that organization failed? Understanding what performance for nonprofits is may not be as clear cut and straight forward as it is for for-profits. After all, we are not looking at how many pairs of shoes have been sold or how many new branches of a bank have been closed. We are looking at quality of life indicators and those are much harder to measure. The most fundamental decision a nonprofit can make is to define the results it must deliver in order to be successful. That process entails translating the organization’s mission into goals that are simultaneously compelling enough to attract ongoing support from stakeholders and specific enough to inform resource allocations. (Thomas J. Tierney and Nan Stone, 2005)
Most traditional management accounting systems are based on financial results and their practical relevance for performance management in for profit organizations is obvious. However, the concept of profit as defined as a way to measure results is not valid for nonprofit organizations. Clearly, this does not exclude that nonprofit organizations generate profits in the sense that they generate a cash surplus. For example, a hospital or a theater may calculate the surplus of specific “products” (a specific operation or a play at the theater) or the surplus during a particular period. (Speckbacher, 2003). However, the main difference is that even though these non-profits had a surplus, their focus is still their mission. They didn’t make decisions based on how they could make more money; they made decisions based on what was better for their programs. The fundamental difference between profitable and non-profit organizations when it comes to financial decision making is that for the latter the mission is still the focus.
The past several decades have seen unprecedented growth in the scope and complexity of relationships between government and nonprofit organizations. These relationships have been more fruitful than many critics had feared and more problematic than many advocates had hoped. In the recent years, governments have increasingly relied on non-profits to address issues on a community-level. Non-profits deal with a wide array of issues and for each of these topics; these particular non-profits are experts on that subject. The government has acknowledged that expertise and also the fact that those organizations are usually community-based and more in tune with the particular needs of those communities or interest groups. As government’s dependence on nonprofits for public services, usually through contracts and grants, has increased, government officials have steadily increased their accountability demands for nonprofits, especially through greater regulation and performance-based contracting (Behn, 2001). Expectations for information and greater transparency in programmatic and financial operations are also on the rise at both the state and federal levels. In addition, many leading associations representing nonprofit organizations have called for greater levels of self-regulation, including better governance procedures (Maryland Association of Nonprofits, 2009; Panel on the Nonprofit Sector, 2007).
A very common concept that derived from this relationship between government and nonprofits is performance based contracting. This paper will review that concept and outline a few additional approaches Non-Profits can use to measure performance.
Performance Contracting
Performance Contracting became very popular in the mid-90s with the “reinventing government” movement. New public management (NPM) practices generated a spike in the interest level from the government in doing business with non-profits. And due to this increased interest, all the ideas and concepts that concerned improving the performance of public services transcended to the non-profit arena. Moreover, this movement and the related NPM encouraged policy makers to adopt more market-based strategies for addressing public problems, such as contracting with private nonprofit and for-profit agencies (Lynn, 1998). In addition, the welfare reform legislation of 1996 created the Transitional Assistance for Needy Families (TANF) program, replacing the long-standing Aid to Dependent Families and Children (AFDC) program (Berman, 2005). A central component of the new TANF program was performance-based contracts to encourage service providers to place individuals in permanent employment quickly (Berman, 2005). These contracts were also part of a broader strategy embodied by TANF to reduce the role of cash assistance in helping low-income individuals; social services delivered extensively by nonprofit and for-profit agencies through performance contracts were designed to help individuals who might have previously relied on cash assistance to obtain employment and/or learn new skills to prepare themselves for the labor market (Berman, 2005).
Non-profit organizations greatly benefited from these new trends in New Public Management which allowed them to conquer a bigger space in the public arena, as they had increased visibility and more access to resources. Under the core principles of that movement, communities had to be empowered to address their own problems and the federal government trusted non-profits to implement high-level projects, as pointed out before. Consequently, governments become increasingly dependent on such organizations to tackle some of the more critical issues in society. And due to the fact these issues, such as welfare, violence prevention and land preservation are of high interest to the government officials’ constituents; accountability came in to play. These performance-based contracts are being executed with tax dollars and the government officials need to be accountable to their voters on how these resources are being allocated and what results those programs are bringing. What it comes down to is that Non-Profits are in charge of executing what elected officials promise their constituents. Therefore, the need to enter contracts with a clear expectation of how the budget will support programs and goals and how those monies will translate into improvements to that community or segment.
Non-Profits greatly benefit from this relationship with government. From both the point of view of business development, since their contract revenue has significantly increased with the grants and contracts received from the federal government. And from the point of view of implementing performance management activities, since this new way of conducting business paved the way for the introduction of valuable concepts related to performance management in non-profits. In Summary, new public management brought a new set of ideas and principles that were embraced by nonprofits and changed some of their paradigm with regards to their own definition of success and they relationship with their mission. Performance started to be evaluated by directly connecting program budget to goals and outcomes to understand the impact of those contracts had on addressing the issues at hand.
Over time, performance contracting spread to a wide variety of service fields in the United States and elsewhere. New York City, for instance, has restructured hundreds of millions of dollars of contracts with social and health agencies as performance contracts. Some state governments have “privatized” at least some of their child welfare services by shifting public services provided by state or county staff to performance-based contracts with nonprofits, with the goal of improving the efficiency and effectiveness of child welfare services (Courtney, 2000). The same has been done by the Health Resource Service Administration (HRSA) and Substance Abuse Mental Health Administration (SMAHSA), in the past five years when they increased substantially the funding available to communities to address major public health epidemics, such as HIV and Heroine/Crack use, that the government alone wouldn’t be able to tackle. Due to the magnitude of these contracts and the threat these issues pose to society, the issue of performance has been addressed tirelessly and governments pressured nonprofits to come up with a set of measures to account for their performance and their ability to fulfill the terms of those contracts.
The benefits and disadvantages of performance contracts have been extensively discussed in recent years. Within the performance management strategy movement, other strategies have been employed that strive to be more nonprofit-centric. These strategies include benchmarking, logic models, balanced scorecards, and social return on investment (SROI). All of these strategies have been used to measure performance in non-profit organizations in recent years and can illustrate examples of how organizations are applying management concepts to their operations. (Heinrich and Marschke, 2008). The Performance management contracts introduced nonprofits to these concepts and in result they became better able to manage their own performance as a whole, and not only when it relates to these contracts. (Heinrich and Marschke, 2008). All these concepts will be discussed in this paper.
Benchmarking
Benchmarking involves identifying excellence and using it as a standard by which to measure performance. Benchmarking entails an effort to compare a specific nonprofit organization (or set of agencies) with other comparable organizations. It has its roots in the for-profit management world where companies are often compared on various measures, including profitability. The attraction of benchmarking is that it offers nonprofits a mechanism for them to assay their organizations, including administrative costs, the efficiency of their fund-raising operations, and number of members in comparison with other organizations with similar missions and profiles. Outcome evaluation is also very complicated, so benchmarking offers a strategy for program improvement and greater accountability, even in the absence of specific outcome data that are often lacking for many nonprofit programs (Kara D. Rutowski, Jeffery K. Guiler and Kurt E. Schimmel, 2007).
Looking again at the issue that the product delivered by nonprofits may not be so easily measured and quantifiable as services and products in the for-profit industry, it is harder for nonprofits to assess their own performance looking at standard reports. For instance, let’s look at an HIV Testing Program whose goals are to promote HIV testing and raise awareness of risk factors. Hypothetically, let’s consider that such program tested 1000 people during a given year and only 4 were positive. How will they measure their performance based on those numbers? That can be quite difficult to determine if a 4% seropositivity rate is an indicator for success or failure. However, using the benchmarking approach this program can compare itself to how it did as it relates to other programs serving similar populations and obtaining similar results. According to HIVqual (HIVqual.org), an organization that specializes in providing benchmarking for different clinical indicators for HIV treatment, despite seeming low that 4% rate is well above the national average. The National average according to the HIVQual Project is about 1%. In this case an apparent low performance indicator, 4%, turned out to be an excellent outcome. Without access to that kind of information that program manager would not know how well he was doing and whether or not his program was being successful.
Undeniably benchmarking tends to be most helpful with easy to obtain information, such as number of administrators, membership levels, and the amount of donations. However, the health care industry utilizes it a little more comprehensively, especially when looking at health outcomes of a particular community and health disparities data. The field of Public Health has also embraced that strategy for community-wide data evaluation, such as rates of violence and STD transmission, and used it to compare how effectively neighborhoods have addressed such problems. Also, the Boston Public Health Commission compares individual program data with city-wide data to determine how well a program is performing in comparison to others.
Benchmarking is an attainable way to measure performance, as non-profits are comparing their outcomes to national and local averages they can have a clear idea of where they rank and where they need to improve. However, that approach can only be utilized if such data exists. As mentioned before, in the health care industry this method is widely used and there are plenty of data available on clinical outcomes.
Different types of benchmarking may be undertaken, depending upon what the organization hopes to achieve (Rutowski, Guiler & Schimmel, 2007). Industry benchmarking, or functional benchmarking, is the measurement of several aspects of the company’s operations and a comparison of these across an industry. Competitive benchmarking is used to compare an organization with its competitors. Process or generic benchmarking is used to compare similar procedures at different companies. There has been relatively little research exploring benchmarking in nonprofit organizations outside of the healthcare industry (Rutowski, Guiler & Schimmel, 2007). Hopefully, nonprofits will follow the trend set by healthcare and employ this strategy as a performance measurement technique more efficiently in the upcoming years.
Balanced Scorecards
Another performance management strategy commonly utilized by nonprofits is the balanced scorecard developed by Robert Kaplan in 2002. The balanced scorecard is intended to counter the criticism from within the nonprofit sector that the application of certain types of performance management strategies borrowed from the for-profit sector do not sufficiently account for the social mission and values of many nonprofits (Berman, 2005).
Kaplan describes the innovation of the balanced scorecard as follows:
"The balanced scorecard retains traditional financial measures. But financial measures tell the story of past events, an adequate story for industrial age companies for which investments in long-term capabilities and customer relationships were not critical for success. These financial measures are inadequate, however, for guiding and evaluating the journey that information age companies must make to create future value through investment in customers, suppliers, employees, processes, technology, and innovation." (Kaplan, 2002)
The balanced scorecard is a strategic-planning tool that seeks to integrate financial, programmatic, operational, and mission-related objectives, so a nonprofit agency can strive to create a more efficient and effective organization while at the same time remaining faithful to its mission. (Berman, 2005). The balanced scorecard does involve a significant investment by a nonprofit organization because of its substantial data requirements and the need for extensive consultation among the different stakeholders of a nonprofit, including the board, staff, clients, community members, and funders. As a result, the balanced scorecard tends to be embraced by larger nonprofit and public organizations eager to drive substantial change in their operations. The balanced scorecard is also particularly worthwhile for organizations that seek to rethink or improve their relationship with their users, such as parents in a family-service agency or patients in the case of a hospital. In this sense, the balanced scorecard reflects the enhanced primacy placed on responsiveness to customers in all types of organizations (Berman, 2005). However, despite its holistic approach to organizational strategy, the balanced scorecard tends to focus on measurable indicators of costs and program utilization and thus is not widely used to consider the citizenship and community-building role of nonprofits although it potentially could be used to address these issues. (Berman, 2005) Also, the measurement of program impact through the balanced scorecard approach remains challenging given the difficulty of obtaining relevant outcome data because of the expense and the long-term effects of many nonprofit programs. (Berman, 2005)
Balance score cards are a viable alternative for nonprofit organizations. In this system, one takes a look at various elements affecting performance and not a single isolated measure. Due to the fact that non-profits are very in tune with their mission, and are constantly focusing on trying to allocate their limited resources efficiently in order to achieve their goals, this system works very effectively as it provides these organizations with this bigger-picture view they much need. The balanced scorecard system has a multiple focus on several perspectives, including financial performance, and that will give nonprofits the tools they need to make decisions regarding where moneys will be invested in comparison with performance analysis of different programs. For a nonprofit organization, profit is not a determining goal of strategy; but no margin, no mission. Therefore, they need to be able to put their money where they can see results.
The other issue to be considered with this approach is stakeholder involvement. In this case, the balanced scorecard provides a comprehensive framework that will help association directors and managers better define strategies, track performance, and provide data to show their various stakeholder groups how well they are performing in terms of mission value and outcomes. It helps as far as celebrating their successes and selling their message to others. Well-rounded and well-presented results will make those organizations look more appealing and that could potentially attract endowments, additional contracts and positive publicity.
Logic Models
Another performance management approach that is widely used by nonprofits is a logic model. As a matter of fact, many public and private funders now require nonprofit grant and contract applicants to develop a logic model as part of their grant application. Logic Models have become a standard performance measure for contracts due to the fact that they focus on process and outcomes. Logic models force nonprofits to map the entire “production process” for their programs, from the initial inputs such as staff and resources to the long term outcomes. For funders, logic models offer an opportunity to hold nonprofits accountable for the implementation of their programs. Thus, funders could sanction a nonprofit that fell short of its intended service deliver model after a contract or grant was awarded (Berman, 2005). For Nonprofits, logic models allow them to select which outcomes they want to achieve, so they can focus their efforts on achieving these particular goals. These goals are not chosen randomly, this consists of a “logic” process, from a cause-consequence frame of reference; therefore, these goals are very achievable and these organizations are very likely to succeed.
Logic models have certainly caught the attention of nonprofits nationwide. Arguably their greatest value is on the “front-end” of service implementation. Ideally, the process of creating a logic model should engage a broad spectrum of a nonprofit agency’s staff and volunteers in thinking about impact and outcomes (Berman, 2005). This level of involvement helps them refine their strategies and win the support of agency stakeholders. By having everyone on board, these agencies will be more likely to achieve program goals. Logic models as a strategy to drive better outcomes and help funders select the most effective agencies for funding remains quite problematic. Furthermore, logic models tend to focus on programmatic performance and generally do not engage the agency in thinking about governance or citizen–agency relationships. (Berman, 2005)
SROI – Social Return on Investment
Another performance strategy designed for nonprofits that also take into account their difficulties in evaluating programs and defining success is the Social Return on Investment (SROI). This strategy was pioneered by Jed Emerson and colleagues at the Roberts Foundation in San Francisco who envisioned SROI as a vehicle for assessing the social value of nonprofit programs. Too often, nonprofit programs, especially social service programs, are evaluated quite narrowly and thus may not appear to demonstrate significant value for the community (Berman, 2005). Topics, such as quality of life, positive decision making, civic pride and affinity for diversity, for instance, are very hard to measure. One can measure how many people attended a benefit to raise autism awareness, but how can we measure how the lives of those who attended were impacted by their participation?
Bearing that challenge in mind, SROI is designed to overcome this problem through a more inclusive approach to thinking about costs and benefits that consider the savings to society of nonprofit services. For example, a person’s employment because of job training and placement by a nonprofit would produce long-term benefits for society that should be considered when evaluating the impact of a nonprofit program (Tuan, 2008). This type of argument may be a hard one to make. There is the counter-argument whether or not current citizens are paying for current services. There is also the counter-argument that tax dollars should be directly benefiting tax payers, and projects such as school renovations may sound more appealing than investing on something that people will see results in the long run.
Similar to other performance management initiatives, SROI focuses on programmatic impact rather than governance (Tuan, 2008). SROI is also quite complicated in practice so its adoption within the nonprofit sector has been quite limited, although the conceptual framework employed in SROI has encouraged funders and nonprofits to approach social impact more inclusively and to be rigorous and data-driven in thinking about costs and benefits. SROI has also spawned other efforts to think broadly about the social value of nonprofits (Tuan, 2008).
In times where government and the country in general faces a dreadful budget crises making decisions from where to cut from such an abstract idea may be not the best way to measure performance as it relates to results from financial investments. This approach is probably the one that makes more sense from a long-term perspective. However, many non-profits can not afford that kind of thinking and need to have more tangible data to account for their performance. The idea of social impact can and should be used for lobbying and for getting buy-in from constituents; however, resting on that strategy to justify resource allocation and to measure results may be a risky decision to make.
Conclusion:
Overall, the varied performance management strategies commonly used by nonprofit organizations tend to minimize attention to internal management and governance as well as the external relations in favor of a focus on impact and the relevant costs and benefits (Berman, 2005). As previously discussed, the biggest issue faced by non-profits is the fact that their product may not be as easily defined as the services and goods are in the for profit world. The issue of the market inclination and how people are responding to their services is also another important one to be kept in mind. Non-profits are not dictated by their consumers’ behaviors, but by the environment as a whole. The definition of success in the nonprofit world is very complex and can be looked at from different angles as explained through the strategies above.
Non-profits have increasingly tried to incorporate performance management strategies to its practices. And although the management of these organizations may be a little more in tune with those principles, we can not forget that those concepts may not be as evident to their staff. For many of the direct line staff, it is very hard to evidence the impact of performance management on management decisions and service improvements. Managers may be aware of the value of performance measurement in influencing decisions and improving services, but sometimes the communication with staff tend to be broad and disappointingly vague. As non-profits utilize these concepts to run their operations, they need to understand that front line staff needs to be equally aware of how the organization is performing and how that affects them. There is a presumed linkage to budget decisions, although promised in theory, is often difficult to detect in practice. Many non-profits have been good about disseminating those ideas among their managers, but that may not have been equally successful in getting their staff on board.
In conclusion, performance management in nonprofit is a very broad topic that can be viewed from many different perspectives.
The need to become more accountable to results has forced many of these organizations to adopt performance management systems. There are a few commonly used systems as explained in this paper, they each have their strengths and their weakness and it is up to each nonprofit manager to decide which one suits them best. This is a very new field, however, that has emerged with New Public Management and become more prominent in the 90s. There is a lot of room for new theories and approaches to be developed, and I am sure in the near future we will be hearing more innovative concepts coming into play. Regardless from which angle you look at predominance for nonprofit organizations, there will always be the issue of hard-to-define products and goals. And there will always be the cultural issues within those organizations where staff may not be as in tune as managers are of the needs to define success and measure performance. People join non-profits because they have affinity with their missions and the idea that they have to achieve goals and quotas may not be as tangible to them as their desire to help
others.
BIBLIOGRAPHY: 1. Bradach, Jeffrey (2005). Non-Profit Effectiveness. Washington, DC: Brookings Institution Press. 2. L., Thomas, J. Tierney, and Nan Stone (2006). "Delivering on the promise of nonprofits." Harvard Business Review. 3. Lencioni, Pat. "Nonprofits vs. For-Profits: Mission and Performance." Business Week Online 6 May 2009. General Reference Center Gold. Web. 1 May 2010. 4. Berry, J.M. (2003). A voice for nonprofits. Washington, DC: Brookings Institution Press. 5. Behn, R.D. (2001): Rethinking democratic accountability. Washington, DC: Brookings Institution Press. 6. Behn, R.D., & Kant, P.A. (1999). Strategies for avoiding the pitfalls of performance contracting. Public Productivity & Management Review, 22, 470-489 7. Blalock, A.B., & Barnow, B.S. (2004). Is the new obsession with performance management masking the truth about social programs? In D. W. Forsythe (Ed.), Quicker, better, cheaper? Managing performance in American government (pp. 485-519). Albany, NY: Rockefeller Institute Press. 8. Bovaird, T., & Downe, J. (2009). Innovation in public engagement and co-production of services. Meta-evaluation of the local government modernization agenda-White policy paper. 9. Emerson, J., Wachowicz, J., & Chun, S. (2000). Social return on investment: Exploring aspects of value creation in the nonprofit sector. San Francisco: The Roberts Foundation. Retrieved December 6, 2009 10. Lynn, L.E., Jr. (1998). The new public management: How to transform a theme into a legacy. Public Administration Review, 58, 231-237. 11. Lyons, M. (in press). Australia: A continuing love affair with the new public management. In S. Phillips & S. R. Smith (Eds.), Governance and regulation in the third sector. London: Routledge. 12. Marris, P., & Rein, M. (1982). Dilemmas of social reform: Poverty and community action in the United States. Chicago: University of Chicago Press. 13. Marshall, T.H. (1964). Class, citizenship, and social development: Essays. New York: Doubleday. 14. Berman, Evan M. Productivity in Public and Nonprofit Organizations. Armonk, NY, USA: M.E. Sharpe, Inc., 2005. p 15. 15. Tuan, M.T. (2008). Measuring and/or estimating social value creation: Insights into eight integrated cost approaches. Seattle, WA: Bill & Melinda Gates Foundation. Retrieved December 11, 2009. 16. Speckbacher, Gerhard. The Economics of Performance Management in Nonprofit Organizations. Nonprofit Management & Leadership; Spring2003, Vol. 13 Issue 3, p267, 15p 17. Ammons, David N., and William C. Rivenbark. "Factors influencing the use of performance data to improve municipal services: Evidence from the North Carolina benchmarking project." Public Administration Review 68.2 (2008): 304+. General Reference Center Gold. Web. 3 May 2010 18. Kara D. Rutowski, Jeffery K. Guiler and Kurt E. Schimmel. Benchmarking organizational commitment across nonprofit human services organizations in Pennsylvania. School of Business, Robert Morris University, Pittsburgh, Pennsylvania, USA, 2007. 19. Courtney, M.E. (2000). Managed care and child welfare services: What are the issues? Children and Youth Services Review, 22(2), 87-91. 20. Kaplan, R.S. (2002). The balanced scorecard and nonprofit organizations. Boston: Harvard Business School.
Sawyer Business School
PAD 713AE: Budgeting and Financial Management
Research Paper
Performance Management in Non-Profit Organizations
Ruy N (Ryan) Ribeiro
05/01/2010
Introduction
Non-Profit organizations are trusted to address some the most challenging issues affecting society: ending violence in inner-city communities, educating disadvantaged children, diminishing health disparities and empowering disfranchised populations to bring about change are just a few of these very difficult tasks non-profits take on. Considering the importance of that work and the pivotal role these organizations play in alleviating the burden of those issues to society, it is fair to say that non-profits …show more content…
are held against high expectations and consequently need to show stellar performance to live up to the magnitude of the scope of the work they were trusted upon. It is also fair to say that their performance will not only affect their bottom lines, but also the welfare of the communities they serve.
Public and nonprofit organizations significantly affect, and have great potential to improve, the lives of citizens and communities in such areas as public safety, transportation, parks and recreation, economic development, education, housing, public health, environmental management, space exploration, social services, and more. In each of these areas there is interest, and sometimes very great interest, in ensuring that public and nonprofit organizations perform well and help society to move forward. (Berman, 2005)
Looking at nonprofits from that viewpoint and understanding the impact their performance has on society, one would think that these organizations are usually driven by results and have efficient performance management systems in place. The truth is that it is not the case, non-profits are known to be mission-driven and the notion of performance-based management is somewhat new to most of those organizations. Non-profit organizations are of increasing importance in modern economies, not only as providers of goods and services but also as employers (Speckbecker, 2003). Moreover, there seems to be a growing awareness that nonprofits need management just as for-profit organizations do. As Speckbecker says: “Twenty years ago, management was a dirty word for those involved in nonprofit organizations” (Speckbecker, 2003). It meant business, and nonprofits prided themselves on being free of the taint of commercialism and above such sordid considerations as the bottom line. Now most of them have learned that nonprofits need management even more than business does, precisely because they lack the discipline of the bottom line.” (Speckbecker, 2003).
In the business world, market forces serve as feedback mechanisms. Companies that perform well are rewarded by customers and investors; underperformers are penalized. Performance is relatively easy to quantify through quarterly earnings, ROI, customer loyalty scores, and the like. Moreover, such metrics can be calibrated and compared, ensuring that the companies producing the best results will attract capital and talent. Managers are encouraged to invest in the people, systems, and infrastructure needed to continue delivering superior performance. And internal feedback mechanisms, from up-to-the-minute operating data to performance reviews, keep everyone focused on critical activities and goals. In the nonprofit world, missions, not markets, are the primary magnets attracting essential resources, from donors inspired by organizations’ audacious goals; from board members, who not only volunteer their time and expertise but also often serve as major funders; and from employees, who accept modest paychecks to do work they care passionately about. (Bradach, 2005)
There are many opportunities for performance improvement in the Non-profit field and there are many organizations that have successfully used performance measurement methods. This paper looks at some areas in which improvement has often been recognized and sought in recent years in order to better serving external stakeholders’ needs, improving organizational effectiveness and using resources efficiently, improving project management, and increasing productivity through people. Modern performance improvements efforts often raise the bar in these areas, and managers are increasingly expected to be familiar with the strategies and standards that they involve. These areas offer important opportunities for increasing performance and productivity.
When it comes to performance management in nonprofit, the first issue that comes to play is how to define performance.
When dealing with a segment whose products are not tangible, how can one define the effectiveness of that kind of work? At the same time, the expectations being placed on these organizations to show results by their staff members, their boards, and public and private donors are rising. Nonprofit leaders are put in a difficult position where they need to demonstrate accountability and quantify the goals they want to achieve. For that reason, most of them have resorted to a set of commonly used performance measures to ensure they are being much more explicit about the results they intend to deliver and the strategies they’ll apply to achieve them. This paper will discuss some of the performance measures used in the non-profit …show more content…
sector.
Performance Measurement
Performance measurement is the activity of documenting the activities and accomplishments of programs. (Thomas J. Tierney and Nan Stone, 2005). The performance of a nonprofit can be measured by quantifying outcomes and outputs that have been achieved through the services they deliver. For example, by showing how well students in a certain school district are doing with standard testing scores, reduction in communicable disease rates and how many inmates were connected with housing and jobs after discharge. It is about measuring what programs are really achieving and letting people know how resources are being translated into results. Performance measurement systems provide considerable detail about programs. It can be argued that performance measurement by itself does not constitute performance improvement; it is an information-gathering strategy. However, the purposes to which this information is put are clearly associated with improving performance (Berry, 2003).
Coming from the point of view that performance is in the eye of the beholder and again revisiting the issue that nonprofits deal with issues that may not be tangible and are hard to quantify, the first question one can ask is who is watching non-profits to make sure they are doing a good job? Moreover, what qualifies as a good job for an organization such as AIDS Action? A cure for AIDS has not been found yet; does it mean that organization failed? Understanding what performance for nonprofits is may not be as clear cut and straight forward as it is for for-profits. After all, we are not looking at how many pairs of shoes have been sold or how many new branches of a bank have been closed. We are looking at quality of life indicators and those are much harder to measure. The most fundamental decision a nonprofit can make is to define the results it must deliver in order to be successful. That process entails translating the organization’s mission into goals that are simultaneously compelling enough to attract ongoing support from stakeholders and specific enough to inform resource allocations. (Thomas J. Tierney and Nan Stone, 2005)
Most traditional management accounting systems are based on financial results and their practical relevance for performance management in for profit organizations is obvious. However, the concept of profit as defined as a way to measure results is not valid for nonprofit organizations. Clearly, this does not exclude that nonprofit organizations generate profits in the sense that they generate a cash surplus. For example, a hospital or a theater may calculate the surplus of specific “products” (a specific operation or a play at the theater) or the surplus during a particular period. (Speckbacher, 2003). However, the main difference is that even though these non-profits had a surplus, their focus is still their mission. They didn’t make decisions based on how they could make more money; they made decisions based on what was better for their programs. The fundamental difference between profitable and non-profit organizations when it comes to financial decision making is that for the latter the mission is still the focus.
The past several decades have seen unprecedented growth in the scope and complexity of relationships between government and nonprofit organizations. These relationships have been more fruitful than many critics had feared and more problematic than many advocates had hoped. In the recent years, governments have increasingly relied on non-profits to address issues on a community-level. Non-profits deal with a wide array of issues and for each of these topics; these particular non-profits are experts on that subject. The government has acknowledged that expertise and also the fact that those organizations are usually community-based and more in tune with the particular needs of those communities or interest groups. As government’s dependence on nonprofits for public services, usually through contracts and grants, has increased, government officials have steadily increased their accountability demands for nonprofits, especially through greater regulation and performance-based contracting (Behn, 2001). Expectations for information and greater transparency in programmatic and financial operations are also on the rise at both the state and federal levels. In addition, many leading associations representing nonprofit organizations have called for greater levels of self-regulation, including better governance procedures (Maryland Association of Nonprofits, 2009; Panel on the Nonprofit Sector, 2007).
A very common concept that derived from this relationship between government and nonprofits is performance based contracting. This paper will review that concept and outline a few additional approaches Non-Profits can use to measure performance.
Performance Contracting
Performance Contracting became very popular in the mid-90s with the “reinventing government” movement. New public management (NPM) practices generated a spike in the interest level from the government in doing business with non-profits. And due to this increased interest, all the ideas and concepts that concerned improving the performance of public services transcended to the non-profit arena. Moreover, this movement and the related NPM encouraged policy makers to adopt more market-based strategies for addressing public problems, such as contracting with private nonprofit and for-profit agencies (Lynn, 1998). In addition, the welfare reform legislation of 1996 created the Transitional Assistance for Needy Families (TANF) program, replacing the long-standing Aid to Dependent Families and Children (AFDC) program (Berman, 2005). A central component of the new TANF program was performance-based contracts to encourage service providers to place individuals in permanent employment quickly (Berman, 2005). These contracts were also part of a broader strategy embodied by TANF to reduce the role of cash assistance in helping low-income individuals; social services delivered extensively by nonprofit and for-profit agencies through performance contracts were designed to help individuals who might have previously relied on cash assistance to obtain employment and/or learn new skills to prepare themselves for the labor market (Berman, 2005).
Non-profit organizations greatly benefited from these new trends in New Public Management which allowed them to conquer a bigger space in the public arena, as they had increased visibility and more access to resources. Under the core principles of that movement, communities had to be empowered to address their own problems and the federal government trusted non-profits to implement high-level projects, as pointed out before. Consequently, governments become increasingly dependent on such organizations to tackle some of the more critical issues in society. And due to the fact these issues, such as welfare, violence prevention and land preservation are of high interest to the government officials’ constituents; accountability came in to play. These performance-based contracts are being executed with tax dollars and the government officials need to be accountable to their voters on how these resources are being allocated and what results those programs are bringing. What it comes down to is that Non-Profits are in charge of executing what elected officials promise their constituents. Therefore, the need to enter contracts with a clear expectation of how the budget will support programs and goals and how those monies will translate into improvements to that community or segment.
Non-Profits greatly benefit from this relationship with government. From both the point of view of business development, since their contract revenue has significantly increased with the grants and contracts received from the federal government. And from the point of view of implementing performance management activities, since this new way of conducting business paved the way for the introduction of valuable concepts related to performance management in non-profits. In Summary, new public management brought a new set of ideas and principles that were embraced by nonprofits and changed some of their paradigm with regards to their own definition of success and they relationship with their mission. Performance started to be evaluated by directly connecting program budget to goals and outcomes to understand the impact of those contracts had on addressing the issues at hand.
Over time, performance contracting spread to a wide variety of service fields in the United States and elsewhere. New York City, for instance, has restructured hundreds of millions of dollars of contracts with social and health agencies as performance contracts. Some state governments have “privatized” at least some of their child welfare services by shifting public services provided by state or county staff to performance-based contracts with nonprofits, with the goal of improving the efficiency and effectiveness of child welfare services (Courtney, 2000). The same has been done by the Health Resource Service Administration (HRSA) and Substance Abuse Mental Health Administration (SMAHSA), in the past five years when they increased substantially the funding available to communities to address major public health epidemics, such as HIV and Heroine/Crack use, that the government alone wouldn’t be able to tackle. Due to the magnitude of these contracts and the threat these issues pose to society, the issue of performance has been addressed tirelessly and governments pressured nonprofits to come up with a set of measures to account for their performance and their ability to fulfill the terms of those contracts.
The benefits and disadvantages of performance contracts have been extensively discussed in recent years. Within the performance management strategy movement, other strategies have been employed that strive to be more nonprofit-centric. These strategies include benchmarking, logic models, balanced scorecards, and social return on investment (SROI). All of these strategies have been used to measure performance in non-profit organizations in recent years and can illustrate examples of how organizations are applying management concepts to their operations. (Heinrich and Marschke, 2008). The Performance management contracts introduced nonprofits to these concepts and in result they became better able to manage their own performance as a whole, and not only when it relates to these contracts. (Heinrich and Marschke, 2008). All these concepts will be discussed in this paper.
Benchmarking
Benchmarking involves identifying excellence and using it as a standard by which to measure performance. Benchmarking entails an effort to compare a specific nonprofit organization (or set of agencies) with other comparable organizations. It has its roots in the for-profit management world where companies are often compared on various measures, including profitability. The attraction of benchmarking is that it offers nonprofits a mechanism for them to assay their organizations, including administrative costs, the efficiency of their fund-raising operations, and number of members in comparison with other organizations with similar missions and profiles. Outcome evaluation is also very complicated, so benchmarking offers a strategy for program improvement and greater accountability, even in the absence of specific outcome data that are often lacking for many nonprofit programs (Kara D. Rutowski, Jeffery K. Guiler and Kurt E. Schimmel, 2007).
Looking again at the issue that the product delivered by nonprofits may not be so easily measured and quantifiable as services and products in the for-profit industry, it is harder for nonprofits to assess their own performance looking at standard reports. For instance, let’s look at an HIV Testing Program whose goals are to promote HIV testing and raise awareness of risk factors. Hypothetically, let’s consider that such program tested 1000 people during a given year and only 4 were positive. How will they measure their performance based on those numbers? That can be quite difficult to determine if a 4% seropositivity rate is an indicator for success or failure. However, using the benchmarking approach this program can compare itself to how it did as it relates to other programs serving similar populations and obtaining similar results. According to HIVqual (HIVqual.org), an organization that specializes in providing benchmarking for different clinical indicators for HIV treatment, despite seeming low that 4% rate is well above the national average. The National average according to the HIVQual Project is about 1%. In this case an apparent low performance indicator, 4%, turned out to be an excellent outcome. Without access to that kind of information that program manager would not know how well he was doing and whether or not his program was being successful.
Undeniably benchmarking tends to be most helpful with easy to obtain information, such as number of administrators, membership levels, and the amount of donations. However, the health care industry utilizes it a little more comprehensively, especially when looking at health outcomes of a particular community and health disparities data. The field of Public Health has also embraced that strategy for community-wide data evaluation, such as rates of violence and STD transmission, and used it to compare how effectively neighborhoods have addressed such problems. Also, the Boston Public Health Commission compares individual program data with city-wide data to determine how well a program is performing in comparison to others.
Benchmarking is an attainable way to measure performance, as non-profits are comparing their outcomes to national and local averages they can have a clear idea of where they rank and where they need to improve. However, that approach can only be utilized if such data exists. As mentioned before, in the health care industry this method is widely used and there are plenty of data available on clinical outcomes.
Different types of benchmarking may be undertaken, depending upon what the organization hopes to achieve (Rutowski, Guiler & Schimmel, 2007). Industry benchmarking, or functional benchmarking, is the measurement of several aspects of the company’s operations and a comparison of these across an industry. Competitive benchmarking is used to compare an organization with its competitors. Process or generic benchmarking is used to compare similar procedures at different companies. There has been relatively little research exploring benchmarking in nonprofit organizations outside of the healthcare industry (Rutowski, Guiler & Schimmel, 2007). Hopefully, nonprofits will follow the trend set by healthcare and employ this strategy as a performance measurement technique more efficiently in the upcoming years.
Balanced Scorecards
Another performance management strategy commonly utilized by nonprofits is the balanced scorecard developed by Robert Kaplan in 2002. The balanced scorecard is intended to counter the criticism from within the nonprofit sector that the application of certain types of performance management strategies borrowed from the for-profit sector do not sufficiently account for the social mission and values of many nonprofits (Berman, 2005).
Kaplan describes the innovation of the balanced scorecard as follows:
"The balanced scorecard retains traditional financial measures. But financial measures tell the story of past events, an adequate story for industrial age companies for which investments in long-term capabilities and customer relationships were not critical for success. These financial measures are inadequate, however, for guiding and evaluating the journey that information age companies must make to create future value through investment in customers, suppliers, employees, processes, technology, and innovation." (Kaplan, 2002)
The balanced scorecard is a strategic-planning tool that seeks to integrate financial, programmatic, operational, and mission-related objectives, so a nonprofit agency can strive to create a more efficient and effective organization while at the same time remaining faithful to its mission. (Berman, 2005). The balanced scorecard does involve a significant investment by a nonprofit organization because of its substantial data requirements and the need for extensive consultation among the different stakeholders of a nonprofit, including the board, staff, clients, community members, and funders. As a result, the balanced scorecard tends to be embraced by larger nonprofit and public organizations eager to drive substantial change in their operations. The balanced scorecard is also particularly worthwhile for organizations that seek to rethink or improve their relationship with their users, such as parents in a family-service agency or patients in the case of a hospital. In this sense, the balanced scorecard reflects the enhanced primacy placed on responsiveness to customers in all types of organizations (Berman, 2005). However, despite its holistic approach to organizational strategy, the balanced scorecard tends to focus on measurable indicators of costs and program utilization and thus is not widely used to consider the citizenship and community-building role of nonprofits although it potentially could be used to address these issues. (Berman, 2005) Also, the measurement of program impact through the balanced scorecard approach remains challenging given the difficulty of obtaining relevant outcome data because of the expense and the long-term effects of many nonprofit programs. (Berman, 2005)
Balance score cards are a viable alternative for nonprofit organizations. In this system, one takes a look at various elements affecting performance and not a single isolated measure. Due to the fact that non-profits are very in tune with their mission, and are constantly focusing on trying to allocate their limited resources efficiently in order to achieve their goals, this system works very effectively as it provides these organizations with this bigger-picture view they much need. The balanced scorecard system has a multiple focus on several perspectives, including financial performance, and that will give nonprofits the tools they need to make decisions regarding where moneys will be invested in comparison with performance analysis of different programs. For a nonprofit organization, profit is not a determining goal of strategy; but no margin, no mission. Therefore, they need to be able to put their money where they can see results.
The other issue to be considered with this approach is stakeholder involvement. In this case, the balanced scorecard provides a comprehensive framework that will help association directors and managers better define strategies, track performance, and provide data to show their various stakeholder groups how well they are performing in terms of mission value and outcomes. It helps as far as celebrating their successes and selling their message to others. Well-rounded and well-presented results will make those organizations look more appealing and that could potentially attract endowments, additional contracts and positive publicity.
Logic Models
Another performance management approach that is widely used by nonprofits is a logic model. As a matter of fact, many public and private funders now require nonprofit grant and contract applicants to develop a logic model as part of their grant application. Logic Models have become a standard performance measure for contracts due to the fact that they focus on process and outcomes. Logic models force nonprofits to map the entire “production process” for their programs, from the initial inputs such as staff and resources to the long term outcomes. For funders, logic models offer an opportunity to hold nonprofits accountable for the implementation of their programs. Thus, funders could sanction a nonprofit that fell short of its intended service deliver model after a contract or grant was awarded (Berman, 2005). For Nonprofits, logic models allow them to select which outcomes they want to achieve, so they can focus their efforts on achieving these particular goals. These goals are not chosen randomly, this consists of a “logic” process, from a cause-consequence frame of reference; therefore, these goals are very achievable and these organizations are very likely to succeed.
Logic models have certainly caught the attention of nonprofits nationwide. Arguably their greatest value is on the “front-end” of service implementation. Ideally, the process of creating a logic model should engage a broad spectrum of a nonprofit agency’s staff and volunteers in thinking about impact and outcomes (Berman, 2005). This level of involvement helps them refine their strategies and win the support of agency stakeholders. By having everyone on board, these agencies will be more likely to achieve program goals. Logic models as a strategy to drive better outcomes and help funders select the most effective agencies for funding remains quite problematic. Furthermore, logic models tend to focus on programmatic performance and generally do not engage the agency in thinking about governance or citizen–agency relationships. (Berman, 2005)
SROI – Social Return on Investment
Another performance strategy designed for nonprofits that also take into account their difficulties in evaluating programs and defining success is the Social Return on Investment (SROI). This strategy was pioneered by Jed Emerson and colleagues at the Roberts Foundation in San Francisco who envisioned SROI as a vehicle for assessing the social value of nonprofit programs. Too often, nonprofit programs, especially social service programs, are evaluated quite narrowly and thus may not appear to demonstrate significant value for the community (Berman, 2005). Topics, such as quality of life, positive decision making, civic pride and affinity for diversity, for instance, are very hard to measure. One can measure how many people attended a benefit to raise autism awareness, but how can we measure how the lives of those who attended were impacted by their participation?
Bearing that challenge in mind, SROI is designed to overcome this problem through a more inclusive approach to thinking about costs and benefits that consider the savings to society of nonprofit services. For example, a person’s employment because of job training and placement by a nonprofit would produce long-term benefits for society that should be considered when evaluating the impact of a nonprofit program (Tuan, 2008). This type of argument may be a hard one to make. There is the counter-argument whether or not current citizens are paying for current services. There is also the counter-argument that tax dollars should be directly benefiting tax payers, and projects such as school renovations may sound more appealing than investing on something that people will see results in the long run.
Similar to other performance management initiatives, SROI focuses on programmatic impact rather than governance (Tuan, 2008). SROI is also quite complicated in practice so its adoption within the nonprofit sector has been quite limited, although the conceptual framework employed in SROI has encouraged funders and nonprofits to approach social impact more inclusively and to be rigorous and data-driven in thinking about costs and benefits. SROI has also spawned other efforts to think broadly about the social value of nonprofits (Tuan, 2008).
In times where government and the country in general faces a dreadful budget crises making decisions from where to cut from such an abstract idea may be not the best way to measure performance as it relates to results from financial investments. This approach is probably the one that makes more sense from a long-term perspective. However, many non-profits can not afford that kind of thinking and need to have more tangible data to account for their performance. The idea of social impact can and should be used for lobbying and for getting buy-in from constituents; however, resting on that strategy to justify resource allocation and to measure results may be a risky decision to make.
Conclusion:
Overall, the varied performance management strategies commonly used by nonprofit organizations tend to minimize attention to internal management and governance as well as the external relations in favor of a focus on impact and the relevant costs and benefits (Berman, 2005). As previously discussed, the biggest issue faced by non-profits is the fact that their product may not be as easily defined as the services and goods are in the for profit world. The issue of the market inclination and how people are responding to their services is also another important one to be kept in mind. Non-profits are not dictated by their consumers’ behaviors, but by the environment as a whole. The definition of success in the nonprofit world is very complex and can be looked at from different angles as explained through the strategies above.
Non-profits have increasingly tried to incorporate performance management strategies to its practices. And although the management of these organizations may be a little more in tune with those principles, we can not forget that those concepts may not be as evident to their staff. For many of the direct line staff, it is very hard to evidence the impact of performance management on management decisions and service improvements. Managers may be aware of the value of performance measurement in influencing decisions and improving services, but sometimes the communication with staff tend to be broad and disappointingly vague. As non-profits utilize these concepts to run their operations, they need to understand that front line staff needs to be equally aware of how the organization is performing and how that affects them. There is a presumed linkage to budget decisions, although promised in theory, is often difficult to detect in practice. Many non-profits have been good about disseminating those ideas among their managers, but that may not have been equally successful in getting their staff on board.
In conclusion, performance management in nonprofit is a very broad topic that can be viewed from many different perspectives.
The need to become more accountable to results has forced many of these organizations to adopt performance management systems. There are a few commonly used systems as explained in this paper, they each have their strengths and their weakness and it is up to each nonprofit manager to decide which one suits them best. This is a very new field, however, that has emerged with New Public Management and become more prominent in the 90s. There is a lot of room for new theories and approaches to be developed, and I am sure in the near future we will be hearing more innovative concepts coming into play. Regardless from which angle you look at predominance for nonprofit organizations, there will always be the issue of hard-to-define products and goals. And there will always be the cultural issues within those organizations where staff may not be as in tune as managers are of the needs to define success and measure performance. People join non-profits because they have affinity with their missions and the idea that they have to achieve goals and quotas may not be as tangible to them as their desire to help
others.
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