BSC is for the private and the public sectors

Kaplan (2001) mentions that BSC also fits PSOs and NPOs with some amendments. These amendments are a fundamental issue because the nature of the strategy and drivers in PSOs and NPOs are often substantially different to the private sector with its profit motive. According to Kaplan and Norton (1996), once these issues have been considered, BSC may operate effectively in NPOs as well as in PSOs.

According to Olve and Wetter (1999), PSOs are perceived as having a short- term perspectives, since political bodies drive the short-term action agenda. These political bodies seem to support the short-term examination of the use of BSC in PSOs. Thus, building a BSC based on this strategy is difficult for several reasons. In addition, external factors such as the influence of political leaders often enforce budget constraints without influencing the mission and vision of the organisation. The impact of media interpretation and local government interventions can also require short-lived resolutions to solve perceived problems. These factors make PSOs focus on the short- term objectives that are not linked to the long-term strategy.

These factors motivated Kaplan and Norton to develop a BSC system that fits the need of NPOs and PSOs. Tonge and Callaghan (1997) claim that BSC may suit NPOs and PSOs because of the growing similarities between the public and private sectors. Kaplan (2001) claims that NPOs and PSOs do not look at revenue growth; therefore, a crucial component of BSC is flawed when applied to the public sector. Public companies that only use BSC to look at revenue issues will gain less benefit. Therefore, public organisations using BSC should recognise the substantially different issues reflected in the public sector. In agreement with this view, Kaplan (2001) recommends that the customer perspective should be the top priority of NPOs and PSOs, in place of the financial perspective. Olve and Wetter (1999) argue that these

43 ideas create problems for these public organisations since they do not build their strategies on the customer base.

Niven (2002) lists the critical differences in BSC for PSOs and NPOs compared with the private sector:

• the difficulty of performance measurement due to outcome-based rather than output-based endpoints;

• using results to punish not reward;

• the blame culture; the lack of clarity in mission and vision as well as objectives; • underestimating negative results due to political and social factors;

• attributing drawbacks to inefficiency or ineffectiveness without recognising real achievement;

• focus on the short-term;

• the domination of some political agendas; • unqualified business leaders;

• fear of business markets; • lack of support for change;

• absence of long-run continuity and plans;

• cost pressures from political parties or tax payers; • absence of personal and organisational motivation.

Niven (2002) agrees with the idea of Kaplan and Norton that the financial perspective should be used as current short-term drivers and that the customer perspective is considered the ultimate goal of PSOs and NPOs (Figure 2.3).

44

Figure 2.3 The nature of BSC in NPOs and PSOs.

Customer Perspective

Internal Process

Mission, Vision, and Strategic goal

Learning and growth Perspective Financial Perspective Source: Niven (2002)

Shifts to the customer perspective suggest that the mission and vision of PSOs and NPOs is customer-oriented rather than financially-based. Sawhill and Williamson (2001) claim that NPOs in particular face challenges in measuring the organization’s vision, as they are incapable of measuring financial performance. Such financial measures are general and are mostly related to the delivery of services. Sawhill and Williamson (2001) suggest that instead, NPOs should concentrate on three main areas. These areas include measuring the efficiency resource use, the efficiency of employees, and progress in achieving the vision. Kaplan (2001) finds that NPOs are more operational than the strategic in the adaptation of BSC since they are more focussed on short-term outcomes. For example, they focus operational issues such as increasing process efficiency. Kaplan (2001) and Sawhill and Williamson (2001) mention that when shifting to the strategic-oriented BSC, NPOs should have a clear a vision as possible. Sawhill and Williamson (2001) also recommend establishing micro-level goals which incrementally lead to achieving the overall strategic goals of NPOs.

45 Kaplan (2001) mentions that most NPOs feature an operational excellence strategy. In addition, they note it is unusual to find an NPO focusing on a strategy that can be thought of as product-leadership or customer intimacy; therefore, their BSC tends to be closer to the Key Performance Indicators (KPI) than to the true strategy scorecards. However, Kaplan (2001) provides several examples of successful implementation of BSC in public organisations. For example, the City of Charlotte municipal, North Carolina (USA) applied a customer-based strategy by selecting an interrelated set of strategic themes. United Way of South Eastern New England (USA) also applied a customer (donor) intimacy strategy (Kaplan and Kaplan 1996). Other examples from NPOs are the May Institute and New Profit Inc- USA. They also apply a successful product and leadership position strategy. In particular, the May Institute applies partnerships with universities and researchers to deliver the one of best behavioural rehabilitation care in the World. It also introduces a new selection, monitoring, and governing process unique among other NPOs. Montefiore Hospital, New York, US, applies a combination of product leadership and achieves excellent customer relationships, through its centres and new patient-oriented care. Montefiore Hospital aims to build market shares in its local area (Kaplan, 2001).

Kaplan (2001) also suggests that PSOs should measure their success by how effectively and efficiently they meet the needs of their voters. Placing the constituencies at the top of their BSC can be measured by reduction in measurable factors such as poverty, illiteracy, malnutrition, homelessness, disease, pollution, or discrimination or an improvement in environment, health, or safety. According to Kaplan and Norton (1996), these examples show that both PSOs and NPOs can build a strategic and competitive advantage. Companies must also move from operational continuous

46 improvement to a strategic continuous improvement. This strategic thinking is important for fulfilling the organization's mission.

Kaplan and Norton (1996) suggest three high-level perspectives for PSO and NPOs. First is cost incurred, which focuses on the importance of operational efficiency. In this perspective NPOs should include both the expenses of the agency and the social cost it imposes on citizens and other organisations through their operations (Kaplan and Norton, 1996). The organisation should minimise the direct and social costs required to achieve its mission.

The second perspective is the value-created perspective, which suggests how locals or citizens benefit from being customers of NPOs. However, it is difficult to quantify the utility of citizens using financial measures. For example, it is hard to measure financially the benefits resulting from improved education; improvement in the working environment; reduced pollution; and better health and safety. Kaplan and Norton (1996) claim that the outputs of BSC can be good measures. There are countless examples using output rather than outcome, such as the mortality rate; the crime rate; the number of complaints; the density of polluted water; and percentage of students acquiring specific skills and knowledge to name a few. In addition, the citizens and their representatives will ultimately strike a balance between the benefits supplied by NPOs and the social and agency costs.

Third, legitimizing support suggests that NPOs and PSOs should treat their donors as customers, since donors fund public and NPOs. To ensure continued financial support for their activities, NPOs and PSOs should try to meet the objectives of their funding bodies.

In summary, NPOs and PSOs have three additional high-level objectives that they must satisfy to achieve their strategy: create value at minimal cost, develop

47 continued support and commit to their funding sources. From these three high-level objectives, the organisations should then proceed to identify their objectives for internal processes. Learning and growth as a result of this should enable BSC to achieve the main strategy of the organisation. The remaining BSC objectives, from the core perspectives can then be moved toward achieving the high-level objective.

Since the mission objective may show only irregular progress, the measures in the four main perspectives of BSC must provide short- to intermediate-term objectives and feedback.

Kaplan (2001) suggests that in NPOs or PSOs, the top management level should work hard to deploy BSC to the lower individual level. Kaplan (2001:359) gives the following example on the importance of spreading awareness of BSC to the lower levels: ''United Way of Southeastern New England (UWSENE), provides a poignant example. The chief financial officer went to talk to the building’s custodian. The custodian told him that strategy was something that people at the top floor did, not him. His job was to plough snow, sweep floors, and remove trash. These activities didn’t have anything to do with strategy or mission. The CFO explained to him that his efforts were very important to UWSENE. “The tenants in the building generate considerable rental income for us. If we maintain the property well, tenants and United Way employees will be pleased to work in the facility. That will help us generate more rental income and help fulfil our 100% guarantee to donors, and attract, retain, and motivate our employees. In addition, donors and volunteers who visit our building will value a clean building, attractive landscaping, and streets from which the snow has been removed. I could see the light of recognition cross his face.” The custodian said, “You’re right; I can see now how what I do is important.” The BSC lets every employee see how he or she fits into the organization. Communicating the top-level and

48 departmental scorecards throughout the organization allows each individual to align his or her day-to-day actions with the organization’s strategic objectives. This is the power of the scorecard — analogous to the organizing effect of a laser — that focuses the entire organization on the strategy to produce brilliant results''.