Charity Management: efficiency and the balanced scorecard.

It constantly amazes me that after so many years in practise as a charity lawyer people struggle to appreciate the fundamental difference between profit making commercial entities and the not for profit sector. So when I’m presented with the statement that charities are often run inefficiently my first thought is to ask who is making that statement. The reality is that the voluntary sector is continually being compared with the commercial sector. The voluntary sector is a much smaller sector, and if using the broad classification of living things, by analogy, in a quite different family to commercial organisations. Comparing the two can produce interesting results. Taking the analogy of the animal kingdom further it can be seen that dogs and cats are similar, yet have important differences which are so fundamental and apparent that a person would be able to tell at first glance what family any given animal belongs to.

This clarity of thinking is, in my experience, often missing. Charities are not commercial organisations because they do not exist to make profits. Similarly, commercial organisations find it just as difficult to appreciate that some people and organisations exist to give away money, help or assets. Initially, they simply cannot understand this. The perspective of the two sectors is completely different. So what does this have to do with the statement that charities are often run inefficiently? Well the point is that what is or is not “efficient” is often defined by tools used in a completely different sector.

It is beyond doubt that charities and companies can share certain characteristics. They may be in the form of a company, have a corporate style hierarchy, have a distinctive brand etc. Dogs and cats also share certain characteristics- both have a backbone, both have four legs, both have a coat. People suggesting that charities are run inefficiently because they don’t have shareholders are missing the point. Additionally, shareholders may not even care if their company is more or less efficient than another one provided it achieves its object, which is monetary gain for its shareholders. Questions about efficiency therefore have to take into account the two entirely different perspectives and objectives of organisations.

So if you are a donor how would you go about assessing the efficiency of a charity and deciding which organisation will utilise your money in the best way? There are no market forces shaping the sector and until recently no real methods or agreed upon standards or measurements unifying the voluntary sector. One blunt measurement of efficiency might be to measure the proportion of administrative or other overheads of a charity. The lower the overheads the greater the efficiency. This measure though is not as simple as it seems as some of the best charities delivering sustainable projects may have higher overheads as the Trustees may have taken the decision to invest in sustainability rather than simply applying a sticking plaster to an immediate problem. Arguably the sustainable project might appear less efficient but the reality might be that over the long term it is more efficient and successful at breaking a recurring or cyclical problem.

Effective measurement of efficiency, and impact, within the voluntary sector are currently the Holy Grail(s) of charity management. Barely a week goes past without some new quality mark being proposed. Cabinet secretary Sir Jeremy Heywood favours a kitemark to vouch for the effectiveness of social policy schemes, whereas Mike Clare favours a system of star ranking for charities based on efficiency. NCVO devotes a whole section of its website to management tools which can be used for planning impact, assessing impact, measuring outcomes, social audit and financially valuing social and economic impact. Out of the twenty or so measuring tools and frameworks one in particular has recently gained more ground than others. This is adopting a balanced scorecard tool to provide a fast and comprehensive view of the business and activities of an organisation.

Ironically, the balanced scorecard was developed in the commercial sector to give companies a clearer and more balanced view of their performance. The idea was to balance the raw financial measurements which were inherently retrospective (being based on past performance) by including other critical ratios which were crucial to future developments. The Balanced scorecard concentrates on achieving the strategic vision and assesses goals from four key perspectives. This framework which originated from Harvard Business School in the early 1990s was always going to appeal to voluntary bodies as it takes into account non financial objectives.

In 2007 Claire Moxham of the University of Manchester observed that performance measurement frameworks were not being utilised greatly in the voluntary sector which was unaccustomed to scrutiny. Since then Trustees have become more aware of the need to justify their activities in maximising public benefit and report on such matters as their objectives, their mission and whether or not they have achieved that mission. Utilising frameworks such as the Balanced Scorecard are now widespread. However, just as the voluntary sector is adopting these tools criticisms are being levelled at attempts to measure efficiency in the sector. In a series of four articles in the Harvard Business Review Dan Pallotta advises caution in even attempting to assess charities in terms of efficiency. Whilst the Balanced scorecard tool is not specifically mentioned he advises caution in trying to assess efficiency as this can be manipulated. Similarly assessing impact in some charities, e.g. those advocating cleaner oceans, is still quite difficult to manage.

So how would I approach the issue of giving? I would look at all the financial data, look at the scorecard and impact reporting, look at the strategy, try and see if it is all a little too “neat” or manipulated in any way, and ultimately I would probably decide by visiting an organisation, and then applying a hefty dose of intuition too.