Chapter 13: Performance measurement in not-for-profit organisations

Chapter learning objectives

Upon completion of this chapter you will be able to:

• comment on the problems, with particular reference to not-for-profit organisations and the public sector, of having non-quantifiable objectives in performance management
• describe how performance could be measured in not-for-profit organisations
• comment on the problems, using simple examples, of having multiple objectives in not-for-profit organisations and the public sector
• describe, in outline, value for money (VFM) as a public sector objective.

1 The problem of non-quantifiable objectives

The not-for-profit sector incorporates a diverse range ofoperations including national government, local government, charities,executive agencies, trusts and so on. The critical thing about suchoperations is that they are not motivated by a desire to maximise profit.

Many, if not all, of the benefits arising from expenditure by thesebodies are non-quantifiable (certainly not in monetary terms, e.g.social welfare). The same can be true of costs. So any cost/benefitanalysis is necessarily quite judgemental, i.e. social benefits versussocial costs as well as financial benefits versus financial costs. Thedanger is that if benefits cannot be quantified, then they might beignored.

Another problem is that these organisations often do not generaterevenue but simply have a fixed budget for spending within which theyhave to keep (i.e. a capital rationing problem). Value for money(‘VFM') is often quoted as an objective here but it does not get roundthe problem of measuring ‘value'.

Illustration 1 – The problem of non-quantifiable objectives

A hospital might use a cheaper cleaning firm because ofdifficulties evaluating how well the cleaning is being done. This maycreate problems in many areas:

• It may indirectly lead to the spread of infection which is costly to eliminate.
• Nursing staff may become demotivated as they are unable to carry out their own work effectively.
• The general public may lose confidence in the quality of the service.

Test your understanding 1

Discuss how a hospital should determine whether toallocate limited surgical resources to expensive organ transplants or tomore routine hip/knee joint replacements.

2 Performance measurement in not-for-profit organisations

Not-for-profit organisations may have some non-quantifiableobjectives but that fact does not exempt them from the need to plan andcontrol their activities.

Illustration 2 – Performance measurement in not-for-profit

A university is an example of a non-profit making organisation. Theperformance of this not-for-profit organisation must be assessed.Measures include:

University overall:

• overall costs compared with budget
• numbers of students
• amount of research funding received
• proportion of successful students (by grade)
• quality of teaching – as measured by student and inspector assessments
• number of publications by staff.

Individual department or faculty:

• cost per student
• cost per examination pass
• staff/student ratios
• students per class
• number of teaching hours per member of staff
• availability of learning resources, e.g. personal computer (PC) per student ratio
• number of library books per student
• average age of library books.

Test your understanding 2

St Alice's Hospice is a charity which collects funds and donationsand utilises these in the care of terminally ill patients. The governingbody has set the manager three performance objectives for the threemonths to 30 June 20X7:

• to achieve a level of donations of $150,000
• to keep administration costs to no more than 8% of donations
• to achieve 80% of respite care requested from the community.

Actual results were as follows:

Prepare a statement to assist the manager in evaluating performance against objectives and comment on performance.

3 The problem of multiple objectives

Multiple stakeholders in not-for-profit organisations give rise tomultiple objectives. As a result, there is a need to prioritiseobjectives or to make compromises between objectives.

Illustration 3 –The problem of multiple objectives

A hospital will have a number of different groups of stakeholders, each with their own objectives. For example:

• Employees will seek a high level of job satisfaction. They will also aim to achieve a good work-life balance and this may result in a desire to work more regular daytime hours.
• Patients will want to be seen quickly and will demand a high level of care.

There is potential conflict between the objectives of the twostakeholder groups. For example, if hospital staff only work regulardaytime hours then patients may have to wait a long time if they come tothe hospital outside of these hours and the standard of patient carewill fall dramatically at certain times of the day, if most staff onlywork regular hours.

The hospital must prioritise the needs of the different stakeholdergroups. In this case, the standard of patient care would be prioritisedabove giving staff the regular daytime working hours that they wouldprefer. However, in order to maintain staff morale an element ofcompromise should also be used. For example, staff may have to workshifts but may be given generous holidays allowances or other rewardsinstead.

Test your understanding 3

Describe the different groups of stakeholders in aninternational famine relief charity. Explain how the charity may haveconflicting objectives and the impact this may have on the effectiveoperation of the organisation.

4 Value for money (VFM)

A common method of assessing public sector performance is to assess value for money (VFM). This comprises three elements:

Economy – an input measure. Are the resources used the cheapest possible for the quality required?

Efficiency – here we link inputs with outputs. Is the maximum output being achieved from the resources used?

Effectiveness – an output measure looking at whether objectives are being met.

Illustration 4 – Value for money

Value for money in a university would comprise the three element of:

Economy - this is about balancing the cost with the qualityof the resources. Therefore, it will review areas such as the cost ofbooks, computers and teaching compared with the quality of theseresources. It recognises that the organisation must consider itsexpenditure but should not simply aim to minimise costs. e.g. low costbut poor quality teaching or books will hinder student performance andwill damage the reputation of the university.

Efficiency - this focuses on the efficient use of any resources acquired. For example:

• How often are the library books that are bought by the university taken out on loan by students?
• What is the utilisation of IT resources?
• What % of their working time do lecturers spend teaching or researching?

Effectiveness - this measures the achievement of the organisation's objectives. For example:

• The % of students achieving a target grade.
• The % of graduates who find full time employment within 6 months of graduating.

Test your understanding 4

A local authority may have ‘maintaining an acceptable quality oflife for elderly residents' as one of its objectives. It has severalmeans by which it may achieve this objective, including:

• providing ‘meals on wheels' (Social Services Department)
• providing a mobile library (Libraries Department)
• maintaining access to and facilities in local parks (Parks Department)
• providing police support to the elderly at home (Police Department)
• providing nursing homes (Housing Department).

Required:

Explain how the local authority would determine whether the service was effective in providing VFM.

5 Chapter summary

Test your understanding answers

Test your understanding 1

A hospital may have many specific quantifiable objectives such as aminimum waiting time for treatment but may also have non-quantifiableobjectives such as improving general healthcare in the area.

The question of deciding priority between different kinds oftreatment cannot simply be determined by comparing measurable cost dataas there would be many social costs/benefits to consider. By carryingout expensive transplant surgery this may directly benefit relativelyfew patients but would be life-saving. It might improve knowledge ofsurgical techniques and life-threatening conditions which could be usedto detect and prevent illness in the future. Hip/knee replacements maygive mobility to many people who would otherwise be totally reliant oncarers.

It may be impossible for a hospital to decide priorities on financial grounds.

Test your understanding 2

Total donations received have exceeded the target for the period.There is no discernable trend and it is possible that there were specialfund-raising activities in May which generated greater income.Administration costs have been within the target of 8% in April and Junebut exceeded the target in May. More information is needed to establishwhy this occurred. There has been a steady improvement in the level ofrespite care provided and in June the target was exceeded.

Test your understanding 3

The stakeholders will include donors, people needing aid, voluntarystaff, paid staff, the governments of the countries granting andreceiving aid.

There may be conflicting objectives. Donors and people needing aidwill want all of the funds to be spent on famine relief. Managementstaff may require a percentage of the funds to be spent onadministration and promotion in order to safeguard the long-term futureof the charity.

Donors may have their own views on how donations should be spent which conflict with management staff.

The charity may wish to distribute aid according to perceived need.Governments in receiving countries may have political reasons fordistorting information relating to need.

These conflicts may make it difficult to set clear objectives on which all stakeholders agree.

Test your understanding 4

All of these departmental activities contribute to achievement ofthe objective. The problem is to find the optimum combination ofspending for each of the departments.

• Many elderly people continue to live in their own homes, but are just on the threshold of requiring accommodation in a nursing home. A small cutback in spending in one area (e.g. the withdrawal of a mobile library) may push a lot of elderly people over that threshold. There is then an enormous demand for extra spending by the Housing Department. Nursing home accommodation is an expensive last resort in caring for the elderly.
• An occasional visit by a care worker or a police officer may enable many elderly people to stay in their own homes for much longer than would otherwise be the case.

The key to effectiveness is in finding an optimum pattern of spending to achieve a given objective.

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