Posted By Sidney on June 9, 2009

Image by Substance Coop

Let’s face it.  It is common practice to take scholarly work written for the forprofit sector and attempt to apply it to the social benefit sector (e.g., nonprofits).  Yet, it does not take long to find enormous holes in the logic, unfortunately leading some to discount the entire analogy.  Today, I came across a HarvardBusiness.org Voices Blog post that I believe is ripe for tweaking and re-purposing for the social benefit sector.  The premise of  “The Fallacy of Financial Metrics” – written by Anthony (Tony) Tjan, CEO, Managing Partner, and Founder of Cue Ball, a venture and early growth equity firm investing in the information media and consumer sectors – is that many business leaders and investors have a laser-like focus on financial metrics to the degree that they overlook the inputs that drive those results.

Financial performance is a result, a by-product, a consequence of something else. The financial “numbers” ultimately represent the scorecard we care about, but they do not help us understand how to score.  Anthonhy Tjan

Over the last four years I have been digging deeper into the relationship between internal operating metrics and external impact for both philanthropic organizations and nonprofits.  What I have learned is that for both foundations and nonprofits the holy grail of results is too often understood as external impact or outcomes.  Similar to Tjan’s assertion this produces the “fallacy of outcome metrics” also known as assuming that outcome metrics are the be-all and end-all to organizational performance while overlooking the very operational drivers that cause the results.  This can lead to the assumption that poor performance is due to inadequate talent delivering services when the real culprit is a faulty approach or process.

Tjan offers three guidelines for developing a culture driven by operating metrics and measuring what he calls “the what” (or what matters) and “the why” (why we arrived at this result).  Below, I’ve re-purposed his guidelines for use in the social benefit sector and added one more.

1. Ensure that the governing body, leadership, and  management understand and agree on the relationship between operating metrics and outcome metrics.
2. Communicate and emphasize the importance of operating metrics across the organization.
3. Develop sub-unit (e.g., department, program) input metrics that are most crucial to achievement of the organization’s overall operational metrics.
4. Regularly review the organizational dashboard and sub-unit metrics, but focus on exceptions.

Over the coming weeks, I will unpack each guideline in a post with greater detail.

Categories: Commentary
Tags: Anthony Tjan, fallacy, financial metrics, foundation, foundations, HarvardBusiness.org, nonprofit, operational metrics, organizational performance, outcome, outcome metrics, performance, philanthropic organizations, social benefit, social impact