Document(s) 7 of 13

The analysis of organizational performance is a crucial step in the organizational assessment process. Yet, measuring performance is one of the most problematic issues in the field of organizational theory (Steers, 1975; Zammuto, 1982; Handa and Adas, 1996). While there are a number of approaches to assessing organizational performance, there is little consensus as to what constitutes a valid set of criteria.

In the 1950s, performance was referred to as the extent to which an organization as a social system fulfilled its objectives (Georgopoulos and Tannenbaum, 1957). In the 1960s and 1970s, Yuchtman and Seashore (1967) defined performance as the ability of an organization to exploit its environment to access scarce resources. In the 1980s and 1990s, as constructivist thinking became more standard in organizational theory, it was recognized that identifying organizational goals is more complex than first thought. A measurement of organizational performance needs to involve the perceptions of the organization’s multiple constituencies or stakeholders, including those who work within the organization (Hassard and Parker, 1993). In other words, the concept of organizational performance is, at least in part, individually constructed. The influence or power of different stakeholders determines which performance message is dominant.

Broadly speaking, the organizational development literature discusses performance at four levels:

• The individual employee (performance appraisal)
• The team or small group (team performance)
• The program (program performance)
• The organization (organizational performance).

In our framework, we reserve the concept of organizational performance for the overall organizational result (the combined results of individual, team and program performance). Every organization has work to do and some way of measuring and communicating how well it does this work. While there are multiple ways of understanding performance, in most sectors and development areas, there are conventional yardsticks that give some direction to understanding that performance.

Education ministries, for example, may measure their performance in terms of their contribution to children’s learning. Health ministries may measure in terms of their contribution to the care and treatment of the sick. Energy companies may measure performance in terms of supplying electricity. Municipalities are often compared on the basis of the quality of life available to their citizens, while in the private sector, the conventional measure is profitability, since companies that ignore making a profit risk their survival.

Stakeholders are interested in the ways an organization defines its results and communicates these to its various publics (Blickendorfer and Janey, 1988). Each stakeholder or constituency group has its own interests, as well as a concept of what constitutes good performance. At the program level, beneficiaries have a primary interest in the performance of the program, and a secondary interest in organizational performance. Clearly, employees have an important stake in the performance of the organization upon which they depend for their livelihood. At the level of organizational performance, there are other constituents such as citizens, funders, politicians and investors, all of whom have yet other sets of interests (Boschken, 1994).

In the private sector, for example, people who invest in an organization—an important stakeholder group—are more interested in profitability and return on investment as a performance issue than are the organization’s employees or beneficiaries. Each interest group or stakeholder in an organization may have a different concept of what constitutes “good” performance.

Amid all these levels and layers of complexity, what are the elements that should be assessed in analyzing the performance of an organization? In our analyses, we attempt to integrate the various schools of thought and devise a multi-dimensional and comprehensive framework for understanding organizational performance that is useful in analyzing any organization. We believe that organizational performance has four main elements: effectiveness, efficiency, relevance and financial viability.

PERFORMANCE IN RELATION TO EFFECTIVENESS

Definition

The starting point for assessing the performance of an organization is its effectiveness. The definition of effectiveness used here is fundamentally embedded in our understanding of the word organization. Organizations are commonly defined as instruments of purpose. Using the classical definition of organization (Etzioni, 1964), every organization is set up for a particular function that is clarified through its goals. The goals are made visible through the results of the organization’s work and activities in pursuit of these goals.

Within our framework, organizational effectiveness is a prerequisite for the organization to accomplish its goals. Specifically, we define organizational effectiveness as the extent to which an organization is able to fulfill its goals. As stated by March and Sutton (1997): “Explaining variation in performance or effectiveness is one of the more enduring themes in the study of organizational performance.”

However, describing and measuring effectiveness presents problems. First, it is unclear whether you can decide on a single set of goals or, for that matter, come to consensus about a multiple set of goals for an organization (Brown, 1994). Second, it is unclear where to go, and to whom to go to, to identify goals or seek consensus. Despite these difficulties, organizations do engage in a variety of processes to identify their goals, objectives and systems to communicate their effectiveness—that is, the extent to which they attain their goals—to their constituents.

Dimensions

What are the component parts or the dimensions of effectiveness? What is the experience? In general, there are no common dimensions of effectiveness across all organizations. This is common sense. The goals of a community NGO are not the same as the goals of an environmental NGO; nor are they the same as those of the Ministry of Finance. Nevertheless, despite the variety of organizations that exist, there are great similarities among various functional groupings of organizations (Heckman, Heinrich and Smith, 1997).

Most Ministries of Education are concerned with imparting adequate skills in reading, writing and math. While it might have other dimensions to its mandate, a Ministry of Education would have little reason to exist if it were not responsible for organizing itself to provide basic skills for its society. Thus, Ministries of Education organize themselves to deliver programs that meet these and other goals. Similarly, Ministries of Finance have a functional responsibility for the economic and financial aspects of a nation’s business.

In assessing the effectiveness of an organization, it is important to first understand its functional purpose (for example, for a university to provide higher learning), and then to explore the way the organization understands the various dimensions (teaching, research and service) of its function. Sometimes an organization’s understanding of its function and dimensions of effectiveness differs from that of its stakeholders. In other cases, the balance the organization places on its dimensions differs among stakeholders. When this happens, stakeholders are dissatisfied, a problem that organizations need to address.

Trying to appreciate the dimensions of organizational effectiveness requires some understanding of the functional purposes of the category of organizations within which the organization fits. These functional purposes give insight into the dimensions of organizational effectiveness.

A review of the university literature finds that, in general, the functional purpose of universities has led to three broad dimensions of university work: teaching, research and service. A similar set of dimensions was identified for research centers, although instead of formal teaching leading to degrees, research centers sometimes provide nondegree-oriented training.

In a different context, we worked with municipalities organized to improve the quality of life of those residing within their jurisdiction. In reviewing their effectiveness, we discovered some 20 dimensions in which the municipalities engage to improve the lives of their citizens. Some of these services address basic human

needs, such as the quality of water and sanitation, for which municipalities are responsible. Other services are less basic. In many Canadian provinces, for example, municipalities take on the responsibility of organizing recreational services.

The dimensions of organizational effectiveness are simultaneously stable and dynamic. They are stable from the perspective of the role of the organization in fulfilling the implicit promise that relates to its existence; that is, education is the goal of schools, improved health the goal of hospitals. Although the dimensions vary among the different organizational types, there is some stability within a specific type of organization (Heckman, Heinrich and Smith, 1997).

From another perspective, the dimensions of effectiveness are stable and dynamic because within any type of organization, the importance of a particular indicator of effectiveness varies with respect to the particular stakeholder (Wohlstetter, 1994). For example, in private sector organizations, profitability is commonly one of the organizational goals. However, profitability means different things to different stakeholders. To a worker, it might mean foregone wages with an implicit agreement that a profitable firm leads to long-term employment. To a manager, profit might mean a bigger salary through stock options. To an investor, it might mean better returns on investment.

Assessing Effectiveness

Assessing the effectiveness of not-for-profit and government organizations is no easy task. Given that we define effectiveness as the extent to which an organization is meeting its functional goals, the first order of business in assessing organizational effectiveness is to identify the goals.

As stated, at one level the organizational goals are self-evident: Ministries of Education educate children. From a functional perspective, assessing the effective-

ness of an organization requires some understanding of its functional responsibilities. As one becomes more familiar with the organization under review, the purpose and goals are made explicit in various organizational documents—the charter, incorporation documents, or the organizational plan or strategy. In government departments, these are outlined in legislation that sets up the department.

Mission statements provide particularly important insight into the organization’s purpose and goals. The U.S. General Accounting Office, for example, requires the plan of its executing agents (organizations) to first identify goals and the measures covering these goals. Once the organization’s purpose, goals and dimensions are clear, the diagnostician is ready to embark on the assessment.

The first step is to decide on a set of questions to guide the process of exploring the extent to which the organization is effective. An important aspect in developing questions is to recognize that some questions are broader than others. In fact, questions can go from extremely broad— What is the quality of teaching at the university?—to extremely specific—What percentage of the teachers received excellent in the student rating system? As you move to specificity within the questioning process, you begin to identify the potential indicators that can help answer the question. These indicators allow for measuring the concept under review and give insight into the issue of effectiveness (see Lusthaus et al., 1999, p. 22).

Assessing the effectiveness of an organization is more elusive than it appears. For example, organizations sometimes emphasize one of the goals at the expense of others. Is the research center described in the accompanying box effective if it publishes a significant number of refereed journals? What can be used to indicate that a research center is effective? Or for that manner, when can it be stated that a Ministry of Education or Finance is effective? These are quite perplexing questions that make the assessment of effectiveness very difficult.

Indicators of Effectiveness

Does your organization have indicators of effectiveness? If not, now is the time to develop some preliminary indicators to guide your assessment and begin a process to help the organization develop indicators and collect data on effectiveness for the future (Healthcare Financial Management, 1997). Questions need answers, and those answers come from various sources of data, including people, documents and analysis. But how do you move from a question to data sources?

Some people find it helpful to identify indicators that help answer the questions. Clearly, a first step in this search is to identify the indicators the organization uses (if any) to describe its effectiveness or proxies of these indictors (i.e., the extent to which the organization contributes to some higher order indicator). Since each

organization type—be it a municipality or an NGO—varies in its function, purpose, goals and dimensions, the indicators of effectiveness similarly vary (Tavenas, 1992).

One difficulty in assessing organizational effectiveness occurs when the organization has not created a set of indicators. Under these conditions, it is necessary to develop, with the organization, a proxy list of indicators, and to collect data on effectiveness. As is the case with the questions associated with effectiveness, there is no set list of indicators usable for all organizations (Eimicke, 1998). Below, however, are what might be called “indicator starting points” that can be used when an organization does not have its own set of indicators:

• Achievement of goals
• Number of clients served
• Quality of services/products
• Service access and usage
• Knowledge generation and utilization
• Quality of life changes
• Demand for services or products
• Replication of the organization’s programs by stakeholders
• Growth indicators for coverage of programs, services, clients and funding.

PERFORMANCE IN RELATION TO EFFICIENCY

Definition

The second general concept for judging organizational performance is efficiency. Every organization has a certain level of resources to provide goods and services, and must operate within its resource constraints. When an organization’s results are measured in relationship to its resources, the measurement yardstick is efficiency. More specifically, we define efficiency as a ratio that reflects a comparison of outputs accomplished to the costs incurred for accomplishing these goals.

There are two aspects of efficiency. The first is the units of production or services that relate to the organizational purpose, and the second is how much it costs to produce those goods and services. How wasteful or economical was the organization in producing the outcomes? This is the question of efficiency (Barker, 1995).

Efficiency is generally measured as the ratio of outputs to inputs. This implies that to attain efficiency, an organization must ensure that maximum outputs are

obtained from the resources it devotes to a program, operation or department (Tavenas, 1992). Conversely, efficiency is achieved when the minimum level of resources is used to produce the target output or to achieve the objectives of a program, operation or department.

In today's competitive economies, organizations must provide exceptional products and services within an appropriate cost structure. In times of economic constraint, performance is increasingly judged by the efficiency of the organization (the cost per service, the number of outputs per staff, publications per employee) (Barker, 1995). By using the monetary values or costs and benefits that are inevitably part of efficiency, it is possible to determine on a quantitative basis where to invest in programs (better value for money), what products and services are becoming obsolete, and which activities are not providing adequate value for the money. Whatever the overall size of the unit, organizations viewed as performing well are those that provide good value for the money expended.

Dimensions

Around the world, organizations face increasing pressure to use their resources wisely. Globalization generally involves lower taxes and rising costs of human and natural resources, all of which combine to push an efficiency agenda in most organizations. Over the last decade, both private and public organizations have been forced to reduce costs and increase productivity through downsizing or rightsizing exercises. “Do more with less” is the rallying cry for many organizations in both the developed and the developing world. In other words, produce more results with less resources (Eimicke, 1998).

In the private sector, particularly in manufacturing, tremendous gains have been made by re-engineering production to improve efficiency. Information technology, along with other technologies, dramatically improved productivity. However, as you

move from manufacturing systems to more people-oriented and politically controlled systems, the issues of efficiency are more difficult to understand (Heckman et al., 1997).

First, in politically dominated systems, efficiency (costs in relation to the accomplishment of goals) is often complicated because unstated goals are as important, if not more important, than stated goals. For example, in many countries, government operated or regulated railroad companies are used to employ people who are loyal or supportive to the government, regardless of their productivity. In other instances, many not-for-profit organizations value human relationships above efficiency measures, though this is often not stated.

In general, there are two approaches to describing organizational efficiency, although neither is well developed for either government or not-for-profit organizations. The first approach is the more standard definition of efficiency. It tries to link the quantity of resources used to the results obtained. Historically, this type of indicator provides a broad view of an organization and allows for comparisons across organizations.

While this approach has met with some success, there is another way to describe the extent to which an organization is “administratively efficient.” Administrative efficiency explores how different work processes contribute to the overall value added in an organization. Simons and Davila (1999) call this the return on management—a measure of how well an organization is managing its strategy and work processes.

Unlike historical methods of efficiency that lead to more precise percentages of return, this measure of efficiency provides a rough estimate of the amount of productive energy expended by an organization in relation to the amount of managerial and professional time invested. In other words, it measures how well the systems produced by managers and other professionals facilitate the productive energy of the organization.

This dimension is linked to the ability of an organization to balance policies, procedures and creative efforts by addressing roles and responsibilities that either help or stifle staff, or the fact that there are either too many or not enough rules. In sum, this second approach to measuring efficiency assesses the extent to which organizational strategy, systems and procedures generate productive energy.

Assessing Efficiency

In assessing efficiency, it is generally more difficult to assess outputs than inputs, especially in service organizations, where outputs tend to be qualitative rather than

quantitative.¹ Even in organizations that produce tangible physical products, it still may be difficult to obtain a timely and ideal assessment of output that captures quality differences over time or across firms (Bowles and Coates, 1993).

For example, if the efficiency of a research organization is measured in terms of the number of research papers written per researcher, the question of the quality of those papers is overlooked. To capture this quality consideration in an efficiency indicator, output can be measured in terms of the number of research articles published in reputable or refereed journals. Those outputs can then be related to the costs of the producers. This example underscores the need for care in deciding on the best choice of indicator that gives a quantitative measure of efficiency but also captures some aspects of product or service quality. In some government ministries,

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¹ We often use outputs as a proxy because of the difficulty of measuring outcomes and the costs of outputs.

qualitative indicators are the most important. For example, how do you assess the efficiency of foreign ministries? Is it the cost of the ministry in relation to the quality of its international relationships? The country image?

Indicators of Efficiency

As with effectiveness, if an organization has not developed efficiency indicators, there are some preliminary indicators that can be used to guide an assessment:

• Cost per service or program provided
• Overhead to total service or program cost
• Outputs per staff
• Cost per client served
• Employee absenteeism and turnover rates
• Program completion rates
• Frequency of system breakdowns
• Timeliness of delivery of services.

Efficiency and effectiveness are traditional concepts used by organizational practitioners to evaluate performance. An organization is efficient if, compared with

similar organizations, its results are relatively high in relation to the resources expended. It is effective to the extent that it reaches its intended purpose or goals. However, organizations can be highly effective without being efficient, and can reach relatively high levels of efficiency without being effective (March and Sutton, 1997).

Effectiveness and efficiency, however, do not tell the whole story of organizational performance. Today, organizations must be, and must be seen as, continually relevant to their stakeholders. Ongoing relevance is the third concept of performance.

PERFORMANCE IN RELATION TO ONGOING RELEVANCE

Definition

In modern organizational literature, organizations are portrayed as webs of relationships among stakeholders (Weick, 1995). These groups vie for importance and power within the organization and try to influence the choice of criteria the organization uses for determining performance. From a stakeholder perspective, the performance of an organization is understood as the extent to which the needs and requirements of each stakeholder are met. Organizations must be relevant to their key stakeholders. In studying development NGOs, we find the requirements and expectations of their donors are not the same as the requirements of their clients (another stakeholder group). These organizations need to be relevant to both funders and clients, and must reconcile the differences.

Organizations in any society take time to evolve and develop, but over time they must create ways to renew themselves in order to remain useful to their major stakeholders. While all organizations ultimately face internal and external crises, the survivors are those that succeed in adapting to changing contexts. From a system perspective, for an organization to survive, it must obtain support from its environment. In other words, an organization must supply stakeholders in the environment with

the goods and services they want, need and are willing to support. A key performance variable is the ongoing relevance of an organization, which we define as the ability of an organization to meet the needs and gain the support of its priority stakeholders in the past, present and future.

In the private sector, the organizational literature captures the notion of relevance through innovation and adaptation. To emerge as a “learning organization,” an organization must strive for the ideal of constantly adapting to the changing environment and to the evolving needs of its stakeholders. Peter Senge argues that organizations that survive are those that learn on a continuous basis and use the learning acquired to improve and perform (Senge et al., 1994, 1999).

In today’s context, organizational performance relates to the ability of the organization to keep its mission, goals, programs and activities aligned with the evolving needs of its key stakeholders and constituents. In most of the literature on the private, public administration and development sectors, clients and customers are identified as central stakeholders in assessing the performance of an organization. However, most organizations have a range of stakeholders whose support is essential if the organization is to remain relevant. Organizations must set priorities and accordingly address the conflicts and paradoxes among their stakeholder groups.

Which stakeholder should be satisfied? How should these sets of expectations be managed? In a health care facility, we found that being relevant to the government by cutting costs and services led to being less client-oriented (meeting needs of patients and their families). In the development context, doing more for less

might be a useful slogan for donors and their taxpayers, but not necessarily satisfying for development workers who are already putting in 60 hour weeks and are away from home a third of the time.

Dimensions

Ongoing relevance is central to the long-term viability of any organization. In the private sector, relevance is dramatically linked to the reaction of the market to the goods, services and information the organization provides to the market. Nowhere is this seen more dramatically and directly than in the way the present stock market responds to information about a company.

When new products or innovations are announced, or when profits from the quarter are made public, market investors make immediate judgments on the ongoing relevance of the firm to its major stakeholders (customers, investors, staff, suppliers, etc.). A judgment is made about the future of the organization. Government and not-for-profit organizations rarely receive this type of immediate feedback about their relevance and thus need to rely on different types of feedback.

We use two basic dimensions for assessing ongoing organizational relevance. The first relates to the ability of an organization to keep its key stakeholders satisfied. To perform well, the organization must make the key stakeholders feel that their expectations are being met. In government and not-for-profit organizations, one way to determine this is to seek information on the perceptions of satisfaction of the stakeholders (taxpayers, clients, staff, suppliers, etc.)

However, this dimension is quite limiting and sometimes paradoxical. As illustrated in the box on the East African research center, different stakeholders hold contradictory expectations (cut health care costs, increase client satisfaction). What this calls for is the second dimension of ongoing relevance, which is the ability to innovate and create new and more effective situations as a result of insight and new knowledge. Innovation and adaptation to changing requirements are crucial performance indicators in today’s fast-paced world.

Assessing Relevance

Organizations need to develop ways to understand the perceptions of their key stakeholders, and over the past decade, organizations significantly increased

expenditures to do just that. Today, private firms spend increasing amounts to assess consumer reactions to new products and services. Along the same lines, private firms recognize the importance of government as a stakeholder in their businesses and invest heavily in developing associations and lobby groups that both help them understand and influence this stakeholder group.

Similarly, government and not-for-profit organizations have recognized the importance of being relevant. Both groups now systematically assess the quality of their client—“customer” service. Increasingly, these organizations also turn to polling to find out more about the needs and wants of their stakeholders. Do citizens think they are obtaining adequate services for their tax dollars? Are government clients obtaining adequate services from service providers? When stakeholders feel their needs are not met, they may act against the organization’s interests through protests or by withholding funds.

Issues related to keeping multiple constituencies satisfied range from maintaining the reputation of the organization in the wider community, to the effects of the organization's programs and services on its beneficiaries or clients, and the effects of management on staff morale.

While part of ongoing relevance is simply meeting stakeholder expectations, another factor is anticipating their needs. Innovation and adaptation to changing conditions are other aspects of ongoing relevance, albeit more speculative ones. Organizations need to anticipate the future, create new products and services, and

engage their stakeholders with respect to their emerging needs. At one level, this is seen in every new budget brought down by government. New programs are introduced and old programs disappear. It is often said that a government department is outdated when it does not adequately engage in trying to improve upon its products and services, or when its staff is no longer motivated to try innovative ideas. Trying to assess innovativeness and adaptability are important parts of ongoing relevance.

Indicators of Relevance

Since many organizations do not take into account relevance indicators, it may be necessary to develop some preliminary indicators, such as the following, to guide an assessment:

• Stakeholder satisfaction (clients, international financial institutions, donors, etc.)
• Number of new programs and services
• Changes in partner attitudes
• Role changes
• Changes in funders (quality and quantity)
• Changes in reputation among peer organizations
• Acceptance of programs and services by stakeholders
• Support earmarked for professional development
• Number of old and new financial contributors (risk of discontinuance, leverage of funding)
• Changes in organizational innovation and adaptability (changes appropriate to needs, methods)
• Changes in organizational reputation among key stakeholders
• Changes in services and programs related to changing client systems.

PERFORMANCE IN RELATION TO FINANCIAL VIABILITY

Definition

Organizations can be relatively effective, efficient and relevant to most of their stakeholders, yet on the verge of collapse. How can this be? Over the past three years, our

work with government and not-for-profit organizations made us realize that to perform well, an organization must also pay attention to its ability to generate the resources it requires. This means not only having the ability to pay its operational bills, but also having some excess of revenues over expenses (profit or surplus) (Booth, 1996). Whether in the private sector, where profits are a measure of financial health, or in public sectors that rely on funding or loans from government or development banks, financial viability is a key short- and long-term concern.

We have added financial viability as a performance criterion since our 1995 volume. This is because of the large number of not-for-profit and government organizations that today are required to be more market driven. They must focus more attention on the demand and revenue side of their work rather than just the supply side (Henke, 1992). This concept is easily grasped in the private sector, but less so by organizations supported by taxpayers. By financial viability, we mean the ability of an organization to raise the funds required to meet its functional requirements in the short, medium and long term.

Dimensions

There are three dimensions to assessing the financial viability of an organization. The first relates to the ability of an organization to generate enough cash to pay its bills, and in the case of not-for-profit organizations, to be prosperous and profitable. The concern here is with both short- and long-term cash flow requirements. Resources are generated through an organization’s ability to create, supply and deliver products, services or programs useful to customers, clients or beneficiaries (Henke, 1992). When there is a direct purchase of services, customers buy products or services and pay for the services. Donors and governments act as third parties in purchasing products and services they believe are needed or wanted by beneficiaries. Customers and government donors provide the resources an organization needs to survive in the short, medium, and long term. In the short term, an organization needs cash to pay its immediate obligations (payroll, supplies, rent).

Organizations unable to meet their short-term obligations present a risk to their creditors, those to whom they provide services, and people working in the organization (Lampe and Sutton, 1997). This is seen in several ways. In some countries governments pass budgets, but do not provide the cash identified in the budget. As such, the government staff and clients are always feeling betrayed by broken promises.

Organizations also need to generate resources for mid- and long-term obligations. In government agencies, this is not viewed as an issue, because all government capital expenses are expensed the year of purchase. However, with the rapidi-

ty of technological change, governments as well as not-for-profit organizations will need to have clear financial plans and methods for implementation allowing for capital replacement.

The second dimension of assessing financial viability deals with the sources and types of revenues on which the organization bases its costs. Traditionally, in government agencies, the source of revenue is anticipated taxes. Poorer countries and government departments also rely on various donors to provide funds for their work. The concern addressed by this dimension is the reliability of the flow of funds. With not-for-profit organizations, we analyzed the diversity and reliability of the different funding sources. Organizations that rely on a single funding source without a legal ( contractual) or moral funding obligation encounter more difficulty than organizations with multiple, reliable funding sources.

The third dimension is the ability of an organization to live within its allocation. Is the organization able to manage within its revenue sources without creating a deficit? This dimension focuses on the actual ability to manage a budgeting process, as well as the results of the process. Financial viability depends on good financial management practices. This is true for both private and public sector organizations. The fact that organizations sell on credit means that it is possible to make profits on paper and still run out of cash, at least in the short term. An NGO can have many contracts signed, but not enough funds to pay bills.

Therefore, short-term financial viability is influenced to a large extent by how effectively the organization manages cash, accounts receivable, and accounts payable. Although there is a perception that financial management requirements are less stringent in the not-for-profit sector, organizations in this sector must nonetheless manage their resources well enough to convince donors and other stakeholders to supply additional funds in the future.

In a general sense, an organization is financially viable if it generates enough value (both internally and from external sources) to keep stakeholders committed to the organization’s continued existence. In the case of many public and not-for-profit organizations (NGOs, foundations), staying financially viable depends crucially on management’s ability to maintain existing linkages or create new ones to ensure a continued flow of funds over time from diverse sources.

Assessing Financial Viability

Assessing an organization’s financial position is an increasingly important aspect of evaluating the organization’s overall performance. In simple terms, to survive, an organization must generate at least the amount of resources that it expends. In systems terms, this is homeostasis. However, an organization must constantly draw

resources from its environment or else it withers. Assessing the financial health of an organization is thus critical to any organizational assessment.

Clearly, the starting point for such an assessment is to review the organization’s financial statements. This is a simple procedure for private and not-for-profit sector organizations that involves reviewing income and expense statements over several years, together with the balance sheet and cash flow statements. These documents

generally provide most of the information required. In assessing financial viability, lists of accounts receivable and actual contracts should also be requested. Both give insight into the future diversity of funding sources and cash flow schedules.

Ministries view financial viability as less important. Historically, government organizations have not attempted to generate resources or create revenue-producing opportunities. Ministries spend taxpayers’ money and other funds (e.g., from donors) to provide services. They are supply-side service providers, and do not have responsibility for either creating demand, or for generating funds to meet the supply needs. However, this concept of government organizations has recently been changing (Osborne and Gaebler, 1992). Increasingly, public policy theorists and practitioners are developing approaches that would make government agencies more sensitive to market forces (Israel, 1990).

By placing government services within market contexts, theorists claim that strong, more viable organizational systems emerge and weaker, poor performing and inefficient organizations disappear.

Indicators of Financial Viability

If the organization does not have financial indicators, it may be necessary to develop some preliminary indicators such as those that follow to guide an assessment.

• Changes over three years to net operating capital
• Ratio of largest funder to overall revenues
• Ratio of cash to deferred revenues
• Ratio of current assets to current liabilities
• Ratio of total assets to total liabilities
• Growth indicators in terms of number of funders, amount of resources mobilized, assets, capital, revenues
• Level of diversification of funding sources
• Frequency or regularity of hiring to provide services.

BALANCING THE ELEMENTS OF PERFORMANCE

In summary, the traditional ideas surrounding organizational performance were limited to the concepts of effectiveness and efficiency—that is, that the organization must meet its goals within an acceptable outlay of resources. However, continued study of organizations increasingly suggests that their performance also incorporates the way they relate and remain relevant to their stakeholders, as well as their ability to attract resources for both the short and long term. To ensure its performance over extended periods of time, the organization must develop and implement appropriate strategies, and its activities and services must remain realistic and connected to stakeholder needs. When an organization’s endeavors are not relevant or are too far-reaching and costly, organizational survival is at risk.

In recent years, there has been a great deal more acceptance of the multidimensional aspects of performance. In the United States, government departments are given report cards on about a dozen performance factors. As part of its Government Performance Project, the Magazine of States and Localities rates cities on five dimensions. Finally, an increasing number of organizations are aware of the four dimensions of the “balance scorecard” devised by Kaplan and Norton (1996). Balancing the dimensions of performance is becoming more important to understand and to do.

This chapter identified four key elements of organizational performance: effectiveness, efficiency, relevance and financial viability. Others categorize the elements of performance with slightly different labels. But regardless of the terminology, it is apparent that all types of organizations struggle to balance the various elements of their performance, and they often need to make strategic tradeoffs between these elements.

Hospital managers, for example, may need to trade off patient care ( effectiveness) with the costs that are required to treat patients (efficiency). Tax departments need to trade off ensuring citizen compliance with tax laws (effectiveness) with the need to ensure that citizens believe that the tax department itself is fair (relevance). NGOs must balance the desire to serve people in need (effectiveness) with the need to obtain the funds to pay for the services they provide (financial viability).

At various stages in the life of an organization, its leaders must decide which tradeoffs to make among the elements of performance. The key is to make informed, conscious decisions on these tradeoffs (Kaplan and Norton, 1996).

From the perspective of our organizational assessment framework, the aim is to determine whether the organization and its leaders have good data about organizational performance, and whether they are consciously trying to understand the required performance tradeoffs. Good data and good processes for making those tradeoffs provides a level of confidence in the leadership of the organization.

Document(s) 7 of 13