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Theory of Change

If you ask pretty much anyone from the business community what the Theory of Change is about they’ll most likely look blank. The same applies to those in government. For the concept is largely restricted to the development world, including NGOs and those who fund them.

Having worked with NGOs over the years I have become familiar with not only what it’s all about but why it’s a good idea to apply it. Figuring out the Theory of Change (ToC) comes in as one is developing one’s strategy, and it links cause-and-effect relationships between what one does and what the outcomes are.

Its focus is on the long-term impact of a whole organisation and of its programmes and projects, and it ensures that the indicators or measures used go beyond those that merely assess intermediate output. This ensures robust performance management – or as NGOs prefer to call it, M&E (Monitoring and Evaluation) – which insists on having answers to the repeated “So what?” question probing the consequences of one’s actions.

As I have mentioned in other articles, measures of intermediate output are usually much easier both to define and to achieve, and too many planners and leaders adopt this shorter, easier path to performance management. My usual example is the objective of developing the capacity of one’s people, where the measure is simply the number of training programmes and how many attended, without looking into the much more challenging task of assessing the consequences of them having done so.

With the application of ToC, there’s no choice. One is forced to think about what change resulted from having done what one has done. Like, did developing the staff capacity change how effectively one operated in achieving the purpose, the vision, of the organisation?

When I was introduced to the Theory of Change I was already familiar with the Balanced Scorecard’s way of carrying out strategic planning. The Balanced Scorecard has strategic planners identify objectives in a “balanced” way, focusing on the four pillars of Customers and Products; Learning and Growth (or “Our People” as I prefer to call it); Systems and Processes; and Financial Sustainability.

Over the three decades since it was launched as a methodology, the Balanced Scorecard has evolved in a number of ways. When it was first introduced it was only intended for use by for-profits, but it has since expanded to not-for-profits and to government (in both of which I and my colleagues have applied it). This was enabled through its evolution from emphasis on shareholders of companies to the inclusive perspective of all stakeholders to any entity, bringing on board the contemporary ESG – Environmental, Social and Governance – issues that any kind of organisation must take into account.

Another vital evolution of the Balanced Scorecard was the introduction of Strategy Mapping. This, just as one does in plotting the Theory of Change, spells out cause-and-effect linkages between objectives – within and between the four pillars, and building up to achieving the ultimate long-term aspiration.

An example I like to describe to illustrate this is the relationship between the Balanced Scorecard’s financial pillar and the other three. One will only reach financial sustainability if all the other pillars are in good shape. They are described as the “lead” factors, with the financial one being the consequential “lag” factor. Having said that, unless the finances are available for the other three they will not be able to deliver. See my point about cause-and-effect relationships?

So whether we’re talking about the Theory of Change or about Strategy Mapping within the Balanced Scorecard framework, my advice to you all is to think hard about how in your organisation, be it for-profit or not-for-profit, private or public sector, large or small, you define the cause-and-effect links between the different elements there. Find out how to do so graphically, so all the links are easily visible.

This will help remove the silos, the walls between functions or levels, between programmes or projects, and that everyone has the whole picture, aware of whose enabling influence they rely on and who they in turn are enabling. And all this so they know how they can best contribute to delivering on what the whole organisation is all about.

Applying the Balanced Scorecard

It’s fifteen years ago that I was introduced to the Balanced Scorecard, and in all my consulting work on strategy since I have consistently incorporated its approach. The concepts are well known and applied by a reasonable number of organisations in Kenya, but still only a small minority. So let me take you through the basics and how they were introduced into the world.

The Balanced Scorecard was launched in January 1992 by Robert Kaplan and David Norton through an article in the Harvard Business Review. They had observed that the scorecard of most companies was unbalanced, with disproportionate emphasis on revenues and costs, cash flows and profits, return-on-investment and earnings-per-share. Yet these are but the consequences of other factors, ones that drive financial performance.

So they helped us with a simple and universally applicable way of looking at a business from four key perspectives: the satisfaction of our customers, through the products and services we offer them; the wellbeing of our people, which they described as “learning, innovation and growth”; systems and processes; and yes, financial performance, with particular emphasis on pleasing shareholders.

Even at its outset, the Balanced Scorecard noted the linkages between the four perspectives, encouraging companies to identify the cause-and-effect relationships between them. They also pointed out that the financial performance measures of the day over-focused on backward-looking and short-term measures.

Plus, the fact that business leaders needed to show how what was happening in the other three perspectives resulted in strong financial results: they are the lead factors and the financial perspective is the lag one. Having said that though, finance must be available to fund the lead factors, so that perspective also leads. That’s the interconnectedness which is revealed so clearly by he Balanced Scorecard.

In their article, Kaplan and Norton pointed out that while traditionally it was financial experts who put together a company’s performance measures – they were after all, unbalanced in favour of the financials – now it became clear why all of the senior management team needed to participate in putting their company’s scorecard together, in a spirit of “systems thinking”. And this was also much more likely to result in productive collaboration between them.

But relative to how we see the Balanced Scorecard today it was relatively “primitive” at the outset, merely getting companies to lay out operational numbers for the four pillars, through what one might call a performance measurement framework, rather than offering a full strategic performance management tool.

The initial version was followed by a second-generation Balanced Scorecard in 1993, and a third generation in the late nineties. Since then there have been overlays that merely reflected what was trendy at the time – first Total Quality Management, now sustainability and Environmental, Social and Governance issues (where the interests of shareholders are expanded to include all key stakeholders), and maybe AI next. Meanwhile, although the Balanced Scorecard was initially only applied to for-profits, its use was expanded to not-for-profits and to government, as the four perspectives apply equally well everywhere.

Not everyone who has applied the Balanced Scorecard approach to their strategic planning has succeeded in making it work for them, and from what I have seen the main cause of failure has been overcomplicating it and also coming up with far too many objectives and measures. The other issue is not following through with managing and adapting the implementation, so like many other kinds of strategic plans, it just gathers dust on a shelf.

And as any other strategic plan it must be cascaded down the organisation, so there is vertical as well as horizontal alignment, and indeed it should reach the individual level, with each person knowing how they contribute to the overall objectives, and indeed to the overarching vision.

I and my colleague Twalib Ebrahim have helped all kinds of organisations to work with the Balanced Scorecard, from large government bodies, development partners and corporates, to NGOs and research institutions, to large and small family businesses. For our most sophisticated clients, when we explained our approach they worried it would be so simple as to be simplistic. And among the less exposed, those who had never imagined they could become “strategic thinkers”, their concern was whether they could handle it all.

Once we got going though, the inspiration of Kaplan and Norton, applied by us, pulled them all through to become enthusiastic disciples. So if you are not familiar with the Balanced Scorecard, I encourage you to find out more about it and to have a go.