Performance Management · Specific performance analysis issues in not-for-profit organisations and the public sector

Problems of Measuring and Controlling NFP Performance

Updated 11 October 2026 · Fact-checked

Not-for-profit (NFP) and public sector bodies exist to deliver a service, not to earn profit. So there is no single profit figure to judge them. Problems include unquantifiable outputs, multiple stakeholders, unintended behaviour and weak comparisons. You solve questions by naming the problem, applying it to the scenario and suggesting a practical fix.

Understand Problems of Measuring and Controlling NFP Performance

A commercial company has one clear test: profit. Shareholders can see it, compare it and set targets from it. An NFP organisation, such as a charity, hospital or state school, has no such test. Its purpose is to provide a service or benefit to society, and money is only a means to that end.

This creates the first set of problems. No profit measure means you must use other indicators. Many outputs are hard to quantify. How do you put a number on a patient's quality of life, a pupil's love of learning or a crime that did not happen? You often measure what is easy to count (patients treated, exam passes) instead of what really matters (health gained, skills developed). Outcomes also take years to appear, and many causes affect them, so you cannot say whether the organisation or something else produced the result.

The second set comes from people. There are multiple stakeholders: funders, government, donors, staff, volunteers, service users and the public. They want different things, so objectives conflict and are often vague. Targets can also cause unintended (dysfunctional) behaviour. Staff may work only on what is measured, manipulate figures, pick easy cases (cream-skimming) or cut quality to hit a number. Funding is often fixed by a grant or budget, so there is little market discipline on costs.

The third set concerns comparison. Two hospitals or schools serve different populations, with different levels of need, deprivation and case complexity. Raw league tables are unfair. Organisations also differ in size, objectives and accounting methods, and there are few true competitors to use as a benchmark.

The fixes follow from the problems. Use a range of indicators, including non-financial ones, and the three Es: economy, efficiency and effectiveness (value for money). Use a framework such as the balanced scorecard. Agree objectives with stakeholders and rank them. Use proxy measures and surveys for hard-to-measure outputs. Adjust comparisons for case mix and context. Combine targets with quality checks and professional judgement to limit gaming.

Key rules to remember

Value for money (the three Es): Economy = inputs bought at lowest cost for suitable quality; Efficiency = most output per unit of input; Effectiveness = outputs achieve the objectives; Effectiveness is the hardest to measure because it needs clear objectives and outcomes, not just outputs.
Efficiency measure (example): Efficiency = Output ÷ Input (or Cost ÷ Output); For example, cost per patient treated. A low figure is not automatically good if quality has fallen.
Problem groups to recall: No profit measure | Non-quantifiable outputs | Multiple stakeholders and objectives | Dysfunctional behaviour | Comparison difficulties | Fixed funding and weak market discipline; Use this list as a checklist when you plan an answer.

How to solve Problems of Measuring and Controlling NFP Performance questions

Use this method for any written or objective question on NFP measurement problems.

1Read the scenario and note the type of organisation (charity, hospital, school, local government) and what it is meant to achieve.
2Read the requirement. Decide whether it asks for problems, solutions, indicators or a comparison.
3Pick the problems that fit the facts. Link each one to a specific detail in the scenario, not a generic definition.
4Explain the effect of each problem in one sentence: what goes wrong for managers or stakeholders.
5Suggest a practical fix for each problem, such as proxy indicators, a balanced scorecard, stakeholder consultation or adjusted comparisons.
6Where measures are needed, structure them under economy, efficiency and effectiveness and give one named example each.
7Add a short warning on side effects, such as gaming or quality loss, and how to control it.
8Check you answered the exact requirement and that the points are separate and clearly labelled.

Quickest way: Problem, scenario link, fix

When to use it: Use it for time-pressured Section C parts and OT questions that ask you to identify a problem or the best remedy.

Scan for clue words: 'targets', 'league table', 'donors', 'different areas', 'cannot measure'.
Match the clue to a problem: targets means dysfunctional behaviour; league table or areas means comparison; donors or government means multiple stakeholders; cannot measure means non-quantifiable outputs.
Write one line for the problem, one line for the scenario evidence and one line for the fix.
For OT questions, eliminate options that mention profit or shareholder returns as the main test.
Keep each point to about two minutes' worth of marks.

Common mistakes in Problems of Measuring and Controlling NFP Performance

Treating profit as the main measure for an NFP body.
Students are used to commercial examples and apply ROI or profit margin by habit.
Fix: Start from the organisation's service objectives. Use financial figures only for control of cost and funds.
Listing problems without applying them to the scenario.
Memorised lists feel safe and are quick to write.
Fix: Quote a fact from the scenario for each problem and explain its effect there.
Confusing outputs with outcomes.
Outputs such as patients treated are easy to count, so they seem like the result.
Fix: Outputs are the activity delivered. Outcomes are the benefit gained. Effectiveness is judged on outcomes.
Saying targets always improve performance.
Students assume that what gets measured gets better.
Fix: Explain that targets can cause gaming, cream-skimming, neglect of unmeasured areas and falling quality. Suggest balancing measures.
Comparing organisations on raw figures.
Simple ratios and league tables look objective.
Fix: State that context, need and case mix differ. Suggest adjusting for them or using like-for-like benchmarks.
Giving problems but no solutions.
The question wording 'discuss' is read as 'list'.
Fix: Pair each problem with a practical remedy unless the requirement says otherwise.

Worked examples

Example 1

A public hospital is told to meet a target that 95% of emergency patients are seen within four hours. Managers have begun moving patients to a waiting ward just before the four hours expire, and routine operations are being delayed. Discuss the performance measurement problems this shows and how they could be reduced.

Show the solution

Problem 1, dysfunctional behaviour: staff are meeting the target by moving patients, not by treating them faster. The measure is being gamed and the real aim, timely care, is not achieved.
Problem 2, narrow focus: the target covers emergency patients only, so routine operations are neglected. Unmeasured areas suffer when one area is targeted.
Problem 3, non-quantifiable outputs: the quality of care and patient health outcomes are harder to count than waiting time, so a simple time measure was chosen.
Fix 1: add balancing indicators such as patient outcomes, readmission rates and waiting times for routine care, so that gaining on one measure cannot hide loss on another.
Fix 2: audit how the data is recorded and use patient satisfaction surveys to check quality.
Fix 3: involve clinicians in setting targets so they accept them and see their purpose, and review targets regularly.

Answer: The target creates gaming and neglect of unmeasured services because waiting time stands in for quality of care. The hospital should use a balanced set of outcome, quality and cost indicators, audit the data and involve staff in setting targets.

Example 2

A charity runs a youth programme in a deprived town. The board wants to compare it with a similar programme in a wealthy area, based on the percentage of participants who find a job within six months. The charity has donors, a local council funder and the young people themselves as stakeholders. Explain why the comparison may be unfair and how the charity could measure its performance better.

Show the solution

Comparison problem: the two areas have different job markets and levels of deprivation. A lower job rate in the deprived town may hide a larger improvement for each young person.
Outcome problem: finding a job within six months is one outcome. It ignores confidence, skills, training completed and longer-term employment, which are harder to quantify.
Multiple stakeholders: donors may want low cost per participant, the council may want job numbers and the young people want useful support. These aims can conflict, so a single measure favours one group.
Fix 1: compare on value added, such as progress made from each participant's starting point, not on raw job rates.
Fix 2: use a balanced set of indicators: cost per participant (economy and efficiency), jobs and qualifications gained (effectiveness), and participant feedback.
Fix 3: agree and rank objectives with the stakeholders so the measures reflect what matters most.

Answer: The raw job-rate comparison is unfair because the context differs and it measures only one outcome. The charity should measure progress from the starting point, use a mix of cost, outcome and satisfaction indicators, and agree objectives with its stakeholders.

Exam tips

Always tie each problem to a fact in the scenario. Generic lists score poorly in Section C.
Use the three Es as a structure for any question asking for indicators. Give a specific measure for each E.
For 'dysfunctional behaviour' questions, name the behaviour, the cause (the target) and a control (balancing measure, audit, staff involvement).
In OT questions, remember that the correct option usually reflects multiple objectives or non-financial indicators, not profit.
Keep a few lines at the end for solutions, as marks are often given for practical recommendations.

Practice questions from Specific performance analysis issues in not-for-profit organisations and the public sector

Problems of Measuring and Controlling NFP Performance: frequently asked questions

What are the main problems of measuring NFP performance?

The main problems are no profit measure, outputs that are hard to quantify, multiple stakeholders with conflicting aims, targets that cause dysfunctional behaviour and difficulty comparing organisations. Funding is often fixed, which weakens cost discipline. In the exam, link each problem to the scenario.

How do you deal with non-quantifiable outputs in an NFP organisation?

Use proxy indicators, such as surveys, satisfaction scores or qualitative assessments, alongside counted outputs. Measure outcomes over time where possible. Combine several indicators so no single number is relied on.

What is dysfunctional behaviour in public sector targets?

It is behaviour that improves the reported measure but not the real objective. Examples include manipulating data, treating easy cases first and ignoring unmeasured areas. You reduce it with balanced indicators, audit of data and staff involvement in target setting.

How can you fairly compare the performance of NFP organisations?

Adjust for differences in need, case mix, size and local conditions before comparing. Compare progress from a starting point instead of raw results. Use like-for-like benchmarks and several indicators, not one league table.