Non-Financial Measures of Success

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Concepts on Non-Financial Measures of Success

Non-Financial Performance Indicators (NFPIs)

What are Non-Financial Performance Indicators?

Why Should Organisations Use non-financial Indicators/ Why should Organisations not focus primarily on Financial Performance Indicators?

• Confusing cause and effect
  • We may be able to see that profits have fallen and this is due to reduced revenue but we are more interested in why sales have been lost - is it due to quality problems, for example. Causes are often non-financial.
• Short-termism
  • Linking rewards to financial performance may tempt managers to make decisions that will improve short-term financial performance but may have a negative impact on long-term profitability.
    • E.g. they may decide to cut investment or to purchase cheaper but poorer quality materials.
    • For example, a manager may decide to delay investment in order to boost the short-term profits of their division.
• Manipulation of results
  • In order to achieve the target financial performance and hence their reward, managers may be tempted to manipulate results. For example:
    • Accelerating revenue - revenue included in one year may be wrongly included in the previous year in order to improve the financial performance for the earlier year.
    • Delaying costs - costs incurred in one year may be wrongly recorded in the next year's accounts in order to improve performance and meet targets for the earlier year.
    • Understating a provision or accrual - this would improve the financial performance and may result in the targets being achieved.
    • Manipulation of accounting policies - for example, closing inventory values may be overstated resulting in an increase in profits for the year.
  • Do not convey the full picture
    • The use of these short-term financial performance indicators has limited benefit to the company as it does not convey the full picture regarding the factors that will drive long-term profitability, e.g.customer satisfaction, quality.
    • Put differently, financial performance is often a consequence of changes in non-financial factors. In particular, many critical success factors involve non-financial factors.
  • Backward Looking
    • Financial performance measures are traditionally backward looking. Not suitable in today's dynamic business environment
  • Therefore, when monitoring performance, a broader range of measures should be used. Many critical success factors, such as quality, are best measured via non-financial measures.

Where are NFPIs Relevant to Business Performance?

The management of human resources

• Traditionally the main performance measure for staff was cost (a FPI). However, businesses have started to view staff as a major asset and recognise that it is important to attract, motivate and retain highly qualified and experienced staff.
• As a result, NFPIs are now also used to monitor and control staff. These can include the following:
  • staff turnover
  • absentee rates / sick days
  • % of job offers accepted
  • results of job satisfaction surveys
  • competence surveys

Product and service quality

• Problems with product or service quality can have a long-term impact on the business and they can lead to customer dissatisfaction and loss of future sales.
• A product (or service) and its components should be critically and objectively compared both with competition and with customer expectation and needs, for example:
  • Is it good value?
  • Can it really deliver superior performance?
  • How does it compare with competitor offerings?
  • How will it compare with competitor offerings in the future given competitive innovations?
• Product and service quality are usually based on several critical dimensions that should be identified and measured over time. Performance on all these dimensions needs to be combined to give a complete picture. For example:
  • an automobile firm can have measures of defects, ability to perform to specifications, durability and ability to repair
  • a bank might be concerned with waiting time, accuracy of transactions, and making the customer experience friendly and positive
  • a computer manufacturer can examine relative performance specifications, and product reliability as reflected by repair data.

Brand Awareness and Company Profile

• Developing and maintaining a brand and/or a company profile can be expensive. However, it can also enhance performance. The value of a brand/company profile is based on the extent to which it has:
  • high loyalty
  • name awareness
  • perceived quality
  • other attributes such as patents or trademarks.
  • customer awareness
  • consumer opinions.

What are Some Challenges in Using and Interpreting Qualitative Information?

• Decisions often appear to have been made on the basis of quantitative information; however qualitative considerations often influence the final choice, even if this is not explicit.
• Conventional information systems are usually designed to carry quantitative information and are sometimes less able to convey qualitative issues. However the impact of a decreased output requirement on staff morale is something that may be critical but it is not something that an information system would automatically report.
• In both decision making and control, managers should be aware that an information system may provide a limited or distorted picture of what is actually happening. In many situations, sensitivity has to be used in interpreting the output of an information system.
• Information in the form of opinions is difficult to measure and interpret. It also requires more analysis.
• Qualitative information may be incomplete.
• Qualitative aspects are often interdependent and it can be difficult to separate the impact of different factors.
• Evaluating qualitative information is subjective, as it is not in terms of numbers - there are no objective formulae as there are with financial measures.
• The cost of collecting and improving qualitative information may be very high.
• Difficulties in measurement and interpretation mean that qualitative factors are often ignored.

Reference

• http://kfknowledgebank.kaplan.co.uk/KFKB/Wiki%20Pages/Non-Financial%20Performance%20Indicators%20(NFPIs).aspx
• http://kfknowledgebank.kaplan.co.uk/KFKB/Wiki%20Pages/Performance%20Management.aspx?mode=none

Guides on Non-Financial Performance Objectives

List of Non-Financial Performance Objectives

• Employee Engagement and Satisfaction
• Quality
• Customer Service
• Public Relations

Reference

http://smallbusiness.chron.com/list-nonfinancial-performance-objectives-35524.html