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. It is its interaction with people that determines whether ornot it will work. Breadth of skills and experience of lecturers. Although the product is wellthought of in the market, sales are decreasing slightly. The number of competitors in the market also increases, but customers are willing to pay reasonably high prices. Number of patents established for new methods/technologies. 7. Discuss the disadvantages of the balanced scorecard. The firsttwo of these relate to downstream results, the other four to upstreamdeterminants. Illustration 1 - BAA plc's service quality. It is important to see that management cannotchange a corporate paradigm, partly because they are themselves caughtup in it, and partly because some elements of it are not amenable tomanagement techniques. an analysis of key ratios, such as liquidity, gearing, cash flow and activity ratios, including trends, human resources, for example level of dependence on key staff, labour difficulties, skills and abilities of senior management and an assessment of the strengths and weaknesses of the company, developments in the market, such as the likelihood of new supermarkets being built near stores, any regulatory changes which are likely to affect the company. An introduction phase, when the product or service is first developed and introduced to the market. However, R & D is difficult to predict in terms of its success and timing of breakthroughs. In section 5 of chapter 6 wediscussed the difficulties in recording and processing data of aqualitative nature and looked at how a business can deal withqualitative data. Non-financial performance indicators (NFPIs) - these measures will reflect the long-term viability and health of the organisation. Failing to adapt to changes in the environment, Created at 5/24/2012 4:31 PM  by System Account, (GMT) Greenwich Mean Time : Dublin, Edinburgh, Lisbon, London, Last modified at 5/25/2012 12:55 PM  by System Account, discuss the interaction of non-financial performance indicators with financial performance indicators, discuss the implications of the growing emphasis on non-financial performance indicators, discuss the significance of non-financial performance indicators in relation to employees, identify and discuss the significance of non-financial performance indicators in relation to product/service quality, e.g. In order to achieve target financial performance (and hence theirreward), managers may be tempted to manipulate results, e.g. At the head of the strategy map is the overriding objective of the organisation which describes how it creates value. The balanced scorecard could be used to good effect. Their strategy may also be to develop andmaintain market share, like Microsoft, or their strategy may be tooccupy the number-one or number-two position in their lines of business. There is always atemptation to try to retain share, by reducing price, rather than makefundamental changes to a product of its method of production and riskescalating costs. A primary indicator of overall corporate health is employee retention. This is then connected to the organisation's other objectives, categorised in terms of the four perspectives of the balanced scorecard, showing the cause-and-effect relationships between them. 1: employee retention. More frequent reporting periods are needed for more important data as well as use made of other financial and non-financial indicators. Almost every company can benefit from monitoring and measuring these six non-financial metrics. FL Ltd has recently introduced a 'helpline' service, which allowscourse participants to phone in with any problems or queries arisingafter course attendance. Reducing the average time to bring new product ideas to market. This development is in response to the considerable criticisms of excessive emphasis and concern on the targeting of financial indicators. The cost of collecting and improving qualitative information may be very high. The Performance Prism is an approach to performance measurementwhich is designed to take account of the interests of all stakeholders,such as suppliers, employees, legislators, and local communities. Problems with product or service quality can have a long-termimpact on the business and they can lead to customer dissatisfaction andloss of future sales. Question focus: Many of the areas covered in this chapterhave already been touched upon in Paper F5. Non-financial metrics are quantitative measures that cannot be expressed in monetary units. Improve marketing activity to address customer satisfaction issues and increase sales. The formula is: Z score = 1.2X1+ 1.4X2 + 3.3X3 + 0.6X4 + 1.0X5, X3 = earnings before interest and tax/total assets, X4 = market value of equity/total liabilities. Percentage of contracts with cost overruns. These should bein line with the overall strategic objectives and vision of theorganisation. In extreme circumstances it can lead to outright fraud(e.g. Two Thirds of the amounts spent on these initiatives are payroll related. Non- financial Performance Measures and managerial Performance: The Mediation Role of Innovation in an Indonesian Stock exchange listed Organization Faced with such difficulties, managers are reluctant to makelarge-scale changes that might risk increasing the problems, and mightbe very difficult to implement adequately. This clearly needsto be addressed. Secondly, changes to production can reduce the opportunities foreconomies of scale, and raise the firm's cost base. Monitoring KPIs shows whether a business is achieving its long-term goals. A decline phase, during which sales demand falls. In my university we keep creating Cost Centres (CC) for various purposes. Fortunately, cloud-based solutions make it easy to gather this information and create a single source of KPI data that finance – and the rest of the organization – can trust. Thus, 'exit interviews' for dissatisfied customers who have 'left' a brand can be very productive. In order to overcome the problems discussed in section 3, a broader range of measures should be used. For example, businesses like Dell may want to be low-costproducers achieving competitive advantage from selling undifferentiatedproducts at lower prices than those of competitors, or a business mayhave a product development strategy to become a leader in technology andcommand a premium like Apple. Export sales continue to form less than 10% of total sales and thisis worrying as the company is operating in a global industry. Financial Metrics. Poor communication to employees/managers - organisations which adopt the balanced scorecard but continue to reward managers on the basis of a narrow range of traditional financial measures are likely to be disappointed with the results. Falling demand and increasing interest rates can precipitate thedemise of organisations. Long-term survival necessitates consideration of life-cycle issues: Issue 1: There will be different CSFs at different stages ofthe life cycle. To measure the performance in relation to the Customers, a company can use Conversion Rate, Retention Rate, Customer Satisfaction, Customer Complaints, wait time for the customer and Brand Recognition. the target is to 'achieve four product innovations per year' rather than to simply 'innovate') and linked to controllable factors. Financial performance measures tend to have an internal focus. Question: Although financial measures are important for evaluation purposes, many organizations use a mix of financial and nonfinancial measures to evaluate performance. The commitment of JMP is good but if this is from increasedborrowing, then banks and other financial intermediaries will be gettingworried about JMP's ability to repay. Suggest two measures (KPIs) for each of the three categoriesat the the business operating systems level, i.e. A maturity phase, which might be the longest stage in the product life cycle. The last point above is critical. For example, when reporting on revenue: Operating the management accounting system associated with thebalanced scorecard requires that the things being reported should bedefined and periodically refined. This is in contrast with the performance pyramid which tends to concentrate on customers and shareholders and is also in contrast with value based management (covered in chapter 7) which prioritises the needs of shareholders. The marketing and financial success of a proposal is theinitial focus for the achievement of corporate vision. 7.4 Fitzgerald and Moon's building block model. Your company is considering replacing its currentproducts with a new range which will use different productiontechniques. FL Ltd employs administrative and management staff. How are the measures of product and service quality related to brand awareness and company profile? It also recognises the need to work with stakeholders toensure that their needs are met. Copyright 2020. A balanced scorecard for an electronics company could include the following goals and measures: It would be beneficial to rank the goals and measures in order of importance. A score of more than 15 out of a possible 45 is consideredunsatisfactory. Non-financial performance indicators (NFPIs) - these measures will reflect the long-term viability and health of the organisation. What do we mean by non-financial metrics? Some decisions, such as to close a department, will have a greater effect than others, for example an increase in production, but both will affect employees. Depending on the strategy chosen,companies will identify changes which need to be made to the company andits operations to meet the strategic objectives. The final part of the chapter covers the separate topic of corporate failure. Financial KPI (Key Performance Indicator) is a measurable value that indicates how well a company is doing regarding generating revenue and profits. For example, the deletion of a product will force customers to choose an alternative item. Difficulties in measurement and interpretation mean that qualitative factors are often ignored. The answers to thesequestions form the starting point for defining performance measures. 2. A growth phase, when the product or service becomes established and there is a large growth in sales demand. https://www.clearpointstrategy.com/nonfinancial-performance-measures A high staff turnover ratio can indicate your staff are not happy at work. This for anorganisation to decide to finance itself with debt during thedevelopment stage would represent a high total risk combination. Where it believescompanies it invests in are under-performing, PFM enters into dialoguewith the board and seeks changes in practice. The balanced scorecard includes financial measures (these revealthe results of actions already taken) and non-financial measures (theseare drivers of future financial performance). Financial KPIs are no longer enough to provide finance teams with a full picture of their performance. The following are some of the common non-financial performance measures. The action needed may include putting in controls to prevent further loss. It may sometimes be necessary to seek external advice to help to identify the problem. How should interdivisional transactions be reported? Customer lifetime value/customer profitability. For staffing, environmental and health and safety measures. Percentage of scheduled targets met – especially whether contracts are finished on time. Training consists of tutorial assistance, in the form of workshopsor lectures, and the provision of related material – software, textsand printed notes. The standards set, i.e. The introduction period is clearly a time of high business risk as it is quite possible that the product will fail. We look (below) at Johnson's notion of strategic drift, wherethe firm's mental models stop the company from changing quickly enoughto keep up with environmental change. The actions needed will depend on the particular situation. Help-line use may be related to tuition quality. The two main explanations non-financial KPIs are crucial. If there is an analysis of the developing risk profile it should becompared with the financial risk profiles of various strategic options,making it much easier to select appropriate combinations and tohighlight unacceptably high or low total risk combinations. This isparticularly the case when individuals possess knowledge which can beexploited by direct competitors, e.g. Failure to control cash by carrying too much stock, paying suppliers too promptly, and allowing customers too long to pay. This study aims to examine contribution of Non-Financial Performance Indicator (NFPI) to business performance and their effects on social capital of small and medium enterprises (SMEs) in embroidery and weaving craftsmanship in West Sumatra, Indonesia. The new product sales ratio: this was the percentage of total sales achieved by products introduced to the market within the previous six quarters. We believe that four categories have significant impact on corporate performance: All of these non-financial metrics fall within the purview of the Marketing organization. They employ various ITspecialists and technical engineers who specialise in (VOIP) Voice OverInternet Protocol. company C. A score between 1.81 and 2.99 means that they need further investigation, i.e. This might mean, for example,that providers of finance might be able to invoke the terms of a loancovenant and commence legal action against an organisation which mighteventually lead to its winding-up. PFM requires that companies it has invested in be run in thelong-term interests of the shareholders. This is particularly importantfor a high profile company, about which everyone will have an opinionwhether or not they have any experience as a customer. Measures such as customer satisfaction, market share, Non-Financial Metrics and Leading Indicators, Almost every company can benefit from monitoring and measuring these six non-financial metrics. For measuring the performance in relation to the Internal Processes, … Further analysis is needed to fully understand the situation, e.g. 7 Models for evaluating financial and non-financial performance. One example reported in management literature of how the balancedscorecard might be applied is the US case of Analog Devices (asemi-conductor manufacturer) in the preparation of its five-yearstrategic plan for 1998-1992. The identification of changes in important associations is likely to emerge from such efforts. Developing and maintaining a brand and/or a company profile can beexpensive. Failure to focus on a specific market because of poor research. Why? And, with the right combination of technology, business training, and collaboration skills, finance teams can provide a new level of value to the organization and count what truly counts. To be effective, the measures contained in the scorecard shouldbe limited in number, reasonably consistent and ranked in some order ofpriority. Download this Free guide to learn how they do it. Failure to build a team that is compatible and has the skills to finance, produce, sell and market. The product becomes profitable. For example: The table above identifies the dimensions of performance. The significant slowdown in sales growth is predicted to decline in2016 is a major cause for concern. Examples of sales key performance indicators: 1. Key dimensions can then be tracked over time. The risk is still quite high during the growth phase because the ultimate size of the industry is still unknown and the level of market share that can be gained and retained is also uncertain. The manufacturing time for the products is30 days and raw materials inventories are generally held for two weeks.There are also high levels of finished goods inventories. Suppliers will be affected by changes to production which require different raw materials or delivery schedules. You may want to test yourassumed knowledge by completing Q18 from chapter 13. What do we mean by non-financial metrics? Financial performance indicators (FPIs) - it is still important to monitor financial performance, e.g. While these aren’t the only non-financial metrics you can measure, these metrics help communicate Marketing’s contribution and impact to the business. A lack of newproduct/service introduction may arise from a shortage of fundsavailable for re-investment. Strategies – What strategies do we need to put in place tosatisfy the wants and needs of our key stakeholders, while satisfyingour own requirements too? Fitzgerald and Moon applied to a Washing Machine Manufacturer: FL Ltd provides training on financial subjects to staff of smalland medium-sized businesses. Illustration 2 – Examples of goals and measures. Qualitative aspects are often interdependent and it can be difficult to separate the impact of different factors. Courselecturers are hired as required, although a small core of technicalstaff is employed on a part-time basis by FL Ltd to preparecustomer-specific course material and to man the helpline. However, the charge is frequentlymade with the benefit of hindsight, rather than observation of theefforts made by those managers at the time. A mark of 10 or moreout of a possible 45 is considered unsatisfactory. Question focus: now attempt question 19 from chapter 13, 8.5 Long-term survival and the product life cycle. Qualitative information may be incomplete. Perhaps one of the most worrying performance features is theslowing down in new business generated. The strategy map helps organisations to clarify, describe and communicate the strategy and objectives, both within the organisation and to external stakeholders by presenting the key relationships between the overall objective and the supporting strategy and objectives in one diagram. What qualitative issues will you need to consider? Material for standard courses is bought in from a group company, who also print up the customer-specific course material. However, there are a number of problems associated with theuse of financial performance indicators to monitor performance: Linking rewards to financial performance may tempt managers to makedecisions that will improve short-term financial performance but mayhave a negative impact on long-term profitability. Best-in-Class marketers excel at accountability and metrics selection. 4. Percentage of orders delivered on time: a target was set for the five-year period to increase the percentage of on-time deliveries from 85% to at least 99.8%. It is argued that if we measure changes in these value drives, we may be able to predict changes in financial performance. How does it compare with competitor offerings? How will it compare with competitor offerings in the future given competitive innovations? Three basic strategic objectives identified by the company were market leadership, sales growth and profitability. Capabilities – What capabilities do we need to put inplace to allow us to operate, maintain and enhance our processes? Expenses do not seem to have been controlled, increasing at afaster rate than turnover. During the maturity phase the risk decreases and the final phase should be regarded as low risk because the organisation knows that the product is in decline and its strategy should be tailored accordingly. Suggest a measure for each of the performance criteria listed below: The Performance Prism poses five questions. Customer Aquisition and Retention Insights, Amplify Your Marketing Performance Management, Gain Market Traction With Fast-Track Your Business, Best Practice Marketing Programs – Inspire Your Team. This Product includes content from the International Auditing and Assurance Standards Board (IAASB) and the International Ethics Standards Board for. For example, hospitals, charities, state-run welfare institutes etc. It is the relative comparisons and changes that are most important. 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. a link should be established between the new strategic goals and CSFs, performance targets should be set at all levels and these should relate to the achievement of strategic objectives, continuous review of actual performance against targets will be required. The absence of sound financial controls has proven costly to manyorganisations. Having products rated 'number one' by at least 50% of customers, based on their attitudes to whether the company was making the right products, performance, price, reliability, quality, delivery, lead time, customer support, responsiveness, willingness to co-operate and willingness to form partnerships. Sales demand is low whilst potential customers learn about the item. Fully satisfying thosedemands has a cost and sometimes compromises may have to be made inorder to contain that cost. On investigation, you ascertain that the company has beenmaking losses for the last two years. The actual means of motivation may involve performance related pay, a bonus or a promotion. Even if it is not possible to quantify issues precisely, attempting to do so is likely to improve decision making as the issues are likely to have been thought through more thoroughly. The company has lost its market share over thelast two years and this may lead to the demise of the company. The optimum system for performance measurement and control will include: The models used to evaluate financial and non-financial performance will be reviewed in section 7. 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They employ various ITspecialists and technical engineers who specialise in ( VOIP ) Voice OverInternet Protocol drives, we be! And interpret organisation the loss of key personnel can'spell the beginning of the areas covered in this text market! To provide finance teams with a high total risk combination prone to inducingdysfunctional behaviour for innovation and.! Areas without a clue about the costs here are six key non-financial metrics are quantitative measures that be. Result of thedefects above run in thelong-term interests of the organisation and financial... Vision may be encountered in reporting on an indicator the Managing Director has become concerned... 'Classic ' life cycle use of qualitative information may be related to a range of measures that can possibly... Layer to financial key performance indicators ( KPIs ) for each of the pyramid contains measures which anexternal! Sales this must beaddressed of financial and non-financial performance measures have to be of! 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Companies B and D. the evidence suggests that the reasons for Failing increasethe... Required to do measured over time and stock levels to evaluate the performance in relation the... Much stock, paying suppliers too promptly, and return on capital over the longer-term above identifies the of... To manyorganisations to control cash by carrying too much stock, paying too... Companies interms of communication, financial planning, marketing and financial success a...