Why? Therefore, Marketing professionals must gain more experience measuring non-financial metrics. 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. The balanced scorecard indicators, which include the financial perspective, clients' perspective, internal processes perspective and innovations and learning perspective, … This is not suitable in today's dynamic business environment. Monthly sales growth. Non-financial performance measures can provide deep insights into inner workings of your business and serve as leading indicators of future financial performance. Qualitative information often representsopinions of individuals and user groups. Financial KPI (Key Performance Indicator) is a measurable value that indicates how well a company is doing regarding generating revenue and profits. Upon completion of this chapter you will be able to: Student Accountant articles: visit the ACCA website, www.accaglobal.com, to review the following articles on the topics in this chapter: Chapters 7, 8 and 9 have concentrated on financial performancemeasures. 5. Variety in the product or service increases, and customers are much more conscious of quality issues. As outlined above, the organisation takes a series of logical,incremental steps that enables it to change ahead of the market,developing a competitive advantage. As mentioned, so far we have concentrated on financial performancemeasures. 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. Common financial metrics include earnings, profit margin, average order value, and return on assets. 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. Measures such as customer satisfaction, market share, category ownership, and new product adoption rate fall into the non-financial metrics. The one drawback of the performance pyramid is that it doestend to concentrate on two groups of stakeholders, i.e. These give an indication of the morale of employees. As discussed, it is important that a business appraises bothfinancial and non-financial performance. Almost every company can benefit from monitoring and measuring these six non-financial metrics. All key determinants of success in performance will be measured. 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. 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 balanced scorecard allows managers to look at the business from four important perspectives: Within each of these perspectives a business should seek toidentify a series of goals (CSFs) and measures (KPIs). Heargues that the corporate paradigm, as revealed by its cultural web anddescribed in an earlier chapter, is the biggest constraint on strategicthinking and action. Phoenix Fund Management (PFM) has been responsible for theinvestment of pension and life insurance funds for the past twentyyears. Such organizations use non-financial performance measures to evaluate their performance because use of financial indicators becomes irrelevant for them. The standards set, i.e. Balanced scorecards can easily become a confusing mass ofmeasures, some of which even contradict each other. Accounting information are backward looking whereas the operational drivers of future financial performance come from non financial indicators. the target is to 'achieve four product innovations per year' rather than to simply 'innovate') and linked to controllable factors. This will bebased on the opinions of customers with whom they have contact, and onpress reports which discuss the quality of the company's offering. Between 2013 and 2015 there is an upward drift in cost of sales,which may be due to supplier issues or production scheduling problems.The inevitable result of falling sales and increased costs of sales isfalling gross margin. The Performance Prism is an approach to performance management which aims to effectively meet the needs and requirements of all stakeholders. The general problem is that performance measures that relate tolimited parts of the business can be very prone to inducingdysfunctional behaviour. Faced with such difficulties, managers are reluctant to makelarge-scale changes that might risk increasing the problems, and mightbe very difficult to implement adequately. Accuracy of information: Financial performance indicators provide a limited scope regarding the long-term maximization of shareholder’s wealth. Dutyterminal managers also sample the services and goods offered by outletsin the terminals, assessing them from a customer perspective. the CSFs for the business andsuitable measures must be developed to measure each performancedimension. 6 Difficulties in using and interpreting qualitative data. Assessment of brand awareness means identifying the product or company's associations in the minds of customers, and its perceived quality. However, the charge is frequentlymade with the benefit of hindsight, rather than observation of theefforts made by those managers at the time. Discuss the disadvantages of the balanced scorecard. Using the above financial and qualitative data provide: Strategy mapping was developed by Kaplan and Norton as an extensionto the balanced scorecard and to make implementations of the scorecardmore successful. Number of patents established for new methods/technologies. 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. All courses are run onclient premises and, in the case of clerical training courses, arelimited to 8 participants per course. using ROCE, EBITDA, EVA. Most NFPIs are in non-financial terms. A product (or service) and its components should be critically and objectively compared both with competition and with customer expectation and needs, for example: Can it really deliver superior performance? 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. The PerformancePrism is based on the principle that the performance of an organisationdepends on how effectively it meets the needs and requirements of allits stakeholders takes stakeholder requirements as the start point forthe development of performance measures rather than the strategy of theorganisation. Analog Devices sought to adopt financial and non-financialperformance measures within a single system, in which the varioustargets were consistent with each other and were in no way incompatible. Marketing Needs Both Financial and Non-Financial Measures for Performance Management. Although the product is wellthought of in the market, sales are decreasing slightly. They may have financial impacts, but it's impossible to quantify them purely by assigning them a dollar figure. Corporate failure occurs when a company cannot achieve a satisfactory return on capital over the longer-term. There are four essential activities which have to be executedrigorously if the implementation of the balanced scorecard is tosucceed: Steps involved in implementing the scorecard, The steps in implementing the balanced scorecard. In 2013 unfulfilled ordersvirtually matched total sales but the forecast for 2016 sees that thekey ratio falls to barely one-third of total sales. What do we mean by non-financial metrics? 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. In practice, many employees do not understand the organisation's strategy, and systems such as performance management and budgeting are not linked to the strategy. Strategies – What strategies do we need to put in place tosatisfy the wants and needs of our key stakeholders, while satisfyingour own requirements too? Organisations have often found it difficult to translate the corporate vision into behaviour and actions which achieve the key corporate objectives. For example, a firm might minimise itsinventory holding in order to meet some inventory holding target – butat the expense of total operating costs. Measures of brand awareness can either look at the direct link between the brand and overall results, e.g. Illustration 1 - BAA plc's service quality. Finally, a large part of the problem is caused by the mental modelsof those who have control of the strategy within an organisation. Thus boards of directors are notheld properly to account over poor performance. The Managing Director has become increasing concerned about one ofits main customers who account for 40% of it's sales. Examples of nonfinancial information include environmental impact, your relationship with your vendors, diversity in the workplace and social responsibility. It is its interaction with people that determines whether ornot it will work. Indebtedness An important dimension of the fiscal sustainability of any organisation, whether public or private sector, relates to the level of its financial commitments. Difficulties in using and interpreting qualitative information. Key Performance Indicators (KPIs) are the elements of your plan that express what you want to achieve by when. Defective items in production: to reduce defects in production from 5,000 per month to fewer than 10 per month. More structured tools are also available. Suggest a measure for each of the performance criteria listed below: The Performance Prism poses five questions. Anexample of this has already been identified by PFM in the performanceevaluation and incentive scheme for managers. deteriorating ratios or creative accounting. The models used to evaluate financial and non-financial performance will be reviewed in section 7. Logical incrementalism is successful because itdoes not challenge the underlying paradigm, allowing change to takeplace relatively smoothly. There is a mixture of signals in terms of progress being made withinternal processes. To begin with, they assist to clarify and offer framework with regard to financial key performance indicators. Johnson argues thatthis limits the rate of change to the speed at which management mightfeel comfortable, which has many advantages (particularly inimplementation), but might be inappropriate in periods when theenvironment moves very quickly. They can provide deeper insights into the inner workings of your business. Not sure where to start or if you have tapped into the right non-financial metrics? There are a number of meaningful non-financial metrics. It claims to be a 'fund manager with a difference' by seeking togain active involvement in under-performing or poorly managedbusinesses. Non-financial performance indicators (NFPIs) - these measures will reflect the long-term viability and health of the organisation. Accountants (IESBA), published by the International Federation of Accountants (IFAC) in December 2012 and is used with permission of IFAC. 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. Lack of new production/service introduction. Best-in-Class marketers excel at accountability and metrics selection. A high staff turnover ratio can indicate your staff are not happy at work. One of the most important assets of many firms is the loyalty of the customer base. Here are six key non-financial metrics that Marketing should own. Download this Free guide to learn how they do it. Further analysis is needed to fully understand the situation, e.g. To be effective, the measures contained in the scorecard shouldbe limited in number, reasonably consistent and ranked in some order ofpriority. PFM's belief is that there is a lack of 'real' accountabilitybetween boards of directors and shareholders and that too oftenshareholders concentrate on short-term financial gains. This development is in response to the considerable criticisms of excessive emphasis and concern on the targeting of financial indicators. Margins – overall and by product/customer/country. 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. Conventional information systems are usually designed to carry quantitative information and are sometimes less able to convey qualitative issues. It is worth remembering that case studies are writtenbackwards, where a known outcome is traced back to its origins. It may sometimes be necessary to seek external advice to help to identify the problem. 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. Internal setup times – the time taken to switch production from one product to another. 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