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A Guide to Performance Measurement and Non-Financial IndicatorsAlastair Shaw, Mattison Public Relations |
Organisational control is the process whereby an organisation ensures that it is pursuing strategies and actions which will enable it to achieve its goals. The measurement and evaluation of performance are central to control and mean posing 4 basic questions :-
The first question can be answered by performance measurement. Management will then have to hand far more useful information than it would otherwise have in order to answer the other three questions. By finding out what has actually been happening, senior management can determine with considerable certainty which direction the company is going in and, if all is going well, continue with the good work. Or, if the performance measurements indicate that there are difficulties on the horizon, management can then lightly effect a touch on the tiller or even alter course altogether with plenty of time to spare.
As to the selection of a range of performance measures which are appropriate to a particular company, this selection ought to be made in the light of the company's strategic intentions which will have been formed to suit the competitive environment in which it operates and the kind of business that it is.
For example, if technical leadership and product innovation are to be the key source of a manufacturing company's competitive advantage, then it should be measuring its performance in this area relative to its competitors. But if a service company decides to differentiate itself in the marketplace on the basis of quality of service, then, amongst other things, it should be monitoring and controlling the desired level of quality.
Whether the company is in the manufacturing or the service sector, in choosing an appropriate range of performance measures it will be necessary however to balance them, to make sure that one dimension or set of dimensions of performance is not stressed to the detriment of others. The mix chosen will in almost every instance be different. While most companies will tend to organise their accounting systems using common accounting principles, they will differ widely in the choice, or potential choice, of performance indicators.
Authors from differing management disciplines tend to categorise the various performance indicators that are available as follows :-
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flexibility | |
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resource utilisation | |
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innovation |
These 6 generic performance dimensions fall into two conceptually different categories. Measures of the first two reflect the success of the chosen strategy, ie. ends or results. The other four are factors that determine competitive success, ie. means or determinants.
Another way of categorising these sets of indicators is to refer to them either as upstream or as downstream indicators, where, for example, improved quality of service upstream leads to better financial performance downstream.
Table 1. Upstream Determinants and Downstream Results
| Performance Dimensions | Types of Measures |
| Competitiveness | Relative market share and position Sales growth, Measures re customer base |
| Financial Performance | Profitability, Liquidity, Capital
Structure, Market Rations, etc. |
| Quality of Service | Reliability, Responsiveness, Appearance, Cleanliness, Comfort, Friendliness, Communication, Courtesy, Competence, Access, Availability, Security etc. |
| Flexibility | Volume Flexibility, Specification and Speed of Delivery Flexibility |
| Resource Utilisation | Productivity, Efficiency, etc. |
| Innovation | Performance of the innovation process, Performance of individual innovations, etc. |
Source : "Performance Measurement in Service Businesses"
by Lin Fitzgerald, Robert Johnston, Stan Brignall, Rhian Silvestro
and Christopher Voss, page 8.
Whether the indicators are of the financial variety or of the non-financial sort, usually it is the functional managers themselves who prepare their own indicators from data generated from within their own departments.
In many companies in the UK, as in the USA, the familiar cry "everything here is viewed in terms of the bottom line!" can be heard. In this sort of corporate environment, financial indicators remain the fundamental management tool and could be said to reflect the capital market's obsession with profitability as almost the sole indicator of corporate performance. Opponents of this approach suggest that it encourages management to take a number of actions which focus on the short term at the expense of investing for the long term. It results in such action as cutting back on R & D revenue expenditure in an effort to minimise the impact on the costs side of the current year's P & L, or calling for information on profits at too frequent intervals so as to be sure that targets are being met, both of which actions might actually jeopardise the company's overall performance rather than improve it.
In general terms, the opponents of "the bottom line school" state that because of the pre-eminence of money measurement in the commercial world, the information derived from the many stages preceding the preparation of the annual accounts, such as budgets, standard costs, actual costs and variances, are actually just a one dimensional view of corporate activity. Increasingly, over the past decade, they have been emphasising that executives should come to realise the importance of the non-financial type of performance measurement.
Research in support of this approach has come up with new dictums for the workplace : "the less you understand the business, the more you rely on accounting numbers" and "the nearer you get to operations, the more non-financial performance indicators you realise could be valuable aids to better management"; or "graphs and bars carry much more punch than numbers for the non-financial manager".
But there is still a lot of resistance. Executives tend to avoid using multiple indicators because they are difficult to design and sometimes difficult to relate, one to another. They have a strong preference for single indicators of performance which are well tried and which produce ostensibly unambiguous signals. But the new school lays great emphasis on the fact that multiple indicators are made necessary by the sheer complexity of corporate activity.
Professor R.S. Kaplan of Harvard Business School in The Evolution of Management Accounting states : "..... if senior managers place too much emphasis on managing by the financial numbers, the organisation's long term viability becomes threatened." That is, to provide corporate decision makers with solely financial indicators is to give them an incomplete set of management tools.
The essential case is twofold; that firstly not every aspect of corporate activity can be expressed in terms of money and secondly that if managers aim for excellence in their own aspects of the business, then the company's bottom line will take care of itself.
So what do non-financial indicators relate to ? They relate to the following functions :-
Whether the company is a manufacturer or a service provider, to be successful its management should be concerned to ensure that:-
Looking at each of these areas in turn, the following non-exhaustive list of performance measures is relevant. No one indicator should be over emphasised and no one indicator should reign supreme for long in the corporate consciousness of executives or management gurus.
The sheer volume, variety and complexity of managerial issues surrounding the production process makes this area of corporate activity a particularly rich one for non-financial indicators. Performance indicators can be devised for all operational areas.
non-financial indicators, depending on the exact nature of the production process, might include the following :-
- indicators deriving from time and motion studies
- production line efficiency
- ability to change the manufacturing schedule when the marketing plan changes
- reliability of component parts of the production line
- production line repair record
- keeping failures of finished goods to a minimum
- ability to produce against the marketing plan
- product life cycle
indicators concerned with controlling production quality - right first time
- measurement of scrap
- tests for components, sub-assemblies and finished products
- fault analysis
- "most likely reasons" for product failures
- actual failure rates against target failure rates
- complaints received against the quality assurance testing programme
- annualised failures as a % of sales value
- failures as a % of units shipped
- various indicators of product / service quality
- various indicators of product / service reliability
indicators concerned with the purchasing department's external relationships with its suppliers
- inventory levels and timing of deliveries
- "just in time" inventory control measurements
- stock turnover ratio
- weeks stocks held
- suppliers delivery performance
- analysis of stock-outs
- parts delivery service record
- % of total requests supplied in time
- % supplied with faults
indicators of sales delivery and service
- shipments vs. first request date
- average no. of days shipments late
- response time between enquiry and first visit
- measurements based on "staying close to the customer"
- complaints re manuals
- complaints re packaging / ease of opening
- quality of packaging materials
- customer satisfaction analysis
- price of products comparisons
- check on unsuccessful visit reports
- monitoring repeated lost sales by individual salesmen
- sales commission analysis
- monitoring of enquiries and orders
- sales per 100 customers
- "strike rate" - turning enquiries into orders
- analysis of sales by product line
- by geographical area
- by individual customer
- by salesmen
- matching sales orders against sales shipments - the trend from the mismatch
- backlog of orders analysis
- flash reports on sales
- publication of sales teams performance internally
- analysis of basic salaries and sales commissions
- share of the market against competitors
- share of new projects in the industry
- new product / service launch analysis
- time to turn round repairs
- delays in delivering to customers (customer goodwill)
- value of warranty repairs to sales over the period
- head count control
- head count by responsibility
- mix of staff analysis
- mix of business analysis vs. staff personnel needs
- skilled vs. non skilled
- management numbers vs. operations staff
- own labour / outside contractor analysis
- workload activity analysis
- vacancies existing and expected
- labour turnover
- labour turnover vs. local economy
- % of overtime worked to total hours worked
- absence from work
- staff morale
- cost of recruitment
- number of applicants per advert
- number of employees per advertising campaign
- staff evaluation techniques
- evaluation of staff development plans
- monitoring of specific departments, eg. accounting
- speed of reporting to internal managers vs. HQ
- accuracy of reporting as measured by misallocations and mispostings
- queries re what reports mean
- monitoring of departments performance long term
- pay and conditions vs. competition
- evaluation vs. basic R&D objectives, strategic objectives and project objectives
- product improvement against potential market acceptance
- R&D against technical achievement criteria, against cost and markets
- R&D priority vs. other projects
- R&D vs. competition
- R&D technical milestones
- analysis of market needs over the proposed product / service life of R&D outcome
- top management audit of R&D projects
- major programme milestones
- failure rates of prototypes
- control by visibility - releases, eg. definition release, design release, trial release, manufacturing release, first shipment release, R&D release
- work place environment yardsticks
- cleanliness
- tidiness
- catering facilities vs. competition
- other facilities vs. competition
- etc.
Many executives will talk freely in terms of quality and standards, of "just in time" inventory control, and of other performance measurement yardsticks and may be quite knowledgeable about them, but when questioned as to the exact nature of the non-financial measurements that they actually have in place in the company will be hard-pressed to tell the researcher what the company is in fact measuring on an on-going basis. There is a lot of lip service paid to these measures, as opposed to those of a purely financial nature, which are of course to a great extent the product of regulation and company law. So, much remains to be done to broadcast the merits of non-financial performance measurement indicators.
The Foundation for Performance Measurement, which was established in 1992, is an important source of information about performance measurement and non-financial indicators and acts as a clearing house for papers and discussions on the latest thinking. The Foundation is a membership organisation dedicated to extending the scope of enterprise performance measurement beyond the conventional focus on internal, historic, financial, numeric and short- term data. It serves not only as a source of information but also as a forum for research and debate and a link to tools and resources for organisations interested in developing practical new ways of measuring enterprise performance. At its regular meetings the Foundation brings together:
- major corporations
- auditors and consultants
- business schools
- not-for-profit organisations
- institutional investors
- information providers
- professional bodies
- software developers
The Foundation for Performance Measurement can be reached as follows :-
Foundation Secretariat, The Foundation for Performance Measurement, c/o Metapraxis Ltd., Hanover House, Coombe Road, Kingston-upon-Thames, Surrey, KT2 7AH.tel : 0181 541 1696 fax : 0181 546 2105 email : info@fpm.com
Other valuable sources of information on performance measurement and non-financial indicators include :-
The Chartered Institute of Management Accountants,
63, Portland Place,
London, W1N 4AB.tel : 0171 637 2311
fax : 0171 631 5309
email : cimalis@cima.org.uk
A further source of information is the European Foundation for Quality Measurement.
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THIS PAPER HAS DRAWN HEAVILY FOR MATERIAL ON THE FOLLOWING BOOKS :-
Measuring Corporate Performance, by Niall Lothian, BA, CA, Heriot-Watt University, published by The Chartered Institute of Management Accountants, ISBN 0 948036 35 4
Performance Measurement in Service Businesses, by Lin Fitzgerald, Robert Johnston, Stan Brignall, Rhian Silvestro and Christopher Voss, published by The Chartered Institute of Management Accountants, ISBN 0 948036 78 8