Accounting 4310

Chapter 18Nonfinancial and Multiple Measures

of Performance

Nonfinancial Measures

• Financial information – is not timely– is based on past information

• Nonfinancial information– is timely – is based on real-time measures

• Increasingly being used• Allows all people in the organization to take

ownership of meeting their measures

Organizational Environment and Business Strategy

• Mission – its values and what it wants to accomplish• Mission statement – statement describing its

mission• Business-level strategy- how the company plans to

meet its mission• Stakeholders – people with an interest in the

organization (employees, customers, suppliers, investors, creditors)

• Critical success factors – factors important to the success of the company

Responsibilities

• Vary according to the level in the organization– Lower-level

• Customer satisfaction• Quality

– Middle-level• Employee turnover• Customer delivery• Employee development• Dealing with business partners

– Top-level• Make sure the company is meeting its responsibilities to

stakeholders

Business Model

• Framework that links the roles of various employees and levels in the organization and that illustrates how the successful completion of these roles will result in achievement of the organization’s goals.

Multiple versus Single Measures

• If local managers are more knowledgeable, a single measure is fine

• If corporate office has more market knowledge, multiple measures may be helpful to make sure local managers accomplish tasks needed

Balanced Scorecard• Developed by Robert S. Kaplan and David O. Norton

(Harvard Professors) in 1992• What is it?– An approach to performance measurement that combines

traditional financial measures with non-financial measures to provide managers with richer and more relevant information about activities they are managing

• It is an information system for employees of all levels of the organization

• The BSC translates a business unit’s mission and strategy into tangible goals and measures.

• Key performance indicators are identified and measured

Balanced Scorecard

• Four perspectives:– Financial– Customer– Internal Business Process– Learning and growth

• Financial goals are the ultimate result for businesses but they are usually short-term

• The last three perspectives are long-term in nature and alert management about future problems/opportunities

Example

Figure 9-1

Balanced Scorecard

• Critical Financial Performance Variables– Operating profit– Net income– Return on Investment– Return on Equity– Return on Capital Employed– Economic Value Added– Return on Sales– Cash flow

Balanced Scorecard

• Critical Customer Performance Variables– Bookings or contracts scheduled– Backorders– Customer satisfaction– Customer response cards• Surveys• Letters of complaint

– Customer retention• Average duration of relationship• Reasons for leaving

Balanced Scorecard

• Critical Customer Performance Variables (continued)– New customer acquisition– Customer profitability– Customer loyalty– Market share– Account share– Key account orders

Balanced Scorecard

• Critical Internal Process Performance Variables– Operations Processes• Capacity utilization• Inventory turnover• Quality measures

– Zero defects

• Cycle time measures– Lead time– On-time Delivery and delivery time

Balanced Scorecard

• Critical Internal Process Performance Variables– Operations Processes• Cycle time measures

– Order fulfillment cycle - receipt of order to delivery– Throughput time - time to manufacture– Manufacturing Cycle Efficiency = Process time/Throughput

time (Goal = 100%)

• Cost measures

Balanced Scorecard

• Critical Internal Process Performance Variables– Innovation Processes• Number of new products• Market position in new products

– Post-Sale Service Processes• Warranty and repair activities• Customer service• Invoicing and collection

Balanced Scorecard

• Critical Learning and Growth Performance Variables– People• Train people• Give them advancement potential• Employee satisfaction

– Systems• Provide for upgrades and improvements

– Organizational Procedures• Align organizational procedures and routines

Managing Strategy and the Balanced Scorecard

• Short-run versus long-run measures• Features of good balanced scorecards– Measures are appropriate for achieving strategy– Communicates strategy to all employees– Places strong emphasis on financial objectives (lagging

indicators) and measures with nonfinancial measures (as leading indicators of future financial performance)

– Limits the number of measures used to those most critical• No more than 7 + - 2

– Highlights problems that could affect future performance

Managing Strategy and the Balanced Scorecard

• Pitfalls when implementing a balanced scorecard– Use actual cause and effect linkages not perceived linkages– Seek improvements through tradeoffs over time– Include subjective and objective measures that are hard to

manipulate– Use nonfinancial along with financial measures– Use critical measures to focus attention rather than using

too many measures– There is no guarantee that future profitability will follow

target achievements in any nonfinancial area.– Poorly designed incentive programs

Example of BSC

• Mayo Clinic Rochester– A BSC is used to guide physicians and other

employees to achieve success– Perspectives include• Quality• Scholarships• Patient satisfaction

– Performance Measures include peer-reviewed papers, numbers of presentations, and number of grants awarded

Example of BSC

• Southwest Airlines Co.– Performance Measures include • Load factors (percentage of seats occupied)• On time performance• Available seat miles• Denied boarding rates• Flight cancellation rates• Customer complaints filed with the Department of

Transportation

Example of BSC

• PriceWaterhouse Coopers– Used a version of the BSC with the following

measurements:• Divisional income – 60%• Generating cross-division income – 10%• Customer satisfaction (measured with surveys) – 10%• Development of new customers (new business) – 10%• Employee turnover (difference between company norm

of 20% per year) – 10%

Example of BSC

• Tri-Cities Community Bank• Financial: Improved loan, deposit, and non-interest

income• Customer: Customer retention rate, customer

satisfaction ratings on quarterly surveys• Internal business: Number of successful referrals

and/or cross-sells• Learning and growth: number of training hours

employees receive, employee scores on in-house tests about sales, service, and product knowledge

Example of BSC

• Dell Computer Corporation– Financial measures

• Selling price• Margins• Overhead costs• Profits

– Nonfinancial measures• Inventory turns• Accounts receivable days• Accounts payable days• Cash-conversion cycle

Balanced Scorecard• According to a recent survey by Bain & Co.,

approximately 50% of Fortune 1000 companies in North America and about 40% in Europe have adopted some version of the BSC. Additional implementers include the following:– ABB Switzerland (Engineering company)– AT&T Canada Long Distance– Chemical Bank– Hilton Hotels– IBM– Sears– UPS– Walt Disney World Company– Wells Fargo Online Financial Services

Continuous Improvement & Benchmarking

• Always get better, faster, more efficient, etc.• Eliminate non-value added activities• Benchmark – compare to best activities– Do not benchmark everything– Benchmark only the most important strategic

activities– Look for internal, regional or industry benchmarks

for less important activities

Common Measures

Functional Measures

• Manufacturing cycle time – total time taken to produce a good or provide a service

• Manufacturing Cycle Efficiency = Process time/Throughput time (Goal = 100%)

• Productivity = inputs into outputs• Partial productivity = output/single input

Employee Involvement

• Nonfinancial measures are understandable• Commitment is greater to company when

given nonfinancial measures that can be achieved

• Employees will be more customer-oriented if measured on customer satisfaction

• Employees will be more motivated to improve the organization

Difficulties in Implementing Nonperformance Measurement Systems

• Fixation on financial results• May be a poor correlation between

nonfinancial measures and results• Measures must be updated• Measurement overload (too many)– Managers will choose easiest measurements if

given too many• More subjective and less reliable