Leture-3

NON-FINANCIAL PERFORMANCE MEASUREMENT

Non-financial performance measures are measures of performance based on non-financial
information which may originate in and be used by operating departments to monitor and
control their activities without any accounting input.
Non-financial performance measures may give a more timely indication of the levels of
performance achieved than do financial ratios. Such performance measurement is particularly
important in the case of service industries where such things as quality are of vital importance
if the business is to grow in the long-term.
The various areas where performance measures are likely to be needed have been
summarized as follows:
A. Fitzgerald and Moon
Fitzgerald and Moon focused on performance measurement in service businesses. They
suggested the following areas needing measures of performance:
 Financial performance
 Competitive performance
 Quality
 Flexibility

Fitzgerald and Moon proposed a Building block model which suggests the solution of
performance measurement problems in service industries. But it can be applied to other
manufacturing and retail businesses to evaluate business performance. It identifies three
areas for performance measurement, these are

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1. STANDARDS.
What kinds of properties good standards or targets should possess.
 Equity.
Performance measures should be equally challenging for all parts of business. Relaxation
given to one part of the business leads to perception of unfair treatment which hinders
productivity.
 Ownership.
Performance measure should be acceptable to everyone. Employees should be involved
in the identification of measures rather than being imposed on them. Ownership means
there is responsibility for the results.
 Achievable.
Performance measure should be realistic. Organizations may use actual results for the
competitors to set its own targets. Employees will not be motivated to achieve targets if
they consider them impossible/unattainable.

2. REWARDS.
What kind of properties reward schemes should possess.
 Motivation.
Rewards scheme should be set in manner which motivates employees to achieve the
business goals. If sales growth is desired then bonus can be linked to performance
measures, like increase in number of units sold from previous year sales.
 Clear.
Rewards scheme should be clearly communicated to employees in advance. What kind
to performance will be rewarded and how their performance will be measured.
 Controllability.
Employees should only be rewarded or penalized for the result over which they exercise
some control or influence. Aspects of business like financing and investment should not
be considered by eliminating related expenses like interest and depreciation, when
evaluating their performance.

3. DIMENSIONS.
They are the areas of business performance which need to be monitored and controlled if
business goals have to be achieved. For overall assessment of the business performance,
performance needs to be measured from various perspectives. They are further divided
into two sub-categories.
 Determinants.
These are performance areas which influence the results. These are.
i. Quality.
It is the ability to deliver goods and service with consistency. Quality should be judged
from eyes of the customers. Quality is the level of benefits customers expects from the
product. Quality should be enough for a product price paid.

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 ii. Flexibility.
It is the responsiveness to change in the factor influencing the business performance. E.g,
ability to cope with sudden increase in sales demand.
iii. Innovation.
Ability of the business to devise new products and new ways of doing things. Like
packaging of products with environment friendly (recyclable) material.
iv. Resource Utilization.
It is the ability to use resources to achieve business objectives. Business assets should be
used for the proper purpose and in most efficient way. E.g, using delivery vans to its
maximum capacity only by carrying authorized goods.
 Results.
It reflects the success or failure of determinants identified above.
i. Financial Performance- Financial performance gives an indication of overall
business at a glance in monetary terms. These can be used to identify areas of
strengths and weaknesses. It may also highlight other areas previous identified
which may be critical to business success.

ii. Competitive Performance- this addresses how the business stands in comparison
to its competitors? How is it different from the competitors? E.g, offering of
products of higher quality than competitors and products having distinct features
than rival products.

B. Kaplan and Norton’s Balanced Scorecard

The balanced scorecard (developed by Kaplan and Norton 1992) views the business from
four perspectives and aims to establish goals for each together with measures which can be
used to evaluate whether these goals have been achieved.

The balanced scorecard is a strategic planning and management system that is used
extensively in business and industry, government, and nonprofit organizations worldwide to
align business activities to the vision and strategy of the organization, improve internal and
external communications, and monitor organization performance against strategic goals.

The balanced scorecard is a management system (not only a measurement system) that
enables organizations to clarify their vision and strategy and translate them into action. It
provides feedback around both the internal business processes and external outcomes in order
to continuously improve strategic performance and results.

Perspectives of balanced score card

The balanced scorecard views the organization from FOUR perspectives which forms the
basis for developing metrics, collecting data and analyzing it relative to each of these
perspectives:

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 I. The Learning & Growth Perspective

The "innovation and learning perspective" encourages the identification of measures that
answer the question "Can we continue to improve and create value?”

This perspective includes employee training and corporate cultural attitudes related to both
individual and corporate self-improvement. In a knowledge-worker organization, people --
the only repository of knowledge -- are the main resource. In the current climate of rapid
technological change, it is becoming necessary for knowledge workers to be in a continuous
learning mode.

II. The Business Process Perspective

The "internal business perspective" encourages the identification of measures that answer the
question "What must we excel at?"

This perspective refers to internal business processes. Metrics based on this perspective allow
the managers to know how well their business is running, and whether its products and
services conform to customer requirements (the mission). These metrics have to be carefully
designed by those who know these processes most intimately.

III. The Customer Perspective

The "customer perspective" encourages the identification of measures that answer the
question "How do customers see us?"

Recent management philosophy has shown an increasing realization of the importance of

customer focus and customer satisfaction in any business. These are leading indicators: if
customers are not satisfied, they will eventually find other suppliers that will meet their
needs. Poor performance from this perspective is thus a leading indicator of future decline,
even though the current financial picture may look good.

In developing metrics for satisfaction, customers should be analyzed in terms of kinds of

customers and the kinds of processes for which they are provided with a product or service.

IV. The Financial Perspective

The "financial perspective" encourages the identification of a few relevant high-level
financial measures that answer the question "How do we look to shareholders?"

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Diagram of the Balanced Scorecard

Objectives, Measures, Targets, and Initiatives

Each perspective of the Balanced Scorecard includes objectives, measures of those

objectives, target values of those measures, and initiatives, defined as follows:

 Objectives - major objectives to be achieved, for example, profitable growth.

 Measures - the observable parameters that will be used to measure progress toward
reaching the objective. For example, the objective of profitable growth might be
measured by growth in net margin.
 Targets - the specific target values for the measures, for example, +2% growth in net
margin.
 Initiatives - action programs to be initiated in order to meet the objective.

These can be organized for each perspective in a table as shown below.

Objectives Measures Targets Initiatives

Financial

Customer

Process

Learning

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Benefits of a Balanced Scorecard

 It increases focus on strategy and results

 It improves organizational performance by measuring what matters
 It aligns organization strategy with the work people do on a day-to-day basis.
 It focuses on the drivers of future performance
 It improves communication of the organization’s Vision and Strategy
 It prioritizes Projects / Initiatives

Illustration:
Equi Group is a Bank operating in Kenya. It uses balanced scorecard tool to streamline its
performance and align its strategy to its vision. It has assembled the following information
regarding the activities on the four pillars of the balanced scorecard as follows:
Equi Group balanced scorecard
Performance measure 2017 2017
Actual Target
Financial perspective
Return on Capital Employed 11% 12%
Interest income (Million) Ksh. 7,500 7,000
Amount of new lending to SMEs (Million) Ksh. 150,000
135,000
Margin achieved on interest income 2.4% 2.5%

Customer perspective
Number of first time buyers given a mortgage 86,000 80,000
Number of complaints per 1,000 customers 1.5 2
Number of branches upgraded to cater for disabled customers 55 50
Number of “talking ATMs” installed for visually impaired 120 100
customers

Internal business process

Number of business processes re-engineered and simplified 110 100
Number of new services made available through mobile 2 5
banking
Incidences of fraud on customer accounts or credit cards per 3 10

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 1,000 customers
Total carbon dioxide emissions (tonnes) 430 400

Learning and growth

Number of staff trained to provide advise to SMEs 1,300 1,500
% Number of Staff complaints addressed 80% 100%
Number of Recorded staff absenteeism without reasonable 15 00
cause
Staff job satisfaction rating 90% 95%

Required:
Using all the information provided, perform a balanced scorecard analysis of Equi Group
Bank ltd and give a generalized position on whether the Bank is on its way to achieving its
vision.

C. The Performance Pyramid

The performance pyramid, developed by Lynch and Cross, includes a hierarchy of financial
and non-financial performance measures.

The diagram below shows actions to assist in the achievement of corporate vision may be
cascaded down through a number of levels, i.e. it shows the link between strategy and day to
day operations.

Level 1: At the top of the organization is the corporate vision or mission through which the
organization describes how it will achieve long-term success and competitive advantage.

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Level 2: This focuses on the achievement of an organization’s critical success factors
(CSFs) in terms of market-related measures and financial measures. The marketing and
financial success of a proposal is the initial focus for the achievement of corporate vision.

Level 3: The marketing and financial strategies set at level 2 must be linked to the
achievement of customer satisfaction, increased flexibility and high productivity at the next
level. These are the guiding forces that drive the strategic objectives of the organization.

Level 4: The status of the level 3 driving forces can be monitored using the lower level
departmental indicators of quality, delivery, cycle time and waste.

The left hand side of the pyramid contains measures which have an external focus and which
are predominantly non-financial. Those on the right are focused on the internal efficiency of
the organization and are predominantly financial.

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