Performance Assessment - non-financial indicators

This page last updated 2012 Nov 30

Non-Financial Performance Indicators

Limiting  evaluation, by only allowing judgement of an enterprise based on financial indicators, is detrimental,
since in Y2K+ companies with global brands are judged on categories much broader than financial ratios.
WTGR
 

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." Before teaching at Harvard Business School, Kaplan served as Vice Chairman of The Goldman Sachs Group, supervising with the Investment Banking and Investment Management Divisions

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Non-Financial Performance Indicators explained by students

In a  "in-class exercise" Nov 2nd in CCT224 at University of Toronto, Mississauga Campus, the students were divided into groups and discussed "non-financial indicators" using sources and resources they are familiar with.

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After a generous amount of discussion, we filmed a member of each student group who presented, casually, what the group had concluded. Then two students (Hana Elali and Arun Babber)(raynmagic.com) took these video segments and using an editor, compiled the segments into one long video which we subsequently uploaded to YouTube Nov 28th 2012.  The purpose of the video is to explain Non-Financial Performance Indicators, in simple language, and using examples and situations students are familiar with.  basically "things that indicate a company is doing well, or poorly, other than money focused items"

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Non-Financial Performance Indicators explained by students

Some of the points mentioned by some of the groups in the video include corporate social responsibility ethical and environmental responsibility Bodyshop - no animal testing aesthetic appeal - how it looks and feels customer service, which effects customer loyalty online feedback  social media trending on twitter employees blogging corporate beliefs and political opinions

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Non-Financial Performance Indicators branding

Most of the groups in the video discussed things in terms of how you "work your brand" and mentioned things companies can do to cause their brand to be popularized, which in turn effects sales growth and is an indicator of the company's performance. brand equity - built by brand ambassadors (including celebrities) Lebron James - running shoes successful branding creates an emotional connection with the customers Lululemon - soccer moms invested cause they liked the product so much when your brand becomes so well known it has its own slang "Timmies" for Tim Hortons, Micky D's for McDonald's "Scottish food" for McDonald's brand awareness through promotion activities including publicity Red Bull -longest freefall parachute jump Drake - publicity from signage re: new album and fan tattoo advertising within movies and video games paid -some companies pay for the brand to be positioned publicity - sometimes the director picks a brand because of the image associated with it, regardless of any promo fee paid by the manufacturer Rolex in the old James Bonds with Sean Connery brand reputation if many "fakes" are available, it can be considered an indication of the "cachet" level of the brand

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Professor Christopher Ittner and Professor David Larcker at Wharton wrote an article in 2000 in the Financial Times "Mastering Management" series. The article was widely quoted and one version of it online is at  http://knowledge.wharton.upenn.edu/article.cfm?articleid=279# "many managers feel traditional financially oriented systems no longer work adequately" Ittner and Larcker write "Inadequacies in financial performance measures have led to innovations ranging from non-financial indicators of "intangible assets" and "intellectual capital" to "balanced scorecards" of integrated financial and non-financial measures."

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Professor Christopher Ittner and Professor David Larcker at Wharton  Ittner and Larcker explain that "Non-financial measures offer four clear advantages over measurement systems based on financial data." 1. "Financial evaluation systems generally focus on annual or short-term performance against accounting yardsticks. They do not deal with progress relative to customer requirements or competitors, nor other non-financial objectives that may be important in achieving profitability, competitive strength and longer-term strategic goals." 2. "drivers of success in many industries are "intangible assets" such as intellectual capital and customer loyalty, rather than the "hard assets" allowed on to balance sheets. " 3. "non-financial measures can be better indicators of future financial performance. Even when the ultimate goal is maximizing financial performance, current financial measures may not capture long-term benefits from decisions made now. Consider, for example, investments in research and development or customer satisfaction programs." 4. "the choice of measures should be based on providing information about managerial actions and the level of "noise" in the measures. Noise refers to changes in the performance measure that are beyond the control of the manager or organization, ranging from changes in the economy to luck (good or bad). Managers must be aware of how much success is due to their actions or they will not have the signals they need to maximize their effect on performance."

 
 
 
 
 
 
 
 

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