CHAPTER 14 Performance measurement 58714.6 Non-financial performance evaluation
LEARNING OBJECTIVE 14.6 Assess the use of non-financial performance measures.
The use of financial performance measures alone is insufficient to gauge organisational success. A
common analogy used to highlight the importance of multiple measures of performance is that of a
football player. Focusing solely on the scoreboard will not provide the full picture. Information such as
tackles, injury rates, penalties, fielding positions, scoring success and so on all help to inform and pro-
vide feedback for future action. Likewise, an entity needs to understand operating, market and employee
indicators as well as overall financial performance measures.
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to balance financial and non-financial measures of performance. There is a need to identify the organ-
isation’s value proposition and then develop a scorecard or dashboard process to collect and monitor
KPIs that gauge value creation and the trade-offs made. It is context specific and a creative process
for any organisation. Non-financial performance measures are part of the suite of measures, but are
generally more operational in nature. They have the following benefits.
- They are more user-friendly and relevant to non-management employees.
- They are more likely to lead to longer term performance gains, as they tend to be linked more readily
to the organisation’s goals.
- They tend to diminish the likelihood of myopic management decision making, as they usually pro-
mote more long-term thinking.
- They can identify problems in a more timely fashion, and locate the entity’s problems and benefits.
- They can be easily structured to suit an organisation’s goals.
- They can be benchmarked easily.
Non-financial performance measures have the following disadvantages:
- They are subjective in nature.
- Including too many measures can impede understanding and be costly to collect, so there is a need to
limit the number of measures.
- Inappropriate measures can be chosen.
- There is no proven cause and effect link between non-financial measures and economic success.
- Various measures give conflicting results.
The choice of non-financial performance measures should be linked to the organisation’s goals;
the measures should be well defined, easily understood and based on reliable data. Once relevant
measures are chosen, appropriate benchmarks must be established. Benchmarks could include past
performance, a target, or competitor or industry measures. The number of measures used should
be limited, as too many measures may become meaningless and end up overwhelming instead of
enlightening the user.
DECISION-MAKING EXAMPLENon-financial performance indicators
SITUATION You are the manager of a pizza chain. Over the last year, you have noticed a change in
customer groups from families to teenagers. The families would come in for the purpose of purchasing
a family meal and were highly likely to get takeaway, but in the instances when they did eat in, they
would be in the store only for the duration of the meal. The teenagers, however, spend a lot of time in
the pizzerias, but do not spend a lot of money. This seemed to be having an adverse effect on the
number of families that came to the store and therefore the store’s overall profitability. You decide to
implement a strategy to encourage the families back and to minimise the number of teenagers hanging
around. Decide upon the types of factors that could be used in your strategy and suggest some
non-financial performance indicators to measure their effect.