Non financial performance models Flashcards
introduction and exam style
Non financial factors drive business performance. Businesses often focus excessively on financial results.
Exam style
1. explain how models work and evaluate it
2. evaluation of an existing set of KPIS or an existing PMS using a
model
3. implementation and “how to use” challenges with these models
problems with ONLY focussing on financial performance assessment
Financial performance is important but performance assessment should not be solely financial.
- They are historic figures - shareholders are interested in current
and future performance. - They are easily manipulatable and is commonly done
- Focus on financial performance can lead to shortermism
Why non financial models are better
- They offer a more balanced approach, covering both financial and
non financial - In some cases they are tailored to certain industries. e.g. building
block - service industry, performance pyramid - manufacturing. - They provide a framework to consider drivers of performance
rather than only results. - They include measures that require subjectivity and opinion. Data capture system will be needed
Balanced score card
4 Angle
1. Financial perspective - current, traditional measures -
2. Learning and growth perspective - Future
3. Internal business perspective - Internal
4. Customer perspective - external
5. Vision/strategy - ties all angles together at the centre
How to implement
1. Each perspective should have objectives and KPI’S
FP - revenue growth, gross margin
LGP- Innovation ideas and market penetration concepts, measures growth into the future
IBP - internally efficient Business must be run efficiently and economically - cost to income ratio
CP - Lead time, quality, service level, price
Evaluation
Positives
1. Ensure consistency of performance hierarchy
2. balanced view
3. can be used in various industries
4.more difficult to game
Negatives
1. measures can conflict. internal efficiency might disappoint customer with service levels.
2. Modern issues are ignored
3. The only external perspective is the customer
4.Rewards not present as a support to the KPI’S
Building block model - Introduction, dimension FC QRFI, standards OEA, rewards CMC
The model was designed to apply to service businesses.
Dimension, standards and rewards
Dimension - upstream (outcomes) and downstream (determinants)
Upstream - outcomes
1. Financial performance
2. competitiveness
downstream - drivers
3. Quality
4. flexibility
5. resource utilisation
6. innovation
Standards
1. Ownership
2. Equity
3. Achievability
Rewards
1. Controllability
2. motivation
3. clear
Building block model - How does the model work
It starts at the bottom with standards and rewards
standards
1.Ownership - Dimensions and measures should be allocated to a
responsible person
2. Achievable - The level of difficulty of the dimensions must be achievable with suitable effort
3. Equity - The level of difficulty for each dimension should be equally difficult so that you have equality or equity between staff.
Rewards
1. Clear - It should be clear and unambiguous what reward will be gained on the successful completion of a target or dimension.
2. Motivating - the rewards should be suitably desirable or generous to encourage participation by staff members.
3. Controllable - The dimensions allocated to individuals must be within their control.
Building block model - How does the model work 2 - upstream/downstream
Upstream - drivers/determinants
1. Quality - This must be defined in a specific manner e.g. punctuality, ease of booking, creativeness and style, there is also a presumption of a differentiating strategy as selling cheap services that aren’t good is difficult.
2. Flexibility - internal and external flexibility. Internal - degree to which business can cope with internal disruption. e.g. quick replacement for sick staff.
External - The degree to which business can meet varying needs of its customer. flexible with opening tomes and product ranges.
3. Resource utilisation - Unused service is lost if unused as it cant be stored, customer per hour or day measures could be used to measure accurately.
4. Innovation - changing and technology driven environments, keeping abreast of new technologies will be crucial and measuring revenue from new products will be key as well
Downstream - Results
1. Financial Performance - this is using traditional KPIS for revenue, profit and so on.
2. Competitiveness - This is the extent to which the service is winning work from others. service industries are competitive due to low barrier of entry. you can measure % of market share
Building block model - Evaluation
Positive
1. Elegant model with supporting models
2. more difficult to game as there are so many measures
3. specific tailoring to service industry
4. forces consideration of conflict between quality, resource utilisation ad flexibility.
Negatives
1. Potential of data overload
2. competition ifs difficult to measure
3. wider aspects of regulation and CSR is ignored
How to answer exam question
- Create outline of model if not given
2.Map existing KPIS to the model in question - consider whether KPI’s are adequate or weak
- Look at the gaps and fill them if asked to do so
Performance pyramid -top down, levels
Top down models
1. Broken into internal and external aspects
2. Internal on right and external on left
3. Vision is logical starting point and the business translates that into what that means for market (market share) and financial (financial results)
4. Third level deals with how market share( keeping customers satisfied and external flexibility) and how financial results (good productivity and internally flexible) can be achieved.
5. The bottom level is used to monitor the top level. customers will be satisfied if the business delivers the desired quality on time and intact. productivity is assured if the cycle time (manufacturing time per unit) is acceptable and little is wasted.
There should be KPI’s from level 2 downwards and these should be consistent with items above.
Level 1 - Mission
Level 2 - Market and financial
level 3 - customer satisfaction, external flexibility/internal flexibility and productivity
Level 4 - Quality and Delivery/cycle time and waste
Performance pyramid - evaluations
Positives
1. Top down consistency
2 . consider both external and internal
3. has specific manufacturing focus
Negatives
1. A lot of measures will be needed with information systems, might be costly
2. Price is not considered at all.
3.quality needs to be defined
4. No rewards systems in support
Implementation difficulties with Non financial models
Introduction of of non financial models may represent significant change for traditional businesses with traditional performance management systems.
- There may be resistance from staff or even management
- selection of measures is never easy and agreement will be difficult
- underlying systems may not exist and will have to be designed and implemented
- Number of measures used is likely to rise considerably and can lead to data overload
Exam question - APX
Exam Slide
- Evaluate and apply the models
- Financial only performance is inadequate
- Financial numbers are backward looking
- Financial numbers can be manipulated
- Shortermism is a threat
- Models bring balance
- Models focus on drivers of performance
- Rewards provide incentive
- Memorise general evaluation
- Implementation can be difficult
