Role on non-financial performance indicators

Question 1

what are the limitations of financial performance metrics?

Answer 1

• only tell you what happened over limited period in immediate past
• no indication of what is going to happen in future
• vulnerable to manipulation and to the choice of accounting policy on matters like depreciation and stock valuation
• they do not relate to the strategic management of the business and may induce short termism

Question 2

what is the main thing that performance indicators should be linked to?

Answer 2

the business’ key success factors (which determine success or failure)

Question 3

how can non-financial performance indicators be helpful?

Answer 3

may give more timely indication of levels of performance achieved than financial, and less susceptible to distortion by uncontrollable variations in effect of mkts.

Question 4

what are NFPIs?

Answer 4

measures of performance based on non-financial information that may originate in, and be used by, operating departments to monitor and control their activities without any accounting input

Question 5

what are the 7 types of NFPI?

Answer 5

competitiveness

level of activity

productivity

quality of service

customer satisfaction

quality of staff experience

innovation

Question 6

what are some example NFPIs for competitiveness, level of activity and productivity?

Answer 6

competitiveness -

sales growth, customer base, market share. regular surveys on internal/ext info can be used to compile these reports

level of activity

units sold, labour/machine hrs worked, passengers carried, overdue debts collected. info drawn mainly from internal sources with appropriate checks

productivity

manufacturing cost/unit produced, capacity utilisation of facilities and personnel, avg number units produced per day or per man day, average setting up time for new production run. most of this can be drawn from internal sources

Question 7

what are some example NFPIs for quality of service and customer satisfaction?

Answer 7

quality of service

units rejected in manufacturing, units failing in service, visits to customer premises, new accounts gained or lost, repeat customer orders received. generally available from internal sources but could be reinforced by periodic customer surveys.

customer satisfaction

average time to response, customer satisfaction with sales staff/technical reps, complaints received. relevant info would mainly come from surveys, although some internal sources could be selectively used. customer surveys can be carried out on a regular structured basis or informally. if sample of customers is used, ensure significant in size + representative in structure

Question 8

what are some NFPIs for quality of staff experience and innovation

Answer 8

quality of staff experience

absence days per week, turnover rate, new qualifications/courses completed, new staff skills certified, expressed job satisfaction, qualification levels of newly recruited staff. some can be external but will also need external trainers. exit interviews and confidential staff opinion surveys can be used to

innovation

number of new products or services brought to market, proportion of sales relating to new products, tech lead relative to competitors, lead time to bring products to mkt. info will come from variety of internal and ext sources. slightly subjective nature of what constitutes a new product means an external assessor/consultant may be useful.

Question 9

how should NFPIs be interpreted?

Answer 9

these are forward looking, and are therefore likely to address factors that relate to business performance in future. e.g., business with high staff turnover rate is at a disadvantage, and if experienced members are leaving and being replaced by unqualified staff customer satisfaction may be at risk.

deteriorating staff quality would not immediately impact ROCE, and this might encourage use of low salary employees - an impact that would only be felt in the long term.

as always, make sure these are viewed in context. good control reports show them in terms of deviation from a plan relative to benchmark or as part of a trend analysis covering comparable earlier periods. best to consider perf indicators as part of a package giving a multi-dimensional impression of how the org is performing.

Question 10

what is the BSC approach?

Answer 10

Balanced scorecard approach is an approach to the provision of information to management to assist strategic policy formulation and achievement. It emphasises the need to provide the user with a set of information which addresses all relevant areas of performance in an objective and unbiased fashion. The information provided may include both financial and non-financial elements, and cover areas such as profitability, customer satisfaction, internal efficiency and innovation.

Question 11

why is the BSC method helpful?

Answer 11

there are many examples of how positive long term actions can have a negative short term impact (R&D, etc.). this means it’s important that info that is passed up the org from operating units contains sufficient non-financial info for mgment to assess the financial results of the subunits in the correct context. similarly important that measures are such that employees are encouraged to take actions consistent with long term profitability.

Question 12

what are the perspectives in the BSC?

Answer 12

profitability - financial perspective **cash flow, sales growth, income, market share, ROE. goals set in terms of survival, success, prosperity.

customer satisfaction - customer perspective. new products, OTIF delivery, key accounts’ purchases and ranking by key accounts, number of cooperative efforts/partnerships

innovation - innovation and learning perspective time to develop next gen, process time to maturity, % of products that = 80% of sales, new product introduction vs competition

internal efficiency - internal business perspective cycle time, unit cost, yield, manf. efficiencies, actual product launch schedule vs plan.

Question 13

what are the questions associated with each perspective in the BSC?

Answer 13

financial - how do we look to shareholders?

internal business perspective - what must we excel at?

innovation and learning - can we continue to improve and create value?

customer - how do customers see us?

Question 14

how do the perspectives in the BSC interact?

Answer 14

components designed in integrative fashion such that they reinforce each other in indicating current and future prospects of org. puts strategy, structure and vision at centre of mgment’s focus.

information for org learning is essential for continual improvement. BSC considers both results and causes of actual perf towards org objectives. to be balanced, perf measurement systems must reflect nature of org’s understanding of the causes of successful performance and measure the most critical aspects of org performance.

Question 15

what underlying system is usually used in conjunction with the BSC?

Answer 15

activity based budgeting is usually used as the underlying system that is used to collect and collate the basic data.

Question 16

what should the performance measures in the BSC be/do?

Answer 16

• be clearly understood by all employees.
• link manufacturing performance and financial performance.
• be linked to ensure constancy of purpose.
• be able to identify cause-effect relations to enable employees to deal with poor performance and continue good practices.
• be based on critical success factors.
• identify trends and rate of change.

Question 17

what are critical success factors?

Answer 17

elements of performance required for an org’s success.

1. quality
2. customer service
3. resource management
4. cost
5. flexibility

Question 18

how do critical success factors work within the BSC?

Answer 18

develop measures for each, for each layer of mgment. scorecards tailored, e.g. production director only needs to know details quartlerly, monthly, annually - but the dept mgr needs to know the day to day measures.

Question 19

what is the significance of BSC?

Answer 19

custom design for each org. can be used as form of budgeting through target setting and variance analysis. requires holistic appraisal of performance, little benefit in reducing costs if quality falls too. Balanced scorecards are concerned with ensuring that the portfolio of diverse organisational activities are planned, controlled and balanced to achieve all the necessary elements to ensure organisational success.

Question 20

what perspectives can a BSC be produced from?

Answer 20

total org

customer / market

divisions

activities

Question 21

what are KPIs?

Answer 21

KPIs represent a set of measures focusing on aspects of performance most crucial to success. decided on for everyone in the org - financial or qualitative. everyone completes scorecard on regular basis and all results are collated to help the business.

Question 22

what are the two newer additions to BSC perspectives?

Answer 22

environmental/community

employee satisfaction

Question 23

what are the typical characteristics of ‘true’ KPIs?

Answer 23

non-financial measure

measured frequently

acted upon regularly by chief executive and top mgment team

all employees understand them and what corrective action they indicate

responsibility for them can be attributed to teams or individuals

they have a significant impact on the org (affect most of the core critical success factors and aspects of BSC)

positive results on KPIs affect other measures positively

current or future looking

Question 24

what are the three types of performance measures identified by David Parmenter?

Answer 24

KRIs - result indicators - that tell the board how mgrs have performed in terms of critical success factor/perspective of BSC

PIs that tell staff and mgrs what to do

KPI that tells staff/mgrs what to do to improve performance dramatically

Question 25

what is the flow chart process for putting a companies vision into an action plan?

Answer 25

for each perspective: 1. strategic aims - if vision succeeds how will we differ? 2. critical success factors - for achieving the strategic aims 3. strategic measures - to indicate direction 4. action plan

Question 26

what is necessary in the early stages of implementing BSC?

Answer 26

when setting, top mgment support is essential. active involvement of as many employees as possible will facilitate discussion of goals, implications for day to day operations and scope for contributing to success.

Question 27

what are the three strategy development tools?

Answer 27

SWOT analysis competitive forces - entrants, buyers, suppliers, substitutes, competitors resource analysis: identify org resources and areas of strength/weakness compared to competitors, identify capabilities appraise potential for sustainable strat adv, select a strategy, identify resource gaps which need to be filled and start again!

Question 28

what four stages did Andrew Likierman define when using the BSC to measure success?

Answer 28

1. identify measurement problems - clarify objectives, measure costs and benefits, identify basis for comparison, make a link between technique and performance 2. take action before starting - identify all monitorable costs/benefits, identify risks and manage, run pilot if possible, adjust expectations 3. improve the measures - move from input to outcome measures, find out what others are doing, establish milestones, recognise limitations of quantification, build in flexibility 4. mitigate remaining problems - analyse evidence, provide written commentary.

Question 29

what are the 4 steps in implementing the BSC?

Answer 29

1. define the role of the org 2. establish org's vision 3. establish perspectives - can add if suits the org 4. determine critical success factors

Question 30

when implementing BSC, how should you define the role of the org and establish the org's vision?

Answer 30

first step is defining the role of the org. can interview mgrs, influential leaders and possibly external consultant. org might use standard strategy development tools like SWOT, forces and resource analysis. then establish org’s vision. mission statement defines business that org is/should be in against values and expectations of stakeholders. objectives or goals are more precise than a mission statement and state clearly what is to be achieved. strategies are principles that show how the major objectives or goals are to be achieved over defined time period. vision is a challenging and imaginative picture of the future role/objectives of an org, going beyond current position

Question 31

when implementing the BSC how can you establish the perspectives and determine critical success factors?

Answer 31

some orgs add, e.g. employee perspective, depending on nature of business. break the vision down and formulate overall strategic aims. various measures are considered, focus on the performance of the key business processes that are creating added value. perspective focuses on maintenance of processes for creating and adding value. can conduct interviews to determine most critical factors for achieving goals. consensus also enables org to develop key measures. scorecard must be internally consistent, important to have clear cause and effect relationships and maintain balance between different measures. overall scorecard should then be circulated widely. set long and short term goals for each measure. individuals should be made responsible for achieving these and detailed plans developed, and USE THE PLANS day to day!!

Question 32

how is performance evaluated in the NFP sector?

Answer 32

not for profit org exists to achieve certain objectives and evaluation based on these objectives must have regard to combo of these two factors. efficiency = achieve max output from resources at disposal, and effectiveness = organise those resources in a manner that achieves results at cheapest route. as always quantitative measures (cost per km of road maintained, cost per child in school) should be considered with qualitative measures too. also consider their comparability.

Question 33

what are the two main problems with assessing NFP orgs?

Answer 33

problem identifying and measuring objectives, and for outputs too. objectives - can vary depending on variety of org (charities, professional institutions, gov bodies). detail will vary depending on org but general objective to provide best possible service within limited resource budget. outputs - not valued in monetary terms. measuring outputs of schools/hospitals difficult. targets can be set but will always be open to debate. almost if not all benefits arising from expenditure are non-quantifiable financially. cost/benefit therefore quite judgemental. danger is that if benefits can’t be quantified they might be ignored :(

Question 34

what is the 3 Es concept?

Answer 34

AKA the VFM concept. developed as useful means of assessing performance in an org which isn’t seeking profit. VFM measured through 3 Es: economy - are resources used the cheapest possible for quality required? efficiency - is maximum output being achieved from resources used? effectiveness - to what extent are outputs generated achieving the objectives of org? VFM still focuses on financial performance, NFP will also need to consider non-financial especially quality.

Question 35

what is seen as the most important innovation in performance evaluation for NFP sector?

Answer 35

benchmarking - standard practice can be used to: - study processes in the organisation and select those which are to be benchmarked. - secure suitable benchmark partners. - compare appropriate figures and indicators with partners. - adopt and implement 'best practices'.

Question 36

how does benchmarking help with efficiency vs effectiveness?

Answer 36

comparing against more than just local authorities can help with efficiency, but usually not so good for effectiveness. If the authority is seeking guidance on the appropriate combination of spend on police, social services, housing and so on in order to provide a certain level of welfare for elderly residents (a quest for effectiveness), the appropriate benchmark partners would have to be other authorities providing a similar service ideally should involve external focus on latest developments, best practice and model examples that can be incorporated within various operations of business orgs. therefore represents ideal way of moving forward and achieving high competitive standards.

Question 37

what is the reason for benchmarking?

Answer 37

receive alarm calls about need for change, learn from others to improve performance, gain competitive edge (private sector only), improve services

Question 38

what are the 5 types of benchmarking?

Answer 38

internal competitive functional strategic customer

Question 39

why is it important that 'what gets measured gets done'?

Answer 39

the Peter principle is important because if an evaluation is based on an incorrect/incomplete range of metrics the system can induce the wrong things to be done. e.g. hospitals focusing on waiting time reduction led to patients with minor illnesses being prioritised as they could be treated quickly.