Summary by Deborah Bichsel
Master of Accountancy Program
University of South Florida, Summer 2003
There are many aspects of a business that cannot be evaluated in financial terms. Performance measurement systems must also include non-financial measures. This article is based on a survey of Fortune 500 and Post 300 companies in the United States and Canada, respectively, regarding their use of non-financial performance measures. The findings of this survey indicate that there are several drawbacks to the importance, measurement and use of non-financial performance measures.
The respondents of the survey indicated that customer service measures are the most important. Over ninety percent responded that customer satisfaction and delivery performance/customer service were highly important. Other important measures are market performance and goal achievement. Innovation and employee involvement were deemed less important. Only 44.3% of the firms indicated that R&D productivity was important.
The only significant difference discovered between the Canadian companies and the American companies was the importance of innovation. Innovation was more important to the Fortune 500 companies than to the Post 300 companies. The authors attribute this to the higher degree of competitive influences in the United States.
The authors indicate that the study results highlight three red flags including: an importance-measurement gap, a measurement-use gap, and an incorrect perception related to the importance of innovation and employee involvement.
The first problem the authors identified is the disparity between the perceived importance of a measure by a company and the actual measurement of that factor. They refer to this as an importance-measurement gap. Often, companies may perceive the factor to be difficult or impossible to measure. Morale and corporate culture, core competencies, and innovation are some of these factors. The authors believe it is important to measure factors that are important to include in the performance measurement system. If factors are not measured, companies cannot control them, which can be damaging. They suggest trying different measurements in order to find one that works. In addition, they state that an inaccurate measurement may sometimes still be better than no measurement at all. A crude measurement, which cannot be used for exact data, may still indicate trends over time.
The measurement-use gap is the second problem the authors identify. Many companies gather data, but do not actually use it in their performance measurement systems. For example, the study indicated that almost thirty percent of the companies measuring delivery performance/customer satisfaction are not using the measure. The largest gap was in the measurement of employee involvement, with forty percent of the companies not utilizing their measurements. This gap may exist because of data that is difficult to interpret. However, companies are wasting resources if they are collecting data and not using it. If this gap exists, companies have two options to narrow it. First, if companies do not see the measurement as relevant, it should not be included in the performance measurement system. Second, if the factor is important, they must try to understand the measurement as best as possible.
Perception related to Innovation & Employee Involvement
The third major problem with regard to the use of non-financial performance measures is the perception that innovation and employee involvement were less important than customer service and market standing. It is important to use the right key factors in decision-making. Specifically, the authors state that innovation and human capital will be increasingly important for a company to retain its competitive advantage. Companies must begin to identify, measure, and use these factors in their performance measurement systems.
Managers of companies must make efforts to overcome the red flags discussed above. They must first determine what non-financial measures should be included in their performance measurement system. Next, they need to find a way to measure the factors. Third, it is crucial to decision-making that they use the data that is collected. A company should also evaluate the importance of its human resources and innovation to its competitive position. Only when a company overcomes these hurdles will a performance measurement system be effective.
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