Non-Financial Performance Measurement
Financial measures report the past. To grow in the long term a business must also measure the things that drive future profit – customer satisfaction, efficiency, quality, innovation and the skills of its staff. These are non-financial performance measures.
The best-known framework is Kaplan and Norton’s balanced scorecard, with its four perspectives: customer, process efficiency, growth and financial. The chapter works a restaurant example, lists the common non-financial indicators for manufacturing and service businesses, and explains the four features of service industries – intangibility, variability, simultaneity and perishability – that make their performance harder to measure.
1 Introduction
The lecture works Example 1 under the restaurant’s old name; the figures are the same as here. Section 3 (the table of non-financial indicators and Illustration 1) is in the written notes only.
In the previous chapter we looked at various measures of financial performance. However it is important to have a range of performance measures considering non-financial as well as financial matters. This is particularly important in the case of service businesses where such things as quality are of vital importance if the business is to grow in the long-term.
In this chapter we will consider the various areas where performance measures are likely to be needed.
Various authors have summarised the areas in different ways – the best known one is Kaplan and Norton’s Balanced Scorecard. You will not be tested specifically on Kaplan and Norton, but you should be aware of the areas that they consider important and be able to suggest performance indicators under the various headings.
2 Kaplan and Norton’s Balanced Scorecard
Detailed knowledge of the balanced scorecard is not required at BA2. Know the four perspectives and be able to suggest – and calculate – sensible measures under each heading, as in Example 1.
Kaplan and Norton stated the importance of having a range of performance measures and forming a balance between them. They grouped them under the following headings, which they called perspectives:
Customer satisfaction perspective
Process efficiency (or internal business process) perspective
Growth (or learning and growth, or innovation and learning) perspective
Financial perspective
Three of the four perspectives are mostly non-financial. The point is balance: a business that watches only its financial results may miss the problems with customers, processes or staff that will reduce its profits in the future.
Perspective | The question it asks | Examples of measures |
Customer satisfaction | How do our customers see us? | Number of new and returning customers; customer complaints; customer satisfaction scores; on-time delivery; market share |
Process efficiency (internal business process) | What must we be good at, and are we efficient? | Time to make a unit or serve a customer; waiting time; reject rate; capacity utilisation; staff turnover |
Growth (learning and growth; innovation and learning) | Can we keep improving and creating value? | Proportion of revenue from new products; number of new products launched; training time or training days per employee |
Financial | How do we look to our shareholders? | Return on capital employed; profit margins; revenue growth; spend per customer |
A business first sets goals under each perspective, then chooses measures that show whether each goal is being achieved, and compares them over time.
Masala House is an Indian restaurant that wishes to implement a balanced scorecard approach and has established the following goals for each of the balanced scorecard perspectives:
Perspective | Goals |
Customer perspective | To increase the number of new and returning customers |
Process efficiency perspective | To reduce the customer waiting time; to reduce staff turnover |
Learning and growth perspective | To increase the proportion of revenue from new meals; to increase the % of training time for staff |
Financial perspective | To increase the spend per customer; to increase the gross profit margin |
The following information is also available for the year just ended (2017) and for the previous year (2016):
2016 | 2017 | |
Total customers | 27,800 | 29,000 |
– of which are new customers | 6,500 | 8,200 |
– of which are returning customers | 21,300 | 20,800 |
Customer complaints | 820 | 1,050 |
Waiting time for order to arrive | 15 minutes | 25 minutes |
% staff turnover | 15% | 30% |
% of time that staff spend training | 4% | 2% |
Revenue | $252,000 | $302,000 |
– revenue from new meals | $26,000 | $64,000 |
– revenue from existing meals | $226,000 | $238,000 |
Gross profit | $51,000 | $64,000 |
Calculate appropriate measures, and comment on whether or not Masala House has achieved its goals.
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3 Non-financial performance indicators
Non-financial measures can be calculated for any kind of business. The ones you choose must suit the business and its critical success factors (chapter 10). Common examples:
Measure | How it is calculated | Context |
Labour productivity | Units produced ÷ labour hours worked | Manufacturing (output per hour); services use, e.g., customers served per hour |
Reject rate | Units rejected ÷ units produced × 100% | Manufacturing – quality |
On-time delivery | Orders delivered on time ÷ total orders × 100% | Manufacturing, retail and delivery services |
Capacity utilisation | Hours (or units, rooms, seats) used ÷ hours available × 100% | Factories (machine hours); hotels (room occupancy); airlines (seats filled) |
Customer complaints | Number of complaints, or complaints per 1,000 customers | All businesses – customer satisfaction |
Average waiting time | Total waiting time ÷ number of customers | Restaurants, banks, hospitals, call centres |
Staff turnover | Staff leaving in the year ÷ average number of staff × 100% | All businesses – process efficiency and staff morale |
Innovation | Revenue from new products ÷ total revenue × 100% | All businesses – growth |
A furniture maker produced 12,000 desks last month using 30,000 labour hours. 240 desks were rejected by quality control. 1,880 of its 2,000 customer orders were delivered on time, and its machines ran for 8,500 of the 10,000 machine hours available.
Measure | Working | Result |
Labour productivity | 12,000 ÷ 30,000 | 0.4 desks per hour |
Reject rate | 240 ÷ 12,000 × 100% | 2% |
On-time delivery | 1,880 ÷ 2,000 × 100% | 94% |
Capacity utilisation | 8,500 ÷ 10,000 × 100% | 85% |
On their own these figures mean little. Like the financial ratios, they are compared with targets, with previous periods and with similar businesses.
No single measure should be used on its own. A manager judged only on one measure will concentrate on it at the expense of everything else – a restaurant judged only on waiting time might rush customers and let quality fall. That is the reason for a balanced range of measures.
4 Service versus manufacturing businesses
Although the same perspectives and approach for measuring performance can be used for both service and manufacturing industries, there are more difficulties involved in both the costing and the performance measurement for service industries.
There are four main features of service industries that make them different from manufacturing industries:
Feature | What it means | Why it makes performance harder to measure |
Intangibility | A service cannot be touched or seen in the way a product can – a dental treatment, a haircut, an audit | Quality and output are hard to measure; a desk can be inspected, a tooth that has been taken out cannot |
Variability | Every service is slightly different, because each customer and each job is different – no two fillings are exactly the same | It is hard to set a standard and check each job against it, as a factory checks hundreds of identical products |
Simultaneity | The service is produced and consumed at the same time – the customer receives it as it is given | Quality cannot be checked before the customer receives it, unlike a product checked before it leaves the factory |
Perishability | A service cannot be stored: an empty hotel room or an unsold seat on tonight’s flight is lost for ever, and once the service has been used it is gone | Capacity left unused cannot be sold later, and a service cannot be returned or re-examined afterwards – once a meal is eaten, any fault is hard to check |
Because of these four features, a service business relies even more on measures such as customer complaints, customer satisfaction surveys, returning customers and waiting times – as Masala House did in Example 1. Costing is harder too: a service has no physical unit, so the business must choose a suitable measure of output, such as a patient-day in a hospital, a room-night in a hotel or a chargeable hour in a firm of accountants (see chapter 13).
5 Test your knowledge
Two quick checks before you move on: work through the flashcards to fix this chapter’s terms and definitions, then sit the objective questions for exam-style practice. Both mark themselves and explain the answers as you go.
Non-Financial Performance Measurement
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