Nonfinancial and Multiple Measures of Performance Chapter 18 Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin

Beyond the Accounting Numbers L.O. 1 Explain why companies use nonfinancial performance measures. Often not useful in identifying the cause of operational problems Commonly reported only on a monthly, quarterly, or annual basis Many people in the organization do not see how their work translates into financial results

Nonfinancial Measures LO1 Nonfinancial measures direct employees’ attention to those things they control. In the case of a desk clerk at a hotel, measuring the clerk's performance in terms of customer satisfaction would be meaningful

Responsibilities According to Level of Organization L.O. 2 Recognize the reasons why performance measures differ across levels of the organization. Stakeholders: Groups or individuals, such as employees, suppliers, customers, shareholders, and the community, who have a stake in what the organization does. Business model: Description of how different levels and employees in the organization must perform for the organization to achieve its goals

Multiple Measures or a Single Measure of Performance? L.O. 3 Understand when the use of a single measure or multiple measures of performance is appropriate. Single Measure Profit

Multiple Measures or a Single Measure of Performance? LO3 Multiple Measures Employee satisfaction Employee learning Branch costs Customer satisfaction Regulatory violations Branch profitability

Balanced Scorecard L.O. 4 Understand how the balanced scorecard helps organizations recognize and deal with their opposing responsibilities. Balanced scorecard: Set of performance targets and results that show how well an organization has performed in meeting its objectives relating to its stakeholders

Four Balanced Scorecard Views or Perspectives Financial perspective Customer perspective Internal business processes perspective Learning and growth perspective Strategy LO

Continuous Improvement and Benchmarking L.O. 5 Understand how to apply the methods involved in an effective performance measurement system. Continuous improvement: Continuous reevaluation and improvement of the efficiency of the organization’s activities. Benchmarking: Continuous process of measuring a company’s own products, services, and activities against competitors’ performance

Nonfinancial Measures L.O. 6 Identify examples of nonfinancial performance measures and discuss the potential for improved performance resulting from improved activity management. Customer Satisfaction Measures Quality control Delivery performance Bookings and purchase orders Market share

Nonfinancial Measures LO6 Quality control: Increase customer satisfaction. Delivery performance: Deliver goods and services when promised. Bookings and purchase orders: A decrease in booking and purchase orders sends a signal to management to devote more marketing effort to sales. Market share: If the market is growing faster than the company's sales, the company is, in effect, experiencing a decline in sales

Nonfinancial Measures LO6 Functional performance measures keep processes efficient and effective. Manufacturing cycle time: Time involved in processing, moving, storing, and inspecting products and materials. Manufacturing cycle efficiency: Measure of the efficiency of the total manufacturing cycle; equals processing time divided by the manufacturing cycle time

Nonfinancial Measures LO6 Productivity focuses on the efficient conversion of inputs into outputs. Partial productivity measures express the relation between output and only one input. Output (quantity or value) Single input such as labor (quantity or value)

Employee Involvement L.O. 7 Explain why employee involvement is important in an effective performance measurement system. Many managers believe that when workers take on real decision-making authority, their commitment to the organization and its objectives increases

Employee Involvement When decision-making responsibility lies with workers closer to the customer, workers are more responsive to customer concerns and can make informed decisions. LO7 Giving decision-making responsibility to workers uses their skills and knowledge and motivates them to further develop those skills and knowledge in an effort to improve the organization’s performance

Difficulties in Implementing Nonfinancial Performance Measurement Systems LO7 Fixation on financial measures Reliability of nonfinancial measures Lack of correlation between nonfinancial measures and financial results

End of Chapter 18 Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin