1. Accounting 4310 Chapter 18 Nonfinancial and Multiple Measures of Performance

2. Nonfinancial Measures Financial information – is not timely – is based on past information Nonfinancial information – is timely – is based on real-time measures Increasingly being used Allows all people in the organization to take ownership of meeting their measures

3. Organizational Environment and Business Strategy Mission – its values and what it wants to accomplish Mission statement – statement describing its mission Business-level strategy- how the company plans to meet its mission Stakeholders – people with an interest in the organization (employees, customers, suppliers, investors, creditors) Critical success factors – factors important to the success of the company

4. Responsibilities Vary according to the level in the organization – Lower-level Customer satisfaction Quality – Middle-level Employee turnover Customer delivery Employee development Dealing with business partners – Top-level Make sure the company is meeting its responsibilities to stakeholders

5. Business Model Framework that links the roles of various employees and levels in the organization and that illustrates how the successful completion of these roles will result in achievement of the organization’s goals.

6. Multiple versus Single Measures If local managers are more knowledgeable, a single measure is fine If corporate office has more market knowledge, multiple measures may be helpful to make sure local managers accomplish tasks needed

7. Balanced Scorecard Developed by Robert S. Kaplan and David O. Norton (Harvard Professors) in 1992 What is it? – An approach to performance measurement that combines traditional financial measures with non-financial measures to provide managers with richer and more relevant information about activities they are managing It is an information system for employees of all levels of the organization The BSC translates a business unit’s mission and strategy into tangible goals and measures. Key performance indicators are identified and measured

8. Balanced Scorecard Four perspectives: – Financial – Customer – Internal Business Process – Learning and growth Financial goals are the ultimate result for businesses but they are usually short-term The last three perspectives are long-term in nature and alert management about future problems/opportunities

9. Example

10. Figure 9-1

11. Balanced Scorecard Critical Financial Performance Variables – Operating profit – Net income – Return on Investment – Return on Equity – Return on Capital Employed – Economic Value Added – Return on Sales – Cash flow

12. Balanced Scorecard Critical Customer Performance Variables – Bookings or contracts scheduled – Backorders – Customer satisfaction – Customer response cards Surveys Letters of complaint – Customer retention Average duration of relationship Reasons for leaving

13. Balanced Scorecard Critical Customer Performance Variables (continued) – New customer acquisition – Customer profitability – Customer loyalty – Market share – Account share – Key account orders

14. Balanced Scorecard Critical Internal Process Performance Variables – Operations Processes Capacity utilization Inventory turnover Quality measures – Zero defects Cycle time measures – Lead time – On-time Delivery and delivery time

15. Balanced Scorecard Critical Internal Process Performance Variables – Operations Processes Cycle time measures – Order fulfillment cycle - receipt of order to delivery – Throughput time - time to manufacture – Manufacturing Cycle Efficiency = Process time/Throughput time (Goal = 100%) Cost measures

16. Balanced Scorecard Critical Internal Process Performance Variables – Innovation Processes Number of new products Market position in new products – Post-Sale Service Processes Warranty and repair activities Customer service Invoicing and collection

17. Balanced Scorecard Critical Learning and Growth Performance Variables – People Train people Give them advancement potential Employee satisfaction – Systems Provide for upgrades and improvements – Organizational Procedures Align organizational procedures and routines

18. Managing Strategy and the Balanced Scorecard Short-run versus long-run measures Features of good balanced scorecards – Measures are appropriate for achieving strategy – Communicates strategy to all employees – Places strong emphasis on financial objectives (lagging indicators) and measures with nonfinancial measures (as leading indicators of future financial performance) – Limits the number of measures used to those most critical No more than 7 + - 2 – Highlights problems that could affect future performance

19. Managing Strategy and the Balanced Scorecard Pitfalls when implementing a balanced scorecard – Use actual cause and effect linkages not perceived linkages – Seek improvements through tradeoffs over time – Include subjective and objective measures that are hard to manipulate – Use nonfinancial along with financial measures – Use critical measures to focus attention rather than using too many measures – There is no guarantee that future profitability will follow target achievements in any nonfinancial area. – Poorly designed incentive programs

20. Example of BSC Mayo Clinic Rochester – A BSC is used to guide physicians and other employees to achieve success – Perspectives include Quality Scholarships Patient satisfaction – Performance Measures include peer-reviewed papers, numbers of presentations, and number of grants awarded

21. Example of BSC Southwest Airlines Co. – Performance Measures include Load factors (percentage of seats occupied) On time performance Available seat miles Denied boarding rates Flight cancellation rates Customer complaints filed with the Department of Transportation

22. Example of BSC PriceWaterhouse Coopers – Used a version of the BSC with the following measurements: Divisional income – 60% Generating cross-division income – 10% Customer satisfaction (measured with surveys) – 10% Development of new customers (new business) – 10% Employee turnover (difference between company norm of 20% per year) – 10%

23. Example of BSC Tri-Cities Community Bank Financial: Improved loan, deposit, and non-interest income Customer: Customer retention rate, customer satisfaction ratings on quarterly surveys Internal business: Number of successful referrals and/or cross-sells Learning and growth: number of training hours employees receive, employee scores on in-house tests about sales, service, and product knowledge

24. Example of BSC Dell Computer Corporation – Financial measures Selling price Margins Overhead costs Profits – Nonfinancial measures Inventory turns Accounts receivable days Accounts payable days Cash-conversion cycle

25. Balanced Scorecard According to a recent survey by Bain & Co., approximately 50% of Fortune 1000 companies in North America and about 40% in Europe have adopted some version of the BSC. Additional implementers include the following: – ABB Switzerland (Engineering company) – AT&T Canada Long Distance – Chemical Bank – Hilton Hotels – IBM – Sears – UPS – Walt Disney World Company – Wells Fargo Online Financial Services

26. Continuous Improvement & Benchmarking Always get better, faster, more efficient, etc. Eliminate non-value added activities Benchmark – compare to best activities – Do not benchmark everything – Benchmark only the most important strategic activities – Look for internal, regional or industry benchmarks for less important activities

27. Common Measures

28. Functional Measures Manufacturing cycle time – total time taken to produce a good or provide a service Manufacturing Cycle Efficiency = Process time/Throughput time (Goal = 100%) Productivity = inputs into outputs Partial productivity = output/single input

29. Employee Involvement Nonfinancial measures are understandable Commitment is greater to company when given nonfinancial measures that can be achieved Employees will be more customer-oriented if measured on customer satisfaction Employees will be more motivated to improve the organization

30. Difficulties in Implementing Nonperformance Measurement Systems Fixation on financial results May be a poor correlation between nonfinancial measures and results Measures must be updated Measurement overload (too many) – Managers will choose easiest measurements if given too many More subjective and less reliable