Non-Financial Performance Evaluation

Parameters

Sheetal Wagh
Any quantitative measure of either an individual’s or an entity’s
performance that is not expressed in monetary units.

This includes any ratio-based performance measure in that a non-financial

performance measure that is ratio-based omits any monetary metric in
either the numerator or denominator of that ratio.

Common examples include:

• measures of customer or employee satisfaction,

• quality, market share, and

• the number of new products.

Non-financial performance measures are sometimes considered to be

leading indicators of future financial performance, while current financial
performance measures such as earnings or return on assets are commonly
considered to be trailing measures of performance.
• Non – Financial Performance Evaluation
Parameters:

Two types:
1) Balance Scorecard

2) Malcolm Baldrige Framework

The balanced scorecard is a strategic planning and management system that is
used extensively in business and industry, government, and non-profit
organizations worldwide to align business activities to the vision and strategy of
the organization, improve internal and external communications, and monitor
organization performance against strategic goals.

It was originated by Dr. Robert Kaplan (Harvard Business School) and

Dr. David Norton as a performance measurement framework that added strategic
non-financial performance measures to traditional financial metrics to give
managers and executives a more 'balanced' view of organizational performance.
 Four Perspective of Balance Scorecard

In these perspective, each perspective identifies generic measures

that show up in most organization's scorecards such as the
following:

1) Financial perspective Return on investment and

economic value added
2) Customer perspective Satisfaction, retention, market
share and account share
3) Internal business Quality, response time, cost and
process perspective new product information
4) Learning and Growth Employer satisfaction and
perspective information system availability
 The Financial Perspective
Kaplan and Norton do not disregard the traditional need for financial data.

Timely and accurate funding data will always be a priority, and managers will do
whatever necessary to provide it.

In fact, often there is more than enough handling and processing of financial
data.

With the implementation of a corporate database, it is hoped that more of the

processing can be centralized and automated.

But the point is that the current emphasis on financials leads to the
"unbalanced" situation with regard to other perspectives.

There is perhaps a need to include additional financial-related data, such as

risk assessment and cost-benefit data, in this category.
 The Customer Perspective

Recent management philosophy has shown an increasing realization of

the importance of customer focus and customer satisfaction in any
business.

These are leading indicators: if customers are not satisfied, they will
eventually find other suppliers that will meet their needs.

Poor performance from this perspective is thus a leading indicator of

future decline, even though the current financial picture may look good.

In developing metrics for satisfaction, customers should be analysed in

terms of kinds of customers and the kinds of processes for which we
are providing a product or service to those customer groups.
 The Internal Business Process Perspective

This perspective refers to internal business processes.

Metrics based on this perspective allow the managers to know how well
their business is running, and whether its products and services
conform to customer requirements (the mission).

These metrics have to be carefully designed by those who know these

processes most intimately; with our unique missions these are not
something that can be developed by outside consultants.
 The Learning & Growth Perspective

This perspective includes employee training and corporate cultural attitudes

related to both individual and corporate self-improvement.

In a knowledge-worker organization, people -- the only repository of knowledge --

are the main resource. In the current climate of rapid technological change, it is
becoming necessary for knowledge workers to be in a continuous learning mode.

Metrics can be put into place to guide managers in focusing training funds where
they can help the most.

In any case, learning and growth constitute the essential foundation for success
of any knowledge-worker organization.

Kaplan and Norton emphasize that 'learning' is more than 'training'; it also
includes things like mentors and tutors within the organization, as well as that
ease of communication among workers that allows them to readily get help on a
problem when it is needed.

It also includes technological tools; what the Baldrige criteria call "high
performance work systems."
 Advantages of Balance Scorecard:

1) Balanced Scorecard presents organizational goals in a single page chart broken down
into relatable areas.

2) Balanced Scorecard allows companies to bridge the gap between mission statement or
over-arching goals and how day to day activities support the company's mission or
objectives. A BSC goal of pleasing the customer can be tied to improving technical
support performance according to the Service Level Agreement or exceeding the SLA.

3) BSC raises innovation and process improvement methods such as six sigma and lean
manufacturing to a corporate goal. It also ensures that voice of the customer is equally
important.

4) Balanced Scorecard does not exclude other methods of business reporting or process
improvement. Six sigma projects naturally fall under the "learn and innovate" section.
Financial standards like Sarbanes Oxley are simply used by the financial department
when meeting financial scorecard goals or implemented by the financial department to
meet a financial scorecard goal.

5) Balanced Scorecards can provide a visual means of demonstrating how different goals
are related. Increased sales improve the profit or sales goals under the financial section.
Improved customer service meets the “voice of the customer” goal.

6) Balanced Scorecards are straightforward enough to be used by many managers after

gaining familiarity with the concept. Advanced training isn’t required to implement a
simple version of BSC.
 Disadvantages of Balance Scorecard:

1) Balanced Scorecard performance is subjective. Unlike quality levels, it cannot be quantified

except by surveys or management opinion. Mandating a specific number of training hours
per year to meet an “learn and innovate” doesn’t necessarily mean all employees take
courses that help them in their jobs or that attending classes to fill in the quota is better than
working on the assembly line. Demanding high employee morale can hurt managers, since
morale is not always a manager’s purview. Setting a goal of high morale along with lay offs
to save money is counter-productive.

2) Balanced Scorecard does not include direct financial analysis of economic value or risk
management. Goal selection under Balanced Scorecard does not automatically include
opportunity cost calculations.

3) Because Balanced Scorecard can add a new type of reporting without necessarily improving
quality or financial numbers, it can seem to be an additional set of non-value-added reporting
or, worse, a distraction from achieving actual goals.

4) Overly abstract Balanced Scorecard goals are easy to reach but hard to quantify.

5) When a company is failing to meet its Balanced Scorecard goals, the goals may be re-
interpreted to the current state of affairs to meet success or avoid failure. Altering the
acceptance criteria for a good balanced scorecard is easier than altering the acceptance
criteria for mechanical parts and hence the reject rate
The Malcolm Baldrige Award was established in 1987 and became Public
Law 100-107.

It was named after the late Secretary of Commerce Malcolm Baldrige, who
was an advocate of quality.

The American Society for Quality (ASQ) administers the award.

ASQ is under contract to the National Institute of Standards and

Technology (NIST), which is responsible for the continuation and
management of the award.

The Malcolm Baldrige National Quality Award recognizes U.S.

organizations:

1. Manufacturing
2. Service company
3. Small business
4. Education
5. Healthcare and
6. Non-profit organizations (NGO)
 Framework of MBNQA

Organizations that apply for the Baldrige Award are judged by an independent board of
examiners.

Recipients are selected based on achievement and improvement in seven areas,

known as the Baldrige Criteria for Performance Excellence:

1) Leadership: How upper management leads the organization, and how the
organization leads within the community.
2) Strategic planning: How the organization establishes and plans to implement
strategic directions.
3) Customer and market focus: How the organization builds and maintains strong,
lasting relationships with customers.
4) Measurement, analysis, and knowledge management: How the organization
uses data to support key processes and manage performance.
5) Human resource focus: How the organization empowers and involves its
workforce.
6) Process management: How the organization designs, manages and improves key
processes.
7) Business/organizational performance results: How the organization performs in
terms of customer satisfaction, finances, human resources, supplier and partner
performance, operations, governance and social responsibility, and how the
organization compares to its competitors.
 Advantages of MBNQA:

1) Helps in achieving sustainable results in today’s challenging environment.

2) Helps American companies to improve quality and productivity for the pride of
recognition while obtaining a competitive edge through increased profits.

3) Helps organizations to think strategically.

4) Establishing guidelines and criteria that can be used by business, industrial,

governmental and other enterprises in evaluating their own quality
improvement efforts.

5) Recognizes the achievements of those companies that improve quality of their

goods and services providing an example to others.

6) Helps companies align processes, people, resources and customer needs.

 Disadvantages of MBNQA:

1) Incremental improvements

2) Narrow focus

3) Baldrige Award is Division-based and not Organization-wide

4) Over-Advertisement

5) Applying for the award is too expensive

6) Use the award’s assessment process and not the award