Accounting Finance and Control (AFC)

Non Financial Indicators

Paolo Maccarrone
paolo.maccarrone@polimi.it
 Introduction

• Non-financial indicators are either quantitative or (more frequently)

qualitative non-monetary measures. Indeed, they are computed
starting from physical values

• They can be absolute measures (such as delivery times), ratios

(like in the case of productivity measures) or they can be
expressed in percentage terms (such as the percentage of waste
in a production line)

• Two main categories:

– Non financial indicators that focus on business processes
(and their output, like products)
– Non financial indicators that focus on some features of the
resources of a company

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 Non Financial Performance Indicators
Visibility Externally-oriented Internal measures
measures
Com petitive factor
Time Time to market, Throughput time
Delivery time

Quality Number of claims Spoilage/scrap/waste

(by customers) percentage
Productivity Labour/Machinery
productivity
Flexibility Time to make a
change
Sustainability Pollution (emission) Energy
levels consumption/savings
Product safety Number of incidents
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at work
 Non Financial Performance Indicators: Time
A) INTERNAL: Time for performing specific processes (internal)
– They typically focus on efficiency (their motivational impact is to find ways to reduce
the time needed -> lower amount of resources used), although they may affect also
the effectiveness (ex: by increasing efficiency a company may be able to produce
and sell more products  higher profitability)
– Examples: Throughput time, Production (technical) time, quality inspection
time, purchase order issue time, time needed to draft (monthly/quarterly)
management reports, time needed for PC (ordinary) maintenance, etc

B) EXTERNAL
B1) Time for delivering products/services (external)
• Examples:
– Average delivery time [days]
– % delayed (late) deliveries [% of orders]
– Average delay [n. of days/order]
• Warning: effects on people behaviour may differ according to the indicator used
( behavioural impacts of performance measurement!)
B2) Time for developing new products (external)
• Time to market (TTM): time needed to develop and launch a product on the
market (from the first activity concerning the development of a product to when
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when the product is available on the market (i.e. it can be sold/purchased)
Non Financial Performance Indicators: Quality

• Design overall quality (external): the extent to what the features

(specifications) of a product or service meet the needs and/or
desires/expecations of customers. It can be measured through:
• Customer satisfaction surveys (on this specific issue)
• Feed backs from points of sale/sales agents

• Quality of conformance: refers to the ability of a product or service to meet its

design specifications. It depends from the quality of internal (production)
processes (process quality). It can be both an internal measure (if measured
during quality inspection processes) and an external measure (in case defective
products reach the customer and the customer detects the quality issue).
Possible indicators:
• N. (or %) of non compliant products identified during quality
control/inspection processes (internal)
• N. of returned products (by customers) during the warranty time
(external)
• Number of repaired products (within warranty terms) - external
• N. of complaints/claims by customers (due to poor quality of
products) (external)

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Non Financial Performance Indicators:
Productivity

• Productivity is one of the most traditional non-financial measures used

in operations management. Their focus is mainly on efficiency
• Productivity measures are ratios: they compare an output (n. of units
produces, n. of orders processed, n. of issued invoices) with the
corresponding amount of resources used to produce it: the lower the
amount of resources, the higher the productivity level
• Productivity measures can in turn be split in two sub-categories:
– single factor productivity indicators, aimed at measuring the
productivity of just one production factor (ex: labour productivity)
– partial (or total) productivity indicators, in which the denominator
includes different production factors (ex: labour + machinery)

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 How to measure productivity

• The computation of productivity indicators may be characterised by some

“technical” issues, referred both to the numerator (the output) and the
denominator (the inputs):
– Numerator: the output may not be homogeneous (i.e. not just one kind of
of output has been produced in a time period)
– Denominator: in case of multiple factors (or global) productivity measures, it
is necessary to find a way to sum factors which are different in nature
(i.e. whose unit of measure is different!)

• 4 possible combinations:
Single factor Multiple factors
Homogeneous output Simplest case Need to find a way to sum
different factors

Etherogeneous output Need to find a way to sum Need to find a way to sum
different types of output different types of output
and different factors

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 The internal/external orientation of
productivity measures

• Productivity indicators are typically internal (efficiency oriented)

indicators, unless the production factor(s) represents a bottleneck for
the company

• In the latter case, an improvement in productivity would enable the

company to increase production in case of a sudden pick in the market
demand, thus resulting in greater profits ( external and effectiveness-
oriented measure)

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 Non Financial Performance Indicators:
Flexibility (1 of 2)
• In a very dynamic (macro-economic, competitive, technological, legal
etc) context companies must be able to change (product features,
production scheduling, production and support technologies, markets,
etc) very quickly. This implies a growing degree of flexibility
• Flexibility can be defined as “the capability by a company to implement
a change with the lowest possible cost and in the shortest possible
time”
• Flexibility indicators can be classified according to the nature and the
magnitude of the change into “small” and “large” flex measures::
– Small flex measures the cost (or time) to implement a change which does
not affect the structure of a firm (i.e. NO impact on n. of employees,
installed capacity, production technologies, Information systems used, etc)
– Large flex mesures the cost (or time) to implement a change which
requires a modification in the strutcture of the company

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 Non Financial Performance Indicators:
Flexibility (2 of 2)

• There is a third type of flexibility, which is conceptually different: it

measures the maximum magnitude of a change the company can cope
with without being forced to make structural changes (ex: the number of
additional products – i.e. «on top» in respect the «standard» or
budgeted production level - that can be produced in a period with the
installed capacity)
• A second dimension of classification looks at the nature of the change
(qualitative vs. quantitative)
• As a result, six possible cases:

Nature of change
Qualitative Quantitative
Magnitude of change
Small Flex Product Volume
Range Flex Production Mix
Large Flex Operation Expansion
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 Non Financial Performance Indicators:
Environment and Society

• The impact on the environment and on society at large of the

ativities of a business organisation cannot be overlooked due to
the relevance of these issues and, consequently, the attention
paid by many stakeholders
• The initiatives aimed at reducing environmental “footprint” and,
more in general, at contributing to the social welfare and well-
being of a city/a region/a country (and of the overall world) have
become an important part of a strategy of a company, given
the possible impacts on its (long-term) competitiveness (and
value)
• Companies are also required by stakeholders to report on these
issues on a regular basis (i.e. at least once per year) 
social/sustainability reporting
 Sustainability reporting: the GRI Standards

• Several reference frameworks for sustainability reporting have been

developed over the last years

• The most common framework is the one by GRI (Global Reporting

Initiative), which is also the most used standard in enterprises worldwide
(www.globalreporting.org)

• GRI standards are divided in two main areas:

– General standard disclosures, addressing high level elements of
sustainability: Strategy, Organizational Profile, Identified Material
Aspects and Boundaries, Stakeholder Engagement, Report Profile,
Governance, Ethics and Integrity.
– Specific Standard disclosure, articulated in three Categories:
• Economic
• Environmental
• Social
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GRI: environment
GRI: Labour Practice and Decent
Work
 Non Financial Indicators:
Resource Indicators (1)
• Resource indicators analyse the state of resources of a firm
• They aim at capturing innovation and growth potential (in
particular in the long term)
• They look both at tangible and intangible assets
• Many classification frameworks have been proposed in literature
(characterized by different criteria and labels). Four man categories
can be identified:
– Financial;
– Technological;
– HR and organizational;
– Image and reputation.
• Each resource can be characterised by three types of measures:
– Quality
– Quantity
– Accessibility
 Non Financial Indicators:
Resource Indicators (2)

Financial Human and

Technological Image and reputation
organizational

Quality Quality Quality

Average cost of Quality
Total patent N. employees with
debt Brand Equity
awarded/pending specific education

Quantity Quantity Quantity

Quantity
Financial position Incidence of new N. employees by
Marketing effort
product sales role

Accessability Accessibility Accessibility Accessibility

financial leverage Research centres education level in Comparative
relationships accessible areas Customer perception

Intellectual Capital
 Non Financial measures
Intellectual Capital
• Often companies refers to Intellectual capital as one
(single) meta-resource, which joins different type of
assets, namely:
– Human capital, which refer to the skill, training, education,
experience, quantity and quality of an organisations
employees.
– Relational capital encompasses relationships with customers
and suppliers, brand names, trademarks and reputation.
– Internal structural capital, which refers to intangible assets and
knowledge embedded in organisational structures and
processes; this dimension comprises patents, research and
development, technology

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 Characteristics of non-financial performance
and resource indicators
• Timeliness: high. This is the one of the main strength points of these
measures
• Long term orientation: it varies from case to case, according to the
nature of each indicators (for ex, in the case “leading” indicators
included in dashboards: high)
• Measurability: usually good. Warning: a protocol for each indicator
must be developed, which has to include the following information:
– Name of the measure (the “label”)
– Purpose: Why does the company want to measure it?
– Unit of analysis: which is the object of measurement? (ex: what do
we mean by “delivery time”? When does the measurement starts
and when does it ends?  the “boundaries” of the process!)
– Formula: How to calculate this measure
– Frequency: How often companies measure this?
– Source of data: From where to get the necessary data?
• Completeness: low. Each indicator refers to a specific factor/area
• Precision: varying to a great extent from case to case
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