NON-FINANCIAL PERFORMANCE INDICATORS (NFPIS)

As part of performance management, organisations will use a mixture of financial performance indicators and non-financial ones. This page
looks at the reasons for using the latter and some of the issues involved with their use.

The drawbacks of sole reliance on financial performance measures
There are a number of problems associated with the exclusive use of financial performance indicators to monitor performance:
Short-termism
Linking rewards to financial performance may tempt managers to make decisions that will improve short-term financial performance but
may have a negative impact on long-term profitability.
For example, a manager may decide to delay investment in order to boost the short-term profits of their division.
Internal focus
Financial performance measures tend to have an internal focus. In order to compete successfully it is important that external factors(such as
customer satisfaction and competitors' actions) are also considered.
Manipulation of results
In order to achieve target financial performance (and hence their reward), managers may be tempted to manipulate results.
For example, costs recorded in the current year may be wrongly recorded in the next year's accounts in order to improve current year
performance.
Do not convey the whole picture
The use of financial performance indicators has limited benefit to the company since they do not convey the full picture regarding the factors
that drive long-term success and maximisation of shareholder wealth, e.g. customer satisfaction, ability to innovate, quality.
Put differently, financial performance is often a consequence of changes in non-financial factors. In particular, many critical success factors
involve non-financial factors.
Backward looking
Financial performance measures are traditionally backward looking. This is not suitable in today's dynamic business environment.
The solution is to use both financial and non-financial performance indicators
The optimum system for performance measurement and control will include:
Financial performance indicators (FPIs) - it is still important to monitor financial performance, e.g. using ROCE, EBITDA, EVA.
Non-financial performance indicators (NFPIs) - these measures will reflect the long-term viability and health of the organisation

NFPIs and business performance
Introduction
There are a number of areas that are particularly important for ensuring the success of a business and where the use of NFPIs plays a key
role. These include:
the management of human resources
product and service quality
brand awareness and company profile.
The management of human resources
Traditionally the main performance measure for staff was cost (a FPI). However, businesses have started to view staff as a major asset and
recognise that it is important to attract, motivate and retain highly qualified and experienced staff.
As a result, NFPIs are now also used to monitor and control staff. These can include the following:
staff turnover
absentee rates / sick days
% of job offers accepted
results of job satisfaction surveys
competence surveys
Product and service quality
Problems with product or service quality can have a long-term impact on the business and they can lead to customer dissatisfaction and loss
of future sales.
A product (or service) and its components should be critically and objectively compared both with competition and with customer
expectation and needs, for example:
Is it good value?
Can it really deliver superior performance?
How does it compare with competitor offerings?
How will it compare with competitor offerings in the future given competitive innovations?
Product and service quality are usually based on several critical dimensions that should be identified and measured over time. Performance
on all these dimensions needs to be combined to give a complete picture. For example:
an automobile firm can have measures of defects, ability to perform to specifications, durability and ability to repair
a bank might be concerned with waiting time, accuracy of transactions, and making the customer experience friendly and positive
a computer manufacturer can examine relative performance specifications, and product reliability as reflected by repair data.
Brand awareness and company profile
Developing and maintaining a brand and/or a company profile can be expensive. However, it can also enhance performance. The value of a
brand/company profile is based on the extent to which it has:
high loyalty
name awareness
perceived quality
other attributes such as patents or trademarks.
NFPIs may focus on areas such as customer awareness and consumer opinions.

Difficulties in using and interpreting qualitative information
Particularly at higher levels of management, non-financial information is often not in numerical terms, but qualitative, or soft, rather than
quantitative. Qualitative information often represents opinions of individuals and user groups. However there are issues related to its use.
Decisions often appear to have been made on the basis of quantitative information; however qualitative considerations often influence
the final choice, even if this is not explicit.
Conventional information systems are usually designed to carry quantitative information and are sometimes less able to convey
qualitative issues. However the impact of a decreased output requirement on staff morale is something that may be critical but it is not
something that an information system would automatically report.
In both decision making and control, managers should be aware that an information system may provide a limited or distorted picture
of what is actually happening. In many situations, sensitivity has to be used in interpreting the output of an information system.
Information in the form of opinions is difficult to measure and interpret. It also requires more analysis.
Qualitative information may be incomplete.
Qualitative aspects are often interdependent and it can be difficult to separate the impact of different factors.
Evaluating qualitative information is subjective, as it is not in terms of numbers - there are no objective formulae as there are with
financial measures.
The cost of collecting and improving qualitative information may be very high.
Difficulties in measurement and interpretation mean that qualitative factors are often ignored.

Models for evaluating financial and non-financial performance
As discussed, it is important that a business appraises both financial and non-financial performance. There are four key tools available:
Kaplan and Norton's balanced scorecard
The performance pyramid
Fitzgerald and Moon's building block model
The performance prism
The benefits of these models are as follows:
financial and non-financial performance measures are included
they are linked in to corporate strategy
include external as well as internal measures
include all important factors regardless of how easy they are to measure
show clearly the tradeoffs between different dimensions of performance
show how measures will motivate managers and employees.

PERFORMANCE MANAGEMENT IN NOT-FOR-PROFIT ORGANISATIONS

Performance management is a key issue for the managers of any organisation but people running not-for-profit organisations face particular
problems. This page looks at those problems and potential solutions.

What is a not-for-profit (NFP) organisation?
NFP organisations display the following characteristics:
Most do not have external shareholders and hence the maximisation of shareholder wealth is not the primary objective.
They do not distribute dividends.
Their objectives normally include some social, cultural, philanthropic, welfare or environmental dimension which would not be readily
provided in their absence.
When assessing the performance of NFP organisations it is important to include both financial and non-financial measures.
Problems associated with performance measurement in NFP organisations include the following:

Problem 1: Non-quantifiable costs and benefits
Introduction
Many of the benefits arising from expenditure by these bodies are non-quantifiable in monetary terms. The same can be true of costs. This is
because:
No readily available scale exists.
For example, how to measure the impact of a charity providing a help line to people suffering from depression?
How to trade off cost and benefits measured in a different way.
For example, suppose funds in a hospital are reallocated to reduce waiting lists (a benefit) but at the expense of the quality of patient
care (a cost). Is the time saved enough to compensate for any potential additional suffering?
Time scale problems.
Benefits often accrue over a long time period and therefore become difficult to estimate reliably. For example, a school may invest in
additional sports facilities that will benefit pupils over many decades.
Externalities.
Suppose a council decides to grant planning permission for new houses to be built. The new residents will increase the number of cars
on local roads, resulting in greater congestion and pollution, affecting other residents.
Solution = cost benefit analysis (CBA)
Some NFP organisations, particularly in the public sector, attempt to resolve the above difficulties by quantifying in financial terms all of the
costs and benefits associated with a decision.

Illustration - CBA
Suppose a local government department is considering whether to lower the speed limit for heavy goods vehicles (HGVs) travelling on a
particular road through a residential area. The affected stakeholders may be identified as follows:


These costs and benefits then need to be quantified financially.

Once these have been quantified, it is relatively straightforward to compare overall costs and benefits to see the net impact on society and
then make a decision.

Problem 2: Assessing the use of funds
Introduction
Many NFP organisations, particularly public sector organisations,do not generate revenue but simply have a fixed budget for spending within
which they have to keep. The funding in public sector organisations tends to come directly from the government.
There are a number of problems associated with this funding:
The organisation may feel under pressure to hit government targets rather than focusing on what they would normally consider
important.
There is not necessarily a link between providing more service and obtaining more funds. Funding tends to be limited and may not be
controllable.
A failure to achieve objectives sometimes leads to higher levels of funding. Fore example, an ineffective or inefficient police force will
not be closed down, but is likely to justify and obtain additional funding.
Solution = assess value for money
Value for money (VFM) is often quoted as an objective in NFP organisations, i.e. have they gained the best value from the limited funds
available?
VFM can be assessed in a number of ways:
through benchmarking an activity against similar activities in other organisations
by using performance indicators/ measures
through conducting VFM studies (possibly in conjunction with other institutions)
by seeking out and then adopting recognised good practice where this can be adapted to the institution's circumstances
through internal VFM audit work
through retaining both documents that show how an activity has been planned to build in VFM, and evidence of the good practices
adopted
by examining the results or outcomes of an activity.

The 3Es
Value for money is interpreted as providing an economic, efficient and effective service.
Economy - an input measure. Are the resources the cheapest possible for the quality desired?
Efficiency - here we link inputs and outputs. Is the maximum output being achieved from the resources used?
Effectiveness - an output measure looking at whether objectives are being met.
Other methods of evaluating performance
In addition to assessing value for money and the 3Es the following approaches can be used to assess the performance of NFP organisations:
The 'goal approach' looks at the ultimate objectives of the organisation, i.e. it looks at output measures.
For example for a hospital: Have waiting lists been reduced? Have mortality rates gone down? How many patients have been treated?
The 'systems resources approach' looks at how well the organisation has obtained the inputs it needs to function.
For example, did the hospital manage to recruit all the nurses it needed?
The 'internal processes approach' looks at how well inputs have been used to achieve outputs - it is a measure of efficiency.
For example, what was the average cost per patient treated?

Problem 3: Multiple and diverse objectives
Diverse objectives
As mentioned, NFP organisations are unlikely to have an objective of maximisation of shareholder wealth. Instead they are seeking to satisfy
the particular needs of their members or sections of society,which they have been set up to benefit.
Diverse objectives in NFP organisations include:
A hospital's objective is to treat patients.
A council's objective is care for the local community.
A charity's objective may be to provide relief for victims of a disaster.
Multiple objectives
Multiple stakeholders in NFP organisations give rise to multiple objectives. This can be problematic when assessing the performance of these
organisations.
Solution
The problem of multiple objectives can be overcome by prioritising objectives or making compromises between objectives.

Illustration
For example, a hospital will have a number of different groups of stakeholders, each with their own objectives:
Employees will seek a high level of job satisfaction. They will also aim to achieve a good work-life balance and this may result in a desire
to work more regular daytime hours.
Patients will want to be seen quickly and will demand a high level of care.
There is potential conflict between the objectives of the two stakeholder groups. For example, if hospital staff only work regular daytime
hours then patients may have to wait a long time if they come to the hospital outside of these hours and the standard of patient care will fall
dramatically at certain times of the day.
The hospital must prioritise the needs of different stakeholder groups. In this case, the standard of patient care would be prioritised above
giving staff the regular daytime working hours that they would prefer. However, in order to maintain staff morale an element of compromise
should also be used. For example, staff may have to work shifts but will be given generous holiday allowances or rewards to compensate for
this.

Problem 4: The impact of politics on performance measurement
The combination of politics and performance measurement in the public sector may result in undesirable outcomes.
The public focus on some sectors, such as health and education, make them a prime target for political interference.
Long-term organisational objectives are sacrificed for short-term political gains.

Illustration - Impact of politics
Politicians may promise 'increased funding' and 'improved performance' as that is what voters want to hear, but it may result in undesirable
outcomes.
Increased funding:
may be available only to the detriment of other public sector organisations
may be provided to organisations in political hot-spots, not necessarily the places that need more money
may not be used as efficiently or effectively as it could be
may only be available in the short-term, as a public relations exercise.
Improved performance:
may be to the detriment of workers and client's
may come about as the result of data manipulation, rather than real results
may be a short-term phenomenon
may result in more funds being spent on performance measurement when it might better be used on improvements, e.g. hospitals
under increasing pressure to compete on price and delivery in some areas may result in a shift of resources from other, less measurable
areas, such as towards elective surgery and away from emergency services.