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Business Readings
How Nonfinancial Performance Measures Are Used Some companies waste resources when they measure nonfinancial performance factors but then don't use them, survey of U.S. and Canadian companies shows. BY BONNIE P. STIVERS, CPA; TERESA JOYCE COVIN; NANCY GREEN HALL; AND STEVEN W. SMALT, CPA Certificate of Merit Most executives agree that there is no magic formula...or one right measure...for evaluating business performance. Therefore, in an effort to capture the essence of business performance, many companies are creating new performance measurement systems that include a broad range of financial and nonfinancial measures. Although we know much about the use of financial measures in companies, our knowledge of these new, nonfinancial performance measures is limited. To determine the scope of current practice, we surveyed top executives in U.S. Fortune 500 firms and in Canadian Post 300 companies. The study was sponsored by the Michael J. Coles College of Business at Kennesaw State University and funded by the Canadian Institute of Chartered Accountants. Study results indicate that top executives in both countries believe that nonfinancial measures are important. But the study also identifies two serious drawbacks:
(For a description of the study design and survey sample, see sidebar.) THE STUDY OF NONFINANCIAL PERFORMANCE MEASURES Although much is being written about nonfinancial performance measures, very little is known about actual current practices. The objective of this study was to provide a comprehensive picture of the process of nonfinancial measurement. Specifically, the study examined the degree to which top executives in Fortune 500 and Post 300 firms identify particular nonfinancial performance factors as important, whether firms are measuring important nonfinancial factors, and whether or not companies actually are using nonfinancial performance factor information in their planning processes.  The questionnaire asked study
participants to indicate, using a five-point scale, the importance of
each of 21 nonfinancial performance factors in setting company goals.
For discussion purposes, we have grouped the factors into five
general categories: customer service, market performance, innovation,
goal achievement, and employee involvement.
The five categories of nonfinancial performance measures are illustrated in Figure 1. For each individual performance measure, the figure shows of the 253 firms in the total sample:
An individual factor was identified as highly important if it received a rating of four or greater on the five-point scale of importance. Results of the study indicate that customer service factors are perceived to be the most important measures. Of the 253 responding firms, 235 (92.9%) rated "customer satisfaction" and "delivery performance/customer service" as highly important. "Product/process quality" was rated as highly important by 206 (81.4%) of the responding firms and "service quality" by 205 (81.0%) of the 253 firms (Figure 1). Market performance and goal achievement also are perceived to be highly important categories. "Market share" in the market performance category was rated highly important by 200 (79.1%) of the responding firms, and "productivity" in the goal achievement category was rated highly important by 211 (83.4%) of the firms (Figure 1). Factors in the innovation and employee involvement categories were perceived to be less important in goal setting. Looking at the individual measures, we see that "R&D productivity" in the innovation category was rated as highly important by only 112 (44.3%) of the 253 firms, and "employee turnover" in the employee involvement category was rated as highly important by only 122 (48.2%) of the 253 firms. The results of the study have important implications for those in the position of designing effective performance measurement systems. The first step is to get the right mix of key factors. If we were to develop a "hit" list of critical, nonfinancial factors to include in any performance measurement system by listening to Kaplan1, Drucker2, and Reichheld3, we would include the following: market standing, innovation, productivity, customer service, and employee involvement. Although the responding executives in this study did identify market share, productivity, and customer service as highly important factors, they perceived innovation and employee involvement measures to be less important. This is clearly an area of concern if we believe what many business experts are saying about the increasing importance of innovation and human capital. It may well be that in the coming decade, intellectual capital will impact the bottom line more than booked, tangible assets. If this is the case, performance measurement systems must include leading indicators that tap human capital. This is one way managers will be able to manage and control knowledge. THE IMPORTANCE-MEASUREMENT GAP Our results show a substantial importance-measurement gap. That is, many companies that view nonfinancial performance factors as important are not capturing data on these factors. As one would expect, the importance-measurement gap is greatest for factors that are perceived to be unmeasurable or at best difficult to measure. For example, in the employee involvement category, although 192 (75.9%) companies rated "morale and corporate culture" as highly important, only 72 (37.5%) are measuring this factor. There is a similar finding for "core competencies"...192 companies (75.9%) rated the factor as highly important, but only 69 (35.9%) are measuring this factor. It is interesting to note that just as the categories of innovation and employee involvement received lower overall ratings of importance, responding firms indicated these two categories also have a low incidence of measurement. In particular, the nonfinancial performance factor least likely to be measured is "innovation." Although 160 firms (63.2%) rated the factor as highly important, only 35 firms (21.8%) are measuring this factor. On the other hand, a number of other factors have a high rate of measurement. In the market performance category, 200 companies (79.1%) rated "market share" as highly important, and 182 firms (91.0%) are measuring this factor. "Market growth" was rated as highly important by 181 firms (71.5%), and 154 firms (85.1%) are measuring this factor. In the customer service category, "customer satisfaction" and "delivery performance/customer service" have measurement rates of 79.5% and 83.8%, respectively. In goal achievement, "productivity" has a measurement rate of 82.9%. After a firm identifies the right mix of factors to include in the performance measurement system, it is critical that these factors get measured and reported. "What gets measured gets done" implies that the organization becomes what it measures. If you cannot measure something, you cannot control it, and control is essential. The results of this study show a substantial importance-measurement gap for a number of highly important factors, particularly in the categories of innovation and employee involvement. Many of these factors may be perceived to be unmeasurable or difficult to measure. However, the fact is that precise data collection may not be possible; a collection effort that provides even crude data can prove valuable. "What matters ... is not the absolute magnitude in any area but the trend ... that the measurements will give ... no matter how crude and approximate the individual readings are by themselves."4Companies may have to experiment with measuring and interpreting different factors. The objective is to provide action-oriented information to managers...not to report balance sheet figures. THE MEASUREMENT-USE GAP The final step in the performance measurement process is the use of measurements in developing and monitoring strategic plans. In this study, we found evidence that a large number of businesses are collecting data that are not being used to inform managers in the planning process. We call this the measurement-use gap. Of course, the underlying assumption is that if companies are collecting the data on important factors, they intend to use the data to make business decisions. To illustrate the measurement-use gap, look at "delivery performance/customer service" in the customer service category (Figure 1). While 197 (83.8%) of 235 study participants (who rated it highly important) indicated that their companies measure this factor, only 140 (71.1%) of 197 indicated that their firms actually use this information for planning purposes. In practical terms, this means that 28.9% of the firms are collecting information that serves no useful purpose in the planning process. The measurement-use gap appears to be most pronounced in the category of employee involvement. Measures such as "employee satisfaction," "employee turnover," "internal recognition," and "morale and corporate culture" are not used in the planning process by more than 40% of the firms that collect data on these factors. Study results show that the measurement-use gap is the smallest in the market performance category. For "market growth," 132 (85.7%) of 154 responding firms measuring the factor are using the factor. Results are similar for "market share" in that 161 (88.5%) of 182 responding firms measuring the factor report that they are also using the data. These are measures that have been around for a while; hence, managers are able to interpret the data and translate the information into action items. The measurement-use gap appears to be moderate for the factors in the categories of customer service, innovation, and goal achievement. Roughly 25% of the companies who measure these factors do not use the results in their planning process. The underlying assumption is valid...if companies collect data on important performance factors, they intend to use the data to make business decisions. Why would companies identify factors as important, collect measurements on these factors, and then not use the information in the planning process? Certainly, in the case of the employee involvement category, the measures are "softer" than in categories such as market performance. The measurements may be more difficult to understand, and, for this reason, managers may have trouble in translating the information into action items. If, for whatever reason, a firm finds that it is using resources to collect data but fails to use the resulting information, this is an inefficient use of resources that must be checked. Either the information is not relevant, in which case the factor should be deleted from the performance measurement system, or, if the information is perceived to be critical and managers do not know how to use it, every effort must be made to understand the significance of the information. COMPARING U.S. AND CANADIAN RESPONSES We also wanted to examine the extent to which perceptions of the importance, measurement, and use of nonfinancial performance measures were similar across U.S. and Canadian firms.  Both U.S. and
Canadian respondents indicate that customer service and market
performance categories are most important in setting company goals
and that the other categories examined are at least moderately
important. The only statistically significant difference between U.S.
and Canadian firms is in their perception of the importance of the
innovation category. U.S. respondents indicate that these measures
are more important in the goal-setting process. U.S. and Canadian
firms also show similar patterns in the measurement and use of
nonfinancial performance factors.
For both U.S. and Canadian firms, market performance, customer service, and goal achievement are shown to be the most used and measured nonfinancial performance categories. However, consistent with U.S. firms' belief concerning the importance of the innovation category, the U.S. firms represented in this sample indicate that they are significantly more likely to both measure and use factors in the innovation category. Although there are several possible explanations for differences between U.S. and Canadian firms as they relate to innovation, it is likely that differences are due, at least in part, to competitive influences. Previous research has shown that competitive pressure often serves as a catalyst for innovation and forces firms to adopt creative internal structures to be responsive to changing markets.5 GETTING PAST THREE RED FLAGS TO A DYNAMIC SYSTEM The performance measurement process involves:
The results of this study, based on responses from the top executives of Fortune 500 and Post 300 firms, provide a comprehensive picture of the process of nonfinancial performance measurement...and show that U.S. and Canadian firms face similar challenges. We believe that study results highlight three red flags. First, measures of innovation and employee involvement were not perceived to be as important as customer service and market standing...this is a concern. If we believe the business experts who are telling us that human capital and other intangible assets classed as intellectual capital are becoming the basis of competitive advantage and wealth creation, then it is imperative that measures of innovation and employee involvement be included in the performance measurement systems...that is, identified, measured, and used to design and monitor strategic plans. Although results show that U.S. firms view measures of innovation as more important in the goal-setting process and are more likely to measure and use innovation factors, both U.S. and Canadian firms show substantial importance-measurement and measurement-use gaps. Second, study results indicate a strong importance-measurement gap for certain factors. That is, although top executives believe that certain nonfinancial factors are highly important, a large number of firms are not capturing data on these measures. It is clear that some factors are more difficult to measure than others. But, even crude measurements on critical factors can provide valuable input to the control framework. To close the importance-measurement gap, companies may need to experiment with different measurement methodologies. Third, results of the study suggest a substantial measurement-use gap. That is, a large number of companies are collecting data that are not being used by managers in the planning process. The reasons underlying the measurement-use gap should be investigated. If the firms are collecting data that are not useful, these factors should be deleted from the performance measurement system. If the data are on factors that are perceived to be critical, however, it may be that managers need help in learning how to use the information in the strategic planning process. To develop a successful performance measurement system, managers must clearly understand the interests of the stakeholders (customers, employees, and investors), the strategic objectives of the company, and every aspect of the company's business processes. Only then can they be assured that the performance measurement system includes the right factors, both financial and nonfinancial. Long-term commitment to the system is required to assure that the factors are measured, understood, and used. The result can be a performance measurement system that is clearly linked to strategy, is dynamic, and is action-oriented. Bonnie P. Stivers, Ph.D., CPA, is professor of accounting; Teresa Joyce Covin, Ph.D., is chair of the department of management and entrepreneurship and associate professor of management; Nancy Green Hall, Ph.D., is associate professor of decision sciences; and Steven W. Smalt, CPA, is assistant professor of accounting. All the authors are with the Michael J. Coles College of Business at Kennesaw State University. This article was submitted through the Atlanta Chapter of which Bonnie P. Stivers is a member. She can be contacted at bstivers@ksumail.kennesaw.edu. 1 Robert S. Kaplan and David P. Norton, "The Balanced Scorecard...Measures that Drive Performance," Harvard Business Review, January-February, 1992, pp. 71-79; Norton (1993); "Putting the Balanced Scorecard to Work," Harvard Business Review, September-October 1993, pp. 134-147; "Using the Balanced Scorecard as a Strategic Management System," Harvard Business Review, January-February 1996, pp. 75-85. 2 Peter F. Drucker, Managing for the Future, New York: Truman Talley Books/Dutton,1992; Post-Capitalist Society, Harper Business, New York, 1993; "The Age of Social Transformation," The Atlantic Monthly, November 1994, pp. 53-80. 3 Frederick F. Reichheld, The Loyalty Effect, Harvard Business School Press, Boston, 1996. 4 Drucker, Managing for the Future. 5 Robert Simons, Levers of Control: How Managers Use Innovative Control Systems to Drive Strategic Renewal, Harvard Business School Press, Boston, 1995.
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