Question

"Companies should focus on financial measures of quality because these are the only measures of quality that can be linked to bottom-line performance." Do you agree? Explain with the use of at least two appropriate examples.

Answer 1

No, companies should emphasize financial as well as nonfinancial measures of quality, such as yield and defect rates. Nonfinancial measures are not directly linked to bottom-line performance but they indicate and direct attention to the specific areas that need improvement to improve the bottom line.

Companies need to track non-financial performance measures because they:

• Help capture strengths and weaknesses. If you excel at customer service but have long wait times before a customer reaches a representative, that will show up in a non-financial KPI such as a feedback survey. These measures can reveal your core competencies and highlight other areas you didn’t realize were suffering.
• Affect business performance. Over- or underperformance is eventually going to show up in your bottom line, and you can trace it back to the source with non-financial performance measures. For example, if the HR recruiting budget skyrocketed, you can see it’s because of the high employee turnover rate and exorbitant cost (in time and resources) of hiring.
• Give employees better feedback on how to meet strategic objectives. When properly constructed, non-financial KPIs are specific, measurable, and ladder up to the organization’s big-picture strategy. Team members are able to see exactly what they need to do to hit their goals and they also understand why they need to pull the same report every month or how their attendance rates lead to productivity. There’s a clear connection between daily tasks and strategic direction.
• Are better at adjusting for external factors. Every business faces external risks outside its control that can negatively impact measures like revenue and expenses. Recessions, war, and Acts of God are unavoidable and unpredictable. If you were just looking at financial KPIs in these situations, it would seem your company’s performance was beyond hope. But non-financial performance measures are largely within your control and can provide a different, more holistic perspective. If you’re getting high marks for company culture and customer satisfaction during a trade war, you’re being successful in key parts of your strategy, and that should pay off in the long term.

Examples Of Non-Financial Performance Measures

Taking the Balanced Scorecard approach, there are four perspectives involved in strategy management: customer, internal processes (operations), learning and growth (HR), and financial

1. Conversion Rate: The percentage of interactions that result in a sale. Formula: (Interactions with Completed Transactions) / (Total Sales Interactions) = (Conversion Rate)
2. Retention Rate: The portion of consumers who remain customers for an entire reporting period. Formula: (Customers Lost in a Given Period) / (Number of Customers at the Start of a Period) = (Customer Retention Rate)
3. Customer Support Tickets: The number of new tickets, the number of resolved tickets, and resolution time.
4. Product Defect Percentage: This will give you the percentage of defective products in a specified timeframe. Formula: (Number of Defective Units in a Given Period) / (Total Number of Units Produced in a Given Period) = (Product Defect Percentage)
5. Efficiency Measure: Efficiency can be measured differently in every industry, so this common KPI will vary. For example, the manufacturing industry can measure efficiency by analyzing how many units are produced every hour and the plant’s uptime percentage.