Essay about Coming Up Short on Nonfinancial Performance Management

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Tracking things like customer satisfaction and employee turnover can powerfully supplement traditional bookkeeping. Unfortunately, most companies botch the job. Coming Up Short on
Nonfinancial
Performance
Measurement
by Christopher D. Ittner and David F. Larcker

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This document is authorized for use only in Managing People Term 2, 2014 by Associate Professor Isabel Metz at Melbourne Business School from March 2014 to September 2014.

Tracking things like customer satisfaction and employee turnover can powerfully supplement traditional bookkeeping. Unfortunately, most companies botch the job.

Coming Up Short on
Nonfinancial
Performance
Measurement

COPYRIGHT © 2003 HARVARD BUSINESS SCHOOL PUBLISHING CORPORATION. ALL RIGHTS RESERVED.

by Christopher D. Ittner and David F. Larcker

In the past decade, increasing numbers of companies have been measuring customer loyalty, employee satisfaction, and other performance areas that are not financial but that they believe ultimately affect profitability.
Doing so can offer several benefits. Managers can get a glimpse of the business’s progress well before a financial verdict is pronounced and the soundness of their investment allocations has become moot. Employees can receive better information on the specific actions needed to achieve strategic objectives.
And investors can have a better sense of the company’s overall performance, since nonfinancial indicators usually reflect realms of intangible value, such as R&D productivity, that accounting rules refuse to recognize as assets.
But the reality is that only a few companies realize these benefits. Why? Because they fail to identify, analyze, and act on the right nonfinancial measures. We conducted field research in more than 60 manufacturing and service companies and supplemented it with survey responses from 297 senior executives. To our

harvard business review • november 2003

surprise, we discovered that most companies have made little attempt to identify areas of nonfinancial performance that might advance their chosen strategy. Nor have they demonstrated a cause-and-effect link between improvements in those nonfinancial areas and in cash flow, profit, or stock price.
Instead, many companies seem to have adopted boilerplate versions of nonfinancial measurement frameworks such as Kaplan and
Norton’s Balanced Scorecard, Accenture’s Performance Prism, or Skandia’s Intellectual Capital Navigator. And yet the frameworks’ own inventors rightly insist that every company needs to dig deep to discover and track the activities that truly affect the frameworks’ broad domains (domains such as “financial,” “customers,” “internal business processes,” and “innovation and learning,” in the case of the Balanced Scorecard).1 But businesses often fail to establish such links partly out of laziness or thoughtlessness. As a result, self-serving managers are able to choose—and manipulate— measures solely for the purpose of making

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This document is authorized for use only in Managing People Term 2, 2014 by Associate Professor Isabel Metz at Melbourne Business School from March 2014 to September 2014.

Coming Up Short on Nonfinancial Performance Measurement

Christopher D. Ittner is a professor of accounting at the Wharton School of the University of Pennsylvania, in Philadelphia. He is coauthor of Linking
Quality to Profits: Quality-Based Cost
Management (ASQC Press, 1994).
David F. Larcker is the Ernst & Young
Professor of Accounting at Wharton.

themselves look good and earning nice bonuses.
How mindless or mendacious can managers be? Here are some examples:
• One of the world’s top information-service providers began evaluating managers’ performance according to how many patents the company filed each year. Whether it might have made more sense to license someone else’s technology, whether the patents were ever put to work, or whether they ever earned back their cost was not considered. The reason for tracking…