Enterprise Strategy: When It Comes to Non-Financial Performance Measurement Methods, E3 Requires Candidates to Know the Performance Pyramid and the Building-Block Model, as Well as the Ubiquitous Balanced Scorecard

By Sims, Adrian | Financial Management (UK), August 2014 | Go to article overview

Enterprise Strategy: When It Comes to Non-Financial Performance Measurement Methods, E3 Requires Candidates to Know the Performance Pyramid and the Building-Block Model, as Well as the Ubiquitous Balanced Scorecard


Sims, Adrian, Financial Management (UK)


This is the second of two articles on management control methods. The first, which appeared in July's FM app, covered financial performance measures, but I will focus here on the development of non-financial metrics.

Concern about the effects of relying too much on financial performance metrics prompted a surge of interest in non-financial measures in the 1980s among accounting professors and other management theorists. Both groups of academics were in fact describing what leading businesses were already doing.

Accounting professors in the US and UK focused on the poor quality of the management information provided by profit-based performance measures. In 1985, for instance, Harvard's Robert Kaplan wrote an article, "Accounting lag--the obsolescence of cost accounting systems", that criticised management accounting for failing to keep pace with the businesses it sought to control. One aspect of this failure, he argued, was the inadequacy of its performance metrics. Emerging commercial trends at the time included lean manufacturing and initiatives such as quality, innovation and customer care.

The management theorists contributed two themes to the debate. The first was a more strategic view of a business. its place in the wider commercial environment and the shareholder value it created. This encouraged managers and investors to focus less on short-term profits. The second was an organisational management perspective that combined the popularity of management by objectives with the increased use of IT into what another Harvard academic, Robert Eccles, termed a "performance measurement manifesto". This called for more measurement of all processes and a willingness to extend performance measurement beyond budget holders to encompass operative staff and suppliers.

Further considerations have since arisen over the ensuing decades, including a growing concern about risk, corporate social responsibility (CSR) and business ethics, and the challenges of managing networked organisations. These aspects also require performance measures. The emergence of enterprise resource management systems has also increased the availability of data greatly.

The main limitations of relying solely on financial measures are as follows:

* It encourages short-termism. Financial measures of profit and cost are based on budget cycles of months, quarters and years, which prompts managers to focus on immediate results rather than assuring the organisation's healthy development for the years to come.

* It offers no control over non-financial processes. Financial measures alone do not provide a way to control those employees who perform key functions such as customer service, R&D, quality assurance and training. The budget holder must supervise these people, but without any performance data to help them.

* It focuses users on results, not causes. A decline in profits may be noted at the end of the year, but the management team won't know from this figure alone how the problem has been caused--and it's too late anyway, because the damage has already been done.

* It doesn't offer a strategic perspective. Financial measures cannot monitor the progress of initiatives that a company has taken to prepare for its future--eg, a restructuring programme. In fact, such initiatives would appear as costs without associated revenues in a financial report, which could lead them to be sacrificed.

* It's of minimal use for not-for-profit organisations whose main goals are, say, furthering the careers of their members, reducing crime or helping the needy.

All organisations, profit-seeking or not, therefore need a model of multidimensional performance measurement that features a mix of financial and nonfinancial metrics. Many such models exist, but here I will cover the three that feature in papers P2 and E3: the balanced scorecard, the performance pyramid and the building-block model. …

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