Non-financial performance measurement: formula sheet

Key formulas

Financial measure limitations (memory aid)

Backward-looking + Short-term + Narrow + Manipulable + Not linked to strategy

Use this as a checklist, not a formula. Each point must be applied to the scenario.

Return on investment (ROI)

ROI = Divisional profit ÷ Capital employed × 100%

Often used to show short-termism: a division may reject an investment whose return is above the cost of capital but below its current ROI.

Leading versus lagging

Financial results = lagging; operational and customer measures = leading

Non-financial measures usually act as leading indicators of future financial results.

Four perspectives

Financial + Customer + Internal business process + Innovation and learning

Learn the four names exactly. Some textbooks call the last one 'learning and growth'. Both are accepted.

Scorecard chain for each perspective

Objective → Measure → Target → Initiative

Use this layout in tables or lists. Every measure should come from a strategic objective, not be chosen at random.

Guiding question for each perspective

Financial: how do we look to shareholders? Customer: how do customers see us? Internal: what must we excel at? Innovation and learning: can we continue to improve and create value?

Use these questions to generate relevant measures from scenario facts.

Cause-and-effect logic

Learning → Processes → Customers → Financial results

Use it to explain how the perspectives link and why non-financial measures are leading indicators.

Performance Pyramid levels

Corporate vision → Business units (market, financial) → Business operating systems (customer satisfaction, flexibility, productivity) → Departments and work centres (quality, delivery, cycle time, waste)

Objectives flow down. Measures flow up. Know which measure sits at which level.

Pyramid measure types

External (effectiveness): market, customer satisfaction, quality, delivery. Internal (efficiency): financial, productivity, cycle time, waste

Use this to show the link between customer outcomes and internal efficiency.

Building Block dimensions

Results: competitiveness, financial performance. Determinants: quality of service, flexibility, resource utilisation, innovation

Six in total. Results are outcomes. Determinants are drivers.

Building Block standards

Ownership, achievability, equity

Test each target against all three.

Building Block rewards

Clarity, motivation, controllability

Staff must understand the reward, want it and be able to influence the result.

Performance Prism facets

Stakeholder satisfaction → Strategies → Processes → Capabilities ← Stakeholder contribution

Five facets. Satisfaction and contribution are two-way. Start with stakeholders, not with financial targets.

Results and Determinants

Results = financial performance + competitiveness; Determinants = quality + flexibility + resource utilisation + innovation

Six dimensions in total. Determinants explain and drive the results.

Performance Pyramid levels

Vision → Business units → Business operating systems → Departments and work centres

Objectives flow down; measures flow up. Split measures into external (effectiveness) and internal (efficiency).

SMART test for a KPI

Specific, Measurable, Achievable, Relevant, Time-bound

Use it to judge whether a proposed measure and its target are well designed. Apply each letter to the scenario rather than just naming it.

Leading versus lagging

Leading indicator = predicts future results; Lagging indicator = reports past results

Most non-financial measures are leading. Say which type each KPI is and why it matters to managers.

Customer retention rate

Retention rate = (Customers at end − New customers gained) ÷ Customers at start × 100

Use customers from the same period. New customers must be removed or the rate is overstated.

Staff turnover rate

Turnover % = Leavers in period ÷ Average number of employees × 100

Average headcount is usually (opening + closing) ÷ 2.

Defect rate

Defect rate % = Defective units ÷ Total units produced × 100

Make clear whether the base is units produced or units inspected.

Controllability principle

A manager should be judged only on factors they can influence

A key design rule. Uncontrollable measures demotivate and distort behaviour.

Quick revision

• Financial measures are backward-looking, can encourage short-termism and can be manipulated.
• Non-financial measures can show drivers of future results, but they can be hard to quantify and compare.
• The Balanced Scorecard has four perspectives: financial, customer, internal business process, and innovation and learning.
• Each perspective should link to strategy and to the others through cause and effect.
• The Performance Pyramid links corporate vision to operations through business units and operating systems.
• The Building Block Model has dimensions, standards and rewards.
• The Performance Prism starts from stakeholders: satisfaction and contribution, with strategies, processes and capabilities.
• Good measures are linked to strategy, clear, controllable, measurable and cost-effective.
• Too many measures cause confusion; too few leave gaps.
• Measures change behaviour, so think about gaming and unintended effects.
• Always tailor the framework to the scenario's sector, strategy and stakeholders.
• Finish with a recommendation, and note implementation risks such as data quality and resistance.

Common mistakes

• Writing a generic list of limitations with no link to the scenario. Fix: Quote a fact from the case for every point. Marks go to application.
• Saying financial measures are useless. Fix: State that financial measures remain necessary and that the aim is balance.
• Listing generic measures that could apply to any company. Fix: Tie each measure to a fact in the scenario, such as a complaint, a strategic aim or a weak area. State why it matters for this business.
• Giving only measures and ignoring objectives, targets and initiatives. Fix: Show the chain from objective to measure to target to initiative. Even a short phrase for each earns credit when the requirement asks for a scorecard.
• Treating the Pyramid as just another scorecard with four perspectives. Fix: Remember the Pyramid is a hierarchy of levels linking vision to operations. The Balanced Scorecard has four perspectives that sit side by side.
• Listing the six dimensions without separating results from determinants. Fix: State that competitiveness and financial performance are results, and that quality, flexibility, resource utilisation and innovation drive them. Then link them in the scenario.
• Listing the five facets without applying them Fix: Spend most of your time on the scenario. Each facet needs a scenario fact and a measure.
• Treating stakeholder contribution as the same as satisfaction Fix: Satisfaction is what the stakeholder wants from you. Contribution is what you want from them. Write both.
• Listing generic KPIs that do not fit the scenario. Fix: Open the scenario, find the strategy and a specific problem, then choose KPIs that address it. Refer to the business by name.
• Choosing KPIs with no link to strategy. Fix: State the objective and critical success factor first. Then say how the KPI shows progress.

Exam tips

• Always apply: a limitation with no scenario link earns little. Quote figures and facts.
• In reward scenarios, link the limitation to manager behaviour and goal incongruence.
• Show balance. Mention a weakness of non-financial measures in every answer on this topic.
• Name measures as leading or lagging where it helps, and tie them to the strategy.
• Use professional skills: a clear structure, a reasoned recommendation and a sceptical view of the data.
• Always name the four perspectives and show the objective, measure, target and initiative chain when asked to design a scorecard. A bare list of KPIs scores poorly.
• Use numbers and facts from the scenario in your measures and targets. Generic answers earn little application credit.
• For 'discuss' or 'evaluate' questions, give both strengths and limitations, tie them to the organisation, and end with a conclusion.