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Coming Up Short on Nonfinancial Performance Measurement

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Rebecca Johnson

on 11 April 2013

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Transcript of Coming Up Short on Nonfinancial Performance Measurement

By: Christopher Ittner & David Larcker
Presented by: Rebecca Johnson Coming Up Short on Nonfinancial Performance Measurement The Importance of
Nonfinancial Measures Companies that have adopted nonfinancial measures and then established a casual link between those measures and financial outcomes produced significantly higher returns on assets and returns on equity over a 5-year period than those that did not. Common Mistakes One: Not linking measures to strategy. Which Measures Matter Doing It Right Develop a Casual Model Questions? The 23% of companies had a 2.95% higher ROA and 5.14% higher ROE than companies that didn't use casual models. Two: Not validating the links. Three: Not setting the right performance targets. Four: Measuring incorrectly One of the companies in the study conducted by the authors - a successful fast food chain - developed this casual model proposing the drivers of strategic success. Companies have a hard time determining which of the hundreds
of nonfinancial measures to track. Even companies that go through the trouble of developing casual models rarely will prove that improvements in nonfinancial performance affect future financial results. Some companies don't make the effort, preferring to focus on initiative that promise short-term financial results, even though other initiatives may have higher long-term payoffs. Many companies employ metrics that lack statistical validity and reliability. Pull Together the Data Turn the Data into Information Continually Refine the Model Base Actions on Findings Assess Outcomes
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