Accounting Finance and Control (AFC) Non Financial Indicators

Paolo Maccarrone paolo.maccarrone@polimi.it

Introduction

•  Non Financial (Performance) Indicators are based on non financial data (i.e. non accounting information)

•  Three main categories: –  Non financial indicators of the present performances of the

enterprise –  Non financial indicators of the state of resources, which

measure the potentiality of the present enterprise resources to generate future value-added projects.

–  Risk drivers, which provides early signals and allow to monitor probability of occurrence of a risky event and its possible impact on the company (loss)

2

3

Non Financial Performance Indicators

Orientation Competitive factor

Revenues drivers Cost Drivers

Time

Time to market, Delivery time

Throughput time

Quality Number of claims (by customers)

Spoilage/scrap/waste percentage

Productivity Labour/Machinery productivity

Flexibility Time of change

Environmental sustainability Pollution levels Product compliance

Energy saving

Non Financial Performance Indicators: Time

•  Time for performing specific processes (internal) –  Highlighting non value added activities

•  Significant opportunities for reducing costs •  Neglected in the past, high potential improvements

–  2 important categories of internal time measures: •  Throughput time •  Time Efficiency

•  Time for delivering products/services (external) •  Delivery time, example:

–  Average delivery time –  % delayed deliveries –  Average delay

•  Effects on human resources behaviour

•  Time for developing new products (external) •  Time to market 4

Non Financial Performance Indicators: Quality

•  The 2 perspectives are relevant also for quality: –  External: product quality –  Internal: process quality

•  Product quality: –  Quality of design: the extent to what the features (specifications) of

a product or service meet the needs and/or desires of customers. It can be measured through:

•  Customers surveys •  Feed backs from points of sale/sales agents

–  Quality of conformance: refers to the ability of a product or service to reflect its design specifications. Possible proxies:

•  N of claims •  Number of returned products •  Number of products repaired within the warranty period

•  Process quality •  Internal failures

5

Non Financial Performance Indicators: Productivity

•  Productivity is one of the most traditional non-financial measures used in operations management

•  Productivity measures are ratios between output(s) and input(s)

•  We can distinguish between partial productivity (productivity of one/some factor(s)) vs global productivity (productivity of all inputs)

•  Output: –  Non financial measures –  Financial measures (in case of heterogeneous outputs)

•  Input: –  Non financial measures –  Financial measures (in case of heterogeneous inputs)

6

Non Financial Performance Indicators: Flexibility

•  Flexibility can be defined as the capability in answering to changes with limited cost and time

7

Nature of change Entity of change Quality Quantity Small Flex Product Volume Range Flex Production Mix Large Flex Operation Expansion

Non Financial Performance Indicators: Environment and Society

•  Environmental compatibility and social responsibility are important elements in the strategy of a company –  Positive effects on economic value

•  They are mainly devoted to the external accountability

•  For having a positive effect on the public we need: –  Stable and standard indicators –  Diffusion (official documents, websites)

•  To improve credibility of sustainability reporting, several reference frameworks have developed

Non Financial Performance Indicators: Environment and Society - GRI Standard

•  The most complete framework is the GRI (Global Reporting Initiative), which is also the most used standard in enterprises worldwide.

http://www.pwc.com/id/en/publications/assets/Sustainability_Reporting-2012.pdf

•  GRI standards are divided in two main areas: –  General standard disclosures, addressing high level elements of

sustainability: Strategy and Analysis, Organizational Profile, Identified Material Aspects and Boundaries, Stakeholder Engagement, Report Profile, Governance, Ethics and Integrity.

–  Specific Standard disclosure, articulated in three Categories: •  Economic •  Environmental •  Social

9

GRI: environment

11 http://www.grom.it/eng/filosofia.php

GRI: Labour Practice and Decent Work

GRI: Human Rights

Barilla

Non Financial Indicators: Resource Indicators (1)

•  Indicators of Resource state aims at capturing potentialities for enterprises to innovate and grow

•  They cover both tangible and intangible assets, such as intellectual capital.

•  In spite of the different labels and clusters, all classifications are referred to four types of resources: –  Financial; –  Technological; –  Human and organizational; –  Image and reputation.

•  Each resource can be characterised by three types of measures: –  Quality –  Quantity –  Accessibility

Non Financial Indicators: Resource Indicators (2)

Financial  

Quality  Average  cost  of  debt  

Quan,ty  Financial  posi4on  

Accessability  financial  leverage  

Technological  

Quality  Total  patent  awarded/pending  

Quan,ty  Incidence  of  new  product  sales  

Accessibility  Research  centres  rela4onships  

Human  and  organiza,onal  

Quality  N.  employees  with  specific  educa4on  

Quan,ty  N.  employees  by  role  

Accessibility  educa4on  level  in  accessible  areas  

Image  and  reputa,on  

Quality  Brand  Equity  

Quan,ty  Marke4ng  effort  

Accessibility  Compara4ve  Customer  percep4on  

Intellectual Capital

Non Financial measures Intellectual Capital

•  Often companies refers to Intellectual capital as resource, which join different type of assets and it is referred to a model including three dimensions: –  Human capital, which refer to the skill, training, education,

experience, quantity and quality of an organisations employees.

–  Relational capital encompasses relationships with customers and suppliers, brand names, trademarks and reputation.

–  Internal structural capital, which refers to intangible assets and knowledge embedded in organisational structures and processes; this dimension comprises patents, research and development, technology

17

Non Financial measures Intellectual capital - Human Resources

•  Regarding more specifically human resource several approaches have been tested, that can be classified in three categories: –  Approaches focused on the process dimension, covering

Human Resource Management (HRM) practices, e.g. effectiveness and efficiency of recruitment, selection

–  Methodology providing one synthetic indicator, starting from the assessment of human resource management, such as the Human Capital Index (HCI), proposed by WatsonWyatt or Human Capital Capability Scorecard proposed by Imperial Consulting.

–  Approaches mainly devoted to external accountability which provides ratings of human resources functions, especially across the public sector. An exemplary country is the United Kingdom and particularly the National Health Service (NHS).

18

Characteristics of non-financial performance and resource indicators

•  Timeliness - high; this is the main advantage of these measures •  Long term orientation - can be high, if companies carefully

select their performances •  Measurability - possible ambiguity. This problem is solved

implementing a protocol for each indicator where the following information are inserted:

–  Measure: Title of the measure –  Purpose: Why companies want to measure this? –  Formula: How to calculate this measure –  Unit of analysis: which is the object of measurement? –  Frequency: How often companies measure this? –  Source of data: From where to get the necessary data?

•  Completeness - each indicator refers to a specific factor (no synthetic measures)

•  Precision - it is necessary distinguishing between: –  Internal measures: possible savings/cost reduction –  Client measures: competitors comparison

19

Risk drivers: key risk indicators

•  Key Risk Indicators (KRI) are defined as metrics allowing to monitor and provide early signals on the probability and impact of one or more events (risks) that influence the capability of enterprises to reach their goal.

20

Risk  event  Intermediate  event  

Root  cause  event  

E.g.  Prepaid  Client  Loss  

E.g.  Credit  recharged  

E.g.  compe4tors  tariff  and  offers  

KRI Typology

•  KRI vary in term of metrics adopted; they can be: –  Objective or Subjective, referring to measurement:

•  Objective: metric derived by measurement of “objective” phenomenon

•  Subjective: refers to metrics derived by stakeholders perceptions (managers, clients, employees, etc);

–  Single or composite, referring to the number of event the indicators monitor:

•  Single: monitor a single event (e.g. oil price); •  Composite: synthetize the control over more than one factor

(for example synthetic country risk indicators collects different factors).

21

Risk Drivers - Characteristics

•  Timeliness is potentiality very high (right KRI) •  Completeness is determined by the coverage of the risk

drivers with reference to –  Micro-environment, which refers to the enterprise internal

environment –  Meso-environment, including elements that insist on the company’s

perimeter (e.g. suppliers, distributors, customers) –  Macro-environment, which refers to the macro-economic context and

the global market;

•  Precision is instead controversial •  Measurability possible ambiguity. •  Specific responsibility, indicators vary in term of the type of

events traced and the possibility to isolate the impact of different factors.

22