What are five advantages that nonfinancial performance measures have over financial performance measures?

By filling in gaps left by financial accounting, nonfinancial measures (such as customer loyalty and employee satisfaction) promise to complete the picture of your company’s performance. This fuller picture, the theory goes, gives you and your employees the information you need to achieve your company’s strategic objectives.

But few companies realize these benefits. Why? They don’t identify, analyze, or act on the right nonfinancial measures—those that will advance their strategies. And they don’t demonstrate clear connections between improvements in nonfinancial activities and financial outcomes, such as profit or stock price. Results? Misdirected investments and unfulfilled strategies.

How to realize the promise of nonfinancial performance measures? Identify the major nonfinancial drivers of long-term economic performance for your firm. Then measure—and act on—the drivers behind those drivers.

The Idea in Practice

Doing It Wrong

Not linking measures to strategy. Few companies tie measures to strategic goals or develop a causal model linking nonfinancial drivers and financial performance. Consider this exception: A fast-food chain aimed to be its industry’s premier cash-flow generator and lead stock-price performer. The company defined a causal model linking nonfinancial measures to those goals: “Better employee selection will increase employee satisfaction and performance. These will drive customer satisfaction, purchase frequency, and retention—improving growth, earnings, and cash flow.”

Without clarifying such links, managers can’t select the few appropriate metrics from hundreds of possibilities. Result? They measure too many—and irrelevant—things.

Not validating the links. Among companies that do develop causal models, many never verify the assumptions behind them. For instance, what kind of supervision and support drive employee satisfaction? How do satisfied employees increase customer satisfaction?

Setting the wrong performance targets. Firms that do test their assumptions often set targets too high. One aimed for 100% customer satisfaction, although 100% satisfied customers spent no more than 80% satisfied ones. Other companies use nonfinancial measures to launch initiatives promising short-term financial results when other initiatives would generate higher long-term payoffs.

Measuring incorrectly. Many companies use invalid measures, which don’t capture what they’re supposed to—for example, customer surveys with too few questions. Unreliable measures introduce contradictory results—e.g., three internal teams using different techniques to measure corporate reputation.

Doing It Right

Develop a causal model. Propose causal relationships between selected nonfinancial drivers of strategic success and specific outcomes related to that success.

Gather data. Inventory your company’s information systems (such as purchasing and customer service) to see which useful nonfinancial metrics you’re already tracking. Then develop concrete, consistent measures for your entire organization.

Turn data into information. Use established quantitative methods (correlation analyses, multiple regressions) and qualitative analyses (focus groups, individual interviews) to validate links in your causal model. Sears used regression analysis on data from many stores to test if employee relations, customer satisfaction/loyalty, and shareholder results drove financial performance.

Continually refine the model. Deepen your understanding of nonfinancial drivers. For example, low employee absenteeism may improve financial performance. But what decreases absenteeism? Satisfactory pay? Excellent working conditions?

Base actions on findings. Act on conclusions promising the greatest financial reward. One finance company based capital-allocation recommendations on the relative importance of three major drivers: employee satisfaction, number of processing mistakes, and customer satisfaction.

Assess outcomes. Determine if your action plans produced desired results. Even disappointing “postaudits” can help you revise your model and expose data-gathering mistakes.

You’ve figured out how to monitor and report on financial metrics related to demand generation and revenue, slicing and dicing data by campaign, region, sales rep/territory, channel, media and more. Now you’re ready to master strategic and non-financial metrics, the critical indicators of a company’s health and value.

What do we mean by non-financial metrics? Non-financial metrics are quantitative measures that cannot be expressed in monetary units. Common financial metrics include earnings, profit margin, average order value, and return on assets. Outcome-based measures such as customer satisfaction, market share, category ownership, and new product adoption rate fall into the non-financial metrics.

Studies by Deloitte Touche Tohmatsu Limited and others have found that the board of members and executives of many companies are indeed interested in non-financial performance measures, despite the fact that their ability to monitor these factors remains inadequate. Why? Because financial performance measures such as earnings or return on assets are considered trailing measures of performance.  By themselves these metrics do no adequately capture a company’s strengths and weaknesses.

Yes, I Want My Growth Idea

Non-Financial Metrics and Leading Indicators

Non-financial performance measures, on the other hand, can serve as leading indicators of future financial performance and can provide insight as to organization’s impact on stakeholders and society. They can provide deeper insights into the inner workings of your business. And the beauty of non-financial metrics is that you can use them to understand why certain financial results occurred and what you need to change to improve your financial metrics.

Non-Financial Metrics Categories that Matter

There are a number of meaningful non-financial metrics.  We believe that four categories have significant impact on corporate performance:

1. Company reputation
2. Customer influence and value
3. Competitiveness
4. Innovation

All of these non-financial metrics fall within the purview of your organization. Therefore, business professionals must gain more experience measuring non-financial metrics. The more experience you gain, the greater your opportunity to create a wider range of predictive, forward-looking managerial tools will become.

6 Key Non-Financial Metrics for Every Marketer

Not sure where to start or if you have tapped into the right non-financial metrics? Here are six key non-financial metrics that Marketing should own.

1. Brand Preference: This measure helps you understand the position of your company and your products and services in relation to competitors. Many marketers talk about awareness, which addresses whether people know you exist, but what truly matters is whether you are among “the chosen.” If you are conducting awareness studies, consider modifying these to learn how your company and its offerings rank in consideration. Your goal is to understand how you stack up relative to the competition.
2. Take Rate: Ok, you’ve built preference; the next key non-financial metric is your take rate. This is how many customers/prospects act on your call to action, whether this is an offer to download a case study, sign up for a free trial, or schedule an appointment. Calculating take rate is relatively easy. Here’s a quick example. Let’s say you are a cyber security company and you create a campaign that offers a 20% discount on a risk assessment to anyone who signs up within the next 30 days. The campaign costs $10,000 (direct and indirect.) Your email sends the offer to 1000 customers in your database and 100 register for the offer. Divide the number of uptakes (100) by the number of customers you engaged (1000). In this case 10% is your take rate. The acquisition cost is 10,000/100 or $100 per registrant. Is this a good number? We can decide whether the investment is a good return by determining whether the campaign had a good return and whether the people who took the offer bought the security services.
3. Customer retention and churn: These metrics are different sides of the same coin. While many marketing organizations focus on customer acquisition, adding customers while a significant number of existing customers are exiting out the back door is a sign of trouble. Retention is how many customers continue to buy from you and churn is the number of existing customers who are no longer buying your products or services. Obviously the goal is to increase the retention number and reduce the churn number. The key is to define when a customer is no longer a customer. For example. If your company provides a subscription-based product you might decide defection/churn is 30 days after the renewal date.
4. Customer experience: Customer experience has direct impact on customer retention and churn. To measure customer experience, you need to take into account all of the major touch points where a customer interacts with your company. Once you have these you will want to establish key criteria for what constitutes a superior vs. subpar experience.
5. Innovation: Innovation is your ability to bring new products/services to market successfully. Both the number of new products in the pipeline and the adoption rate of these new products reflect your company’s ability to bring value to your customers and the market.
6. Market share: Each of the prior metrics: preference, customer retention, take rate, customer experience, and innovation impact your company’s market share. Note that a key word in this metric is market. Market share is a primary measure for both the company and marketing’s success. An increase in market share has a number of benefits, including better operating margins, one of those financial metrics company’s often track. To measure your market share you will need to know how many customers and dollars are available in the market and then calculate how many of these customers and dollars are in your portfolio of products and services.

Almost every company can benefit from monitoring and measuring these six non-financial metrics. While these aren’t the only non-financial metrics you can measure, these metrics help communicate Marketing’s contribution and impact to the business. Learn more about creating key metrics for your organization in our Marketing Metrics Workshop.