How reliance solely on Financial Performance Measurement can weaken the effectiveness of Performance Management System
When managers concentrate on financial performance measures (FPM) they ignore other important variables that cannot be stated in monetary terms.
- For instance, quality of service is a vital competitive activity in business but it can’t be stated in monetary terms.
In knowledge industries intangible factors such as innovation and learning need to be measured.
- Innovation and know-how are intangible. The balance scorecard measures innovation and learning as one of its four perspectives.
Some financial performance measures can lead to short-termism where managers focus on achieving annual returns at the expense of long-term investment.
- The use of ROCE is an example of this. By keeping old assets which have been written down, the measure of ROCE is improved but the business may be retaining assets past their most productive period.
Concentrating on cutting costs is an example of looking solely at financial measure of performance.
- When staff are laid off this may see a short-term cost reduction but motivation may suffer and good, experienced staff may be lost forever..
Financial measures look backward at what happened rather than trying to plan for the future.
- Managers cannot rely on past performance solely to guide them going forward.
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