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No Such Thing as Non-Financial Metrics

by BILL WADDELL

I thought it was high time the air got a little clearer regarding this whole metrics business.  After all, which metrics to use and their relative importance is the universal question I can count on being asked by every manufacturer I visit.

There is no such thing as a "non-financial metric".  If it isn't financial then who cares?  The business exists to make money and all we care about is measuring how things impact our ability to do so.

What we have are a lot of financial metrics, and a lot of other things that are equally financial, only accounting hasn't figured out how they relate to money yet.  Make no mistake, however.  Things like on time delivery, employee turnover, cycle times, quality results and all of the rest are very much financial.  If they had no impact on sales or costs no one would care about them.

The big problem isn't that accounting hasn't figured out how to dollarize them.  No, the problem is a belief in many organizations and among many managers that, if we can't dollarize them, they can't be as important.  In too many companies, numbers without dollar signs in front of them aren't viewed as bearing the same weight as those that do have them.

In this we are guilty of the self-centered arrogance of know-it-all teenagers.  Armed with few life experiences and exposed to few places and cultures beyond their own neighborhood, they often go forth preaching to their parents, naively laying claim to the high moral and philosophical ground.  Their views are often silly due to their vast ignorance of the world, but they don't know what they don't know, and operate on the assumption that anything they don't know is unimportant.

The same is too often true with management.  We cannot calculate the precise financial impact of changes in employee turnover rates or fluctuations in delivery performance, so we assume it must not be as important as concise cost figures.  Too often, proposals to improve performance to these critical things accounting should know how to dollarize but doesn't are shot down because the people proposing the improvement cannot do accounting's job for them - that is to devise ways to determine a financial return from improving these measures.

Shame on managers who play along with this thinking.  The existence of critical non-financial metrics is merely proof that management has more work to do, but certainly not proof that these things are not critical drivers of financial results. 

While touring an aluminum extruder a few months ago I asked an operating manager why he thought accounting is so hung up with direct labor.  His answer: "Because it's easy to count."  He is absolutely correct.  Accounting systems count the things that are easy - purchase prices and direct labor.  The rest they either fudge with allocations or ignore all together, like delivery performance and quality levels.  That is no way to run a business.  The fact is that, in many cases - most cases probably - the things too difficult for accounting to quantify have a lot more to do with whether the company is going to succeed or not than the things accounting can dollarize.

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6 Responses to "No Such Thing as Non-Financial Metrics"

  • Erik N.
    8 May 2011 - 5:16 pm

    Nice blog post, Bill. I agree with your comments and recommend a fantastic book, Factory Physics, to your readers so they can get a grasp of non-financial metrics that matter and WHY they matter. Metrics such as MCE (manufacturing cycle efficiency) and the importance of understanding the length and variance of process queues are described in detail in the book. Other important topics such as push versus pull are described in an easy to understand format as well. One of the best non-financial metrics in the book is the coefficient of variation.

    I hope all of your non-operational readers out there will take the time to buy and READ this book. One of the best operations books on the market and what business does not have an operations component to it?

  • Aaron
    8 May 2011 - 5:39 pm

    I couldn’t agree more. And this is the reason that accountants make the worst managers.
    There is a certain amount of ‘soft-skill’ work that goes into successfully managing a team or company, mainly in interpreting some of these harder to quantify (in dollar terms) metrics.
    I worked for a company that had a fairly rapid turn-over in the ‘C’ level management. When we had a CFO who actually had business experience as opposed to accounting experience, that business did better, and was a better place to work. Get an accountant into that position, and the exact opposite was the case, often happening within weeks of a change-over.
    Most business degrees I have looked at have a couple of accounting papers involved; how many accounting degrees require business management to be taught?

  • Juniper Innovations
    9 May 2011 - 1:19 am

    Good post! One of the tricks here is to llok at the business goals and how they directly relate to annual targets. Otherwise it is harder for managers and employees to understand the correct impact of their decisions. It is simpler to understand statements such as “cut budgets” or “don’t spend money” however is this always in line with what the business is trying to achieve? Alternatively when spending decisions are made are they for the corporate or localised needs?

  • david foster
    9 May 2011 - 8:54 am

    Believing that understanding finance is THE key to running a businesses is analogous to believing that altimetry is THE key to flying airplanes. Of course executives need to understand finance–but it is far easier to conduct a discounted cash-flow analysis than to understand and assess the many factors–cycle times, product-development leadtimes, political risks, employee morale, etc etc–that influence the assumption used in that analysis.

    Generally speaking, the excessive emphasis on formal education/credentials tends to downplay the importance of experience-based, intuitive, “tacit knowledge” in favor of the kind of things that can be taught in a class by a professor whose own business experience is probably quite limited.

  • Bruce Lehmann
    13 July 2011 - 11:10 am

    There have been several books written on this subject. Like one of the other commenters, I’ll recommend the book Factory Physics.

    I’ve been fairly successful at putting $ values to improvements, but it is not a science yet. In many situations there are too many uncontrolled factors involved, so sorting out true cause and effect can be difficult to impossible. As a result we have to make estimates that an accountant would choke on, but are everyday stuff for engineers. In many cases, the value is so large that we divide our estimate by 2 to satisfy the critics and still end up with a large number. In fact, if the estimated value from a project proposal is marginal, I conclude it’s the wrong project: there is likely to be other low hanging fruit projects that cost half as much and return twice as much.

    You may want to do some research on Lean Accounting. It’s meant to provide data useful for production management as well as satisfying the financial requirements while reducing paperwork.

  • Kevin
    13 July 2011 - 3:49 pm

    You’re suggesting Bill should bone up on Lean Accounting? You may want to look at the speaker list for the last several Lean Accounting Summits! http://www.leanaccountingsummit.com