OBU RAP Topic 10 – Analyse and evaluate the use of non-financial metrics in the management of the performance of the company

Overview

Financial analysis is important to keep track of all the costs and revenues of the company. But it has its limitations when you want to judge the performance of the company. similarly, companies need to keep a record of non-financial metrics to help capture strengths and weaknesses that impact the overall business performance of the company.

Choosing suitable non-financial metrics to evaluate the performance of the company has always been a challenge. Performance measurement systems play a key role in developing strategies and evaluating the impact of the organizational changes in relation to the performance of the company. Nowadays companies believe that focusing too much on financial measures such as profit, revenue and earnings are not very satisfactory. The drivers of value such as customer and employee satisfaction, innovation and quality should also be looked into.

Non-financial metrics have many advantages to offer over financial ones. They are very closely related to the long-term strategic planning of the company. Financial metrics are usually focused on short-term or annual performance. However, non-financial metrics help the company grow and move in the long term while short-term objectives may be compromised.

The main areas that could be considered are

• Sustainability management
• Environmental performance management

• Risk management

Non-financial or sustainability reporting helps companies to give information on their environmental, social and governance (ESG) activities and their effects on the environment and society. Such information is required by many stakeholders to assess whether companies’ practices are sustainable. This ensures higher transparency which is relevant for investors as there are many benefits to risk, liquidity, cost of equity etc. . sustainability reporting may result in improved environmental or social conditions such as higher working safety and lower greenhouse gas (GHG) emissions.

There has been a growing need to manage risk in the non-financial areas to enhance performance. Many of the largest risk events have occurred from non-financial risks rather than traditional financial risks. The use of non-financial metrics in the management of risk is growing rapidly. Some of the most common non-financial risks are cyber-crime, conduct risk, third party risk and model risk as well. Many metrics can be evaluated to judge non-financial risk management. These can be summarized as Operational Risk (including HR, Culture & Conduct, IT, Data & Cyber, Business Disruption, Fraud, Legal & Compliance, Assets, and Infrastructure) and Strategic Risk.

Students need to develop a great understanding of the NFRs and the metrics that can be used to measure them. A proper and detailed discussion relating to the performance of the company is expected to achieve a passing grade for RAP.

Key features/requirements

Main requirements set forth by OBU are

• Selecting a suitable company that uses a non-financial metric system of evaluation
• Understanding the concept of non-financial metrics and their need in the growing businesses
• Identification of suitable non-financial metrics that can be applied to judge the performance of the company.
• Understanding the importance of sustainability and environmental reporting
• Risk management non-financial metrics should be clearly identified

Key success factors

Following are the main points that need to be considered for a successful RAP submission

• Selecting a suitable company whose performance can be measured
• Identification of the financial and business aspects of the company
• Identification of the Non-financial metrics that can be used
• Assessing the use of non-financial metrics in the management of performance of the business
• Assessing the sustainability by measuring non-financial metrics used by the management
• Assessing the non-financial measures related to environmental reporting and CSR
• Access to the internally generated information
• Permission from the management to use the internally generated information
• In-depth knowledge of all the non-financial measures used to measure the strategic or operational performance of the company
• In-depth knowledge of the management of the performance of the company
• Demonstrating a clear understanding of the industry and its competitive peers
• Adequate application of the selected goals and objectives that were set at the beginning of the RAP in the proper sections of RAP
• The implementation of the correct research methodology to get satisfactory results on all the selected goals and objectives that were put in place at the beginning of the RAP
• Keeping the discussion logical by keeping all the objectives in mind
• Using reliable and appropriate sources for data gathering
• Properly referencing the information gathered according to the Harvard referencing style as told by the OBU.
• Usage of suitable business models to study various aspects of employee behaviour and its reasons
• A comparison to another organisation or the industry sector average if the publicly available information is being used
• Explaining the approach (primary or secondary data collection) that has been used for the RAP

Accounting and Business models

All the non-financial performance indicators can be used to access this topic in a better way. Some of them are

Balanced scorecard: What is the balanced scorecard? A balanced scorecard is a way of analysing financial performance internally so that external results can be improved. It involves the analysis of past performance so that decisions can be made in an informed way in the future. A balanced scorecard has four aspects: Financial, Customer, Internal Process, and Learning and Growth.

The financial perspective tells the organization how it should appear in front of the shareholders. The customer perspective helps the organization achieve its vision by telling how should it appear in front of the customers. The scorecard focuses on customer concerns primarily in four categories: time, quality, performance and service, and cost. The internal process aspect measures the processes internally, core attributes, and technologies that would complete customer needs. Lastly, the innovation and learning aspect asks how the organization would sustain its ability to change and improve to achieve the organization’s vision.

Building block model: Fitzgerald and Moon’s Building Block Model is an evolution of the Balanced Scorecard, developed to meet the needs of service organisations. It is a tool that helps management set a forward-looking performance management framework that links an organisation’s strategy and objectives to employee targets and motivation. What are the 5 building blocks?

Key Building Blocks for Every Change Management Plan

• Measuring Success: Many models can further be used to measure the company’s environmental performance.

• The most popular STANDARD for this is GRI. The GRI Standards make any organization – large or small, private or public –  understand and report on their impacts on the economy, environment and people comparably and credibly, thereby increasing transparency on their contribution to sustainable development. In addition to reporting companies, the Standards are highly relevant to many stakeholders – including investors, policymakers, capital markets, and civil society. ​the GRI reporting is done in five main steps.
• Prepare
• Connect
• Define
• Monitor
• Report

The Risk Management Framework provides a process that integrates security, privacy, and cyber supply chain risk management activities into the system development life cycle. Detailed analysis and evaluation of RMF can also help better tackle topic 10.

Possible limitations faced by the students

The main aim of conducting research is to set up new facts or confirm the outcomes of the previous research. It enables us to gain new knowledge regarding the subject. However, while preparing for OBU thesis research students face many problems.

Some of the key limitations are as follows

General Limitations

• Research method: Students need to have a clear understanding of the research methods. Mainly the research methods are not relevant or reliable as students are not trained in different methodologies. Simply replicating the knowledge available online or from different sources is not wise. There is a lack of basic knowledge regarding the correct methods of research.
• Interaction between the subject company and student: Mainly there isn’t any proper interaction between the subject company and the student. This means that a substantial amount of data going into the thesis goes untapped. The key issues of the company can only be highlighted with the help of internal company management.
• Overlapping information: overlapping information is often obtained as a result of excessive research through different sources. Each source has its own story to tell. Students often get confused regarding the facts and statements
• Limited Time: it is without a doubt that students need to complete their RAP before the deadline hits. Sometimes, the time limit can affect the quality of RAP very negatively. Students need to acknowledge this from the very start and set a schedule to be consistent with their research.
• Data collection process: The different ways of collecting data presents a strong limitation. If a student conducts an interview person to person or if he does it over the phone, both can have different effects on the interview. Hence, this data limitation must be reflected upon

 

Specific Limitations

• Environmental report Comprehension: It may be difficult for students to study the environmental reports as they may not be aware with the format of such reports
• Identification of Non-Financial metrics: Students may not be able to pin point the exact non-financial metric needed to study the specific areas of the company
• Internal Risk management report: It is quite possible that students will not be able to get the risk management report due to confidential reasons

Suitable organisation for topic 10

The most suitable organization is the one that uses non-financial indicators to judge its performance. Selecting a company which is established enough so that its performance and financial position to be studied over some time is necessary. To make a high-quality RAP, it is essential that students choose a company whose operations are easily understood by the student and he can make connections between various topics.

The following factors should be kept in mind while choosing a company for RAP:

• The general interest of the student in the company
• The amount of information available for the company
• Access to reliable secondary sources of information
• Familiarity with the industry sector associated with the company

The non-financial metrics are important and can be used to measure the strengths and weaknesses of a company. Most companies in the customer service and airline sectors can be considered for this topic.

Suggested approach for topic 10

Before starting your research, you should understand the assignment. The guidelines mentioned in the information pack should be read. The word count and length should be looked upon. What kind of sources are required by the topic, primary or secondary? The style of citation ‘Harvard referencing’ should be understood by the students. All the other requirements and directions made by the OBU must be complied with. After choosing this topic, a proper mind map must be made from the start so the student conducts all the required tasks in a proper and timely manner. All the major requirements and aspects of the topic should be considered thoroughly so that a strategy can be devised to meet those requirements. A research methodology and all reliable websites and authentic sources should be noted down. The style of referencing must be kept in mind while researching this topic to pass the OBU RAP.

A suitable comparator organisation must be used if the publicly available information is being used.

In Part 1- (Research objectives and overall research approach), The First part is started by making a table of contents and numbering the pages. The title of the topic must be mentioned on the first page with the ACCA registration number. Then the objectives of RAP are written down. In this topic, the main objective is to study non-financial metrics. you should consider your approach from the start and make it consistent with the objectives. Your company introduction and the justification for its choice are also part of this section. Make sure that all research questions are answered well.

Part 2- (Information gathering/accounting and business techniques) is an essential section as all your understanding of the business and accountancy models is analyzed here. A quality explanation of the used models or any other frameworks and analysis of all their possible limitations must be performed. The most structured way of representing section 2 is by first mentioning the sources of information that were used to acquire the data for research on topic 10. Topic 10 includes the use of non-financial metrics and measures to study management performance. This can be done with the help of both, primary and secondary data.  Students should mention the kind of data used for the research. in this topic, you will require the conversion rates, retention rates of employees, and customer satisfaction index to study the performance. Discussion of the limitations of your information gathering must be included. Students should find references to mention limitations instead of writing from their own opinion. Any ethical issues that arose during information gathering and your solutions regarding the issues. Every part should be backed up by good references. Next, you would list down all the business and accountancy models and their possible limitations. The building block model and risk management framework are the most appropriate for this topic. To find out more about the selection of respective models for topic 5, kindly refer to section ‘Accounting and business models for topic 10’ above.  Word count is to be prioritized which is 1800-2000 words.

In part 3, there is a further evaluation, analysis, and conclusion. It should contain a description of the results obtained and all the limitations. Further research with examples and comparisons between the two companies is done. It is the most critical section, and most students fail in it if they are not in the hands of an experienced mentor. Only a qualified mentor can guide the students critically to secure a passing grade. Evaluation and analysis of topic 10 mean you need to explain all the non-financial metrics being used and how the company is using them to manage its performance. Non-financial measures can be analysed by looking at the employee productivity rate, retention rate, training periods, potential customers, etc. Evaluation means that you will be extracting results from the data researched. Hence this part of RAP provides actual value and meaning to your research and RAP. All findings should be presented in a good form with the help of graphs, pie charts, tables, etc. Conclusions must be made based on your research work. Recommendations to the selected company may be made but it is not very necessary. It is of utmost importance that word count must be kept in mind. If you exceed it in any way, then the examiner will not mark the conclusions resulting in failure.  4500 words must be written to ensure a detailed analysis.

Every student has his perception of the topic, and this is only a broad version of what can be done. Whatever approach is selected; it is important to discuss it with your mentor.

Suggested approach for SLS

The meetings with the mentor must be planned at the start of the RAP and a track of those meetings must be kept in a diary as it will help later on to write the SLS. The time required to conduct effective research needs to be calculated at the start and a timetable should be kept in place. Religiously following the requirements and keeping track of the time is necessary to pass the RAP. All the information gathered should be recorded systemically and needs to be shared with your project mentor so that complete guidance can be given to you. Consultation with the project mentor ensures that a student passes with the highest possible grade. If any issue arises it can be solved by discussing it with your project guide.

Sources of information

Primary sources are those sources that can be collected first-hand. In this topic, students are required to directly collect information regarding the use of non-financial metrics. Primary data can include the parameters used to set the non-financial metrics of the company, Environmental reports, risk management reports, etc.

Secondary sources are those sources that are already available to the students. Under this topic, students can use the annual reports, websites, and articles to check the performance of the company. The reliability of the source must be checked first.