There are many complex branches that constitute the design, development and implementation of a Performance Measurement and Management System. Critics and academics often address specific aspects of this discipline because it is very broad and difficult to grasp in whole. Eccles focused on the revolution from “treating financial figures as the foundation for performance measurement to treating them as among a broader set of measures” (1991). This essay seeks to delve a bit deeper into this paradigm shift and compare the use of financial and non-financial measures to logically deduce whether one is better than the other or best work together with equal status. The success of a chosen system depends on the reliability and validity of information gathered for input. It is therefore important to discuss the selection of data beginning with the traditional financial measures and reasons for this radical change to nonfinancial measures. The conclusion suggests that although more sophisticated nonfinancial measures provide some relevance, its diversity and lack of specificity makes businesses reluctant to reject financial measures. Therefore to maximise benefits, nonfinancial measures supplement financial information to produce quality and quantity.
Traditional Financial Measures
In its most historical beginnings, financial measures provided the foundation for performance measurement. There were not many critics in this era because people were content with existing principles and markets were less sophisticated. The reawakening of learning in the Renaissance was the starting point of an intellectual transformation in the 14th to 17th century followed by the Industrial Revolution in 18th century and Great Depression 1930s were all significant influences (Hendriksen and Breda 1992). People started to formulate standards and regulation to guide the preparation and presentation of financial information. Several characteristics of financial information were identified to ensure people could rely on the results to make wise decisions. Henderson and Herbohn discussed the selection and presentation of financial information as well as constraints which were inserted into a conceptual framework (2008). Financial Performance Measures were developed from these basics. Return on Investment is an important financial indicator for investors to evaluate their profit from investment; and return on equity adopts the perspective of managers who are entrusted with resources to generate profit as a ratio of equity (Simons 2009). There are several more measures such as stock turnover; current ratio, debtors’ turnover, debt/equity ratio just to name a few. Regardless of the many efforts to keep information reliable and relevant, technological advances exposed financial information to manipulation and fraud. Dale Gerboth for example suggested that economic consequences should be taken into account so people should frame financial statements to produce a chosen effect. Solomons argued against this politicization of accounting by saying that Accounting is financial map-making and should be a truthful representation of financial information free from bias and error (Solomons 1978). It was inevitable that a revolution was approaching and there were several reasons put forward to support the departure from solely relying on financial measures and into valuing non-financial measures.
Reasons for Change
There are so many critics who encouraged the change to using nonfinancial performance measures some of which would be briefly discussed. First of all financial information encourages short-termism (Neely 1999). This follows Eccles (1991) who stated that managers are willing to “play the earnings game” so they manipulate financial figures to favour a short-term perspective and make earnings look good today at the expense of company’s “failure to make capital investments or pursue long term strategic...