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relied only on financial controls would soon find their organizations in trouble. You
can help us come up with plenty of examples here, but let’s simply look at the
relationship between customer satisfaction and a retail store’s sales. A dissatisfied
customer is hard to get back (and may have been dissatisfied enough to leave the

store before even making that first purchase)!
While interest in nonfinancial controls is exploding, it seems somewhat
disappointing that they aren’t living up to the job. Why do so many companies appear
to misunderstand how to set and use nonfinancial controls effectively? Let’s take a
look at four additional top mistakes Ittner and Larcker identified in their research.
Not Linked to Strategy
This mistake appears to be a common one but its root cause—failure to adapt
the control system to the specific strategy of the organization—is not obvious.
Growth in interest in nonfinancial controls has led to widespread adoption of such
systems as the Balanced Scorecard, Performance Prism, or the Intellectual Capital
Navigator. However, because these systems are complex, managers tend to put them
in place without tailoring them to the specific needs and characteristics of their
organization.
Several things can go wrong when nonfinancial controls are not linked to the
strategy. First, control systems tend to be tied to reward systems, and if managers and
employees are being paid based on the achievement of certain nonstrategic,
nonfinancial outcomes, then the firm’s strategy and, hence, performance, could
suffer. Second, if the controls are not linked to the strategy, or the linkages are
unclear, then managers do not really understand which nonfinancial controls are the
most important. This leads us to the second common mistake.
Failing to Validate the Links
There are two big challenges that organizations face when trying to use
nonfinancial controls. First, nonfinancial controls are indirectly related to financial
performance; the relationship is like a sequence of nonfinancial outcomes that
cascade down to financial performance. For instance, (1) good employee recruiting
leads to (2) satisfied employees, which leads to (3) an employee base that creates
value, which leads to (4) satisfied customers, which leads to (5) profitable customer
buying patterns, which lead to (6) good profitability. Yikes! You can see how these
six nonfinancial outcomes might lead to good financial performance, but you can also
imagine that it might be challenging to identify and manage the inputs to each step.
The second challenge is, once you’ve taken the step of identifying these
linkages, to show that the linkages actually exist. However, while more companies
are putting such models into place, few are collecting the information to test and
validate the actual relationships in their organization. In fact, Ittner and Larcker found
that less than a quarter of the firms that they surveyed actually did any formal
validation of the nonfinancial model they had developed.
You can imagine the possible problems that might be created with such an
unvalidated system. For one, the organization might be investing in all these steps,
without any evidence of their effectiveness. Worse, some of the steps might actually
lead to lower performance—unfortunately, without validation, managers just don’t
know. For example, an organization might believe that better technology in a product

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