The elements of a good performance-management system are simple, but integrating them into a business’s fundamental operating system is more difficult than it seems.
Businesses require effective performance management. It assists them in aligning their workers, resources, and systems to accomplish their strategic objectives through both formal and informal approaches.
It also serves as a dashboard, alerting management to possible problems and letting them know when they need to make changes to keep the firm on course.
When it comes to performance management, organizations that get it right become formidable competitive machines.
For example, much of GE’s successful transformation was credited to former CEO Jack Welch’s ability to have the company’s 250,000 or more people “pulling in the same direction”—and pulling to the best of their particular talents.
“Coming together is a beginning; remaining together is progress; working together is a success,” remarked Henry Ford.
Despite this, the performance-management system in far too many businesses is slow, shaky, or simply defective.
These organizations, at best, aren’t as efficient or productive as they could be. Changes in technology, markets, or competitive settings can render them unable to respond in the worst-case scenario.
The simple premise of “what gets measured gets done” underpins effective performance management. A corporation should build a cascade of measures and targets from its top-level strategic objectives down to the everyday operations of its frontline staff in an ideal system.
Managers keep a close eye on such measures and meet with their teams on a regular basis to discuss progress toward attaining the goals. Good performance is rewarded, whereas poor performance prompts corrective action.
Where do things go wrong?
In the real world, the details of performance management systems are difficult to get right. Let’s look at a few common pitfalls.
A company’s chosen measurements must genuinely encourage the desired performance. It can usually only do so by combining many of them into a balanced scorecard. When this does not occur, problems ensue.
Some industrial plants, for example, continue to establish separate overall production targets for each shift. Workers have every incentive to decide whether they can finish a full “unit” of work during their shift because each shift’s incentives are based solely on its own performance, not on the performance of all shifts for the entire day.
They start and finish a unit if they believe they can. If they don’t, they’ll have to slow down or stop altogether at the conclusion of the shift, because else the credit for finishing their unfinished task will be given to the next shift. As a result, each shift begins with little or no work in progress, reducing both productivity and production.
A better approach would be to combine targets for individual teams with the plant’s overall output, so workers benefit from doing what they can to support the next shift as well as their own.
Selecting the right targets is both science and art. If they are too easy, they won’t improve performance. If they are out of reach, staff won’t even try to hit them. The best targets are attainable, but with a healthy element of stretch required.
Companies must frequently overcome cultural hurdles in order to set such goals. Missing targets, for example, is highly embarrassing in certain Asian firms, so managers prefer to set them overly low.
Setting a target lower than one reached at a previous time, on the other hand, is frequently thought inappropriate in the United States, even if there are solid reasons for the shift.
Lack of transparency
Employees must think that their goals will motivate them to attain them. However, as metrics and targets cascade through the organization, the relationship between individual effort and business objectives is sometimes obscured or blurred.
Different levels of management may incorporate buffers into targets in order to improve their own standing or protect themselves from underperformance elsewhere. Metrics at one level may have no logical connection to those higher up in the hierarchy.
The greatest performance-management systems function on a single, verified version of the truth, and all employees are aware of the organization’s overall success as well as their individual contributions.
All employees at one automotive business pass the daily production board at the conclusion of each shift, where they can view their department’s results and the impact on the plant’s performance.
The corporation has linked top-line financial measures that are important to shareholders and the board of directors to production data that are important on the ground. Employees on the front lines can see the “thread” that links their daily performance to that of their factory or business unit (Exhibit 1).
Through quarterly town-hall meetings for more than 5,000 employees, a senior leader at another factory unifies the whole organization around a shared goal.
Managers not only report on the company’s financial performance and plant-specific outcomes, but they also welcome new employees, commemorate work anniversaries, and honor winning teams. Most importantly, if goals are not met, the senior leader sets an example by accepting responsibility.
Lack of relevance
The correct set of metrics for any aspect of a business is determined by a variety of criteria, including the organization’s size and location, the scope of its activities, the growth characteristics of its industry, and whether it is a startup or an established company.
Companies must consider both top-down and bottom-up to handle these disparities. The hoshin-kanri (or policy-deployment) strategy is one option: all employees establish the measurements and targets for their respective portions of the company.
Employees who create their own goals feel more ownership of them and are more committed to reaching them than those who have goals pushed on them from above.
Lack of dialogue
Performance management will fail without frequent, honest, open, and effective communication. Metrics are an active element of an organization’s day-to-day management rather than a passive measure of progress.
Daily shift huddles, toolbox talks, after-action reviews, and other activities serve to keep team members engaged and focused on the most important tasks. The “plan–do–check–act” feedback loop, developed by Charles Shewhart and W. Edwards Deming, aids teams in learning from their failures and identifying good ideas that may be used elsewhere.
Supervisors also serve as coaches and mentors in many high-performing firms. At every step of a career’s development, one-on-one sessions for employees display concern and promote positive behaviors.
Lack of consequences
Performance must have consequences. While the majority of employees will never face the relentless “win or leave” pressure typical of professional sports, weak accountability tells people that just showing up is acceptable.
It’s arguably more vital to reward good performance than to punish bad performance. Most businesses have a variety of formal and informal recognition and reward systems in place, but few do enough of it, either in terms of volume or frequency.
Employee-of-the-month and team-achievement awards are essential in a variety of settings, from lunchroom festivities to town-hall announcements, to encourage conduct that improves and maintains high performance.
One COO at an industrial goods company keeps an agenda item for a monthly business review for recognizing the performance of people and teams on the agenda. Employees on the list may find a gift waiting for them (and their families) at home as a thank you for a job well done.
Lack of management engagement
“Go and observe, ask why to show respect,” said Toyota honorary chairman Fujio Cho, who is now widely recognized as an essential lean-production concept.
Senior executives rarely visit factories except for occasional business reviews, and they only visit the shop floor when a substantial new capital upgrade is to be assessed.
Interactions between management and frontline employees are a highly effective performance management strategy. They provide the message that employees are valued as experts in their field, allow managers to serve as role models, and are a rapid approach to address problems and find improvements.
For example, one company’s machinery shop had earned a reputation for sloppiness and missed deadlines, so managers advised outsourcing much of its work. When a senior manager was convinced to go to the workshop, he was shocked to see how filthy, cluttered, and poorly maintained it was.
Employees reported chronic underfunding for replacement parts and tools and asked the manager what it would take to save their jobs. He told them to “clean up the shop and give me a list of what needs to be fixed.”
Both sides lived up to their commitments, and in less than a year the shop became a reference case for efficiency within the company.
Building a Strong Performance-Management System
The best companies build performance-management systems that actively help them avoid these pitfalls. Such systems share a number of characteristics.
Metrics: Emphasizing Leading Indicators
Companies frequently use lagging indicators to measure and manage performance, such as monthly output or quality targets. It is too late to change the outcomes by the time the results are known.
The top organizations track the same data as their competitors, but they also incorporate their performance-management systems into essential process inputs.
Industrial Internet technologies, such as the SCADA1 architecture and distributed-control systems, alert manufacturing personnel to performance differences in minutes (or seconds), even if they occur in remote portions of a plant. This allows people to react before the variation has a negative impact on output or quality.
Some modifications don’t necessitate much in the way of technological expenditure. Production and functional teams, for example, can complete a checkout form at the end of each workday to assess how things went.
A combination of quantitative and qualitative data, as well as simple images (such as traffic lights and happy faces), creates a simple but powerful tool for finding and addressing problems.
The metrics used by performance-management systems will become more complex as time goes on, incorporating continuous rather than discrete variables: “everyone arrived on time today” will become “the team achieved 93 percent on the schedule-performance index using 90 percent of the labor-performance index.”
The extra information helps with decisions like whether to hire more personnel to meet a delivery deadline or whether to postpone a delivery date.
Sustainability: Standard work and a regular heartbeat
Regardless of changes to metrics and targets, the best companies keep the cadence of meetings and reviews constant, so they become an intrinsic part of the rhythm of everyday operations (Exhibit 2).
Regular, consistent processes are emphasized in all aspects of a company’s operating models, not just explicit performance-management activities. For example, standard work follows three simple rules. For starters, all actions should adhere to a set of guidelines.
Second, everyone must be aware of and capable of meeting that level. Finally, it must be monitored and measured to ensure that it is followed.
The business cycle demands a regular rhythm or cadence in many functions: weekly payroll, monthly accounting closure, and quarterly inventory review, to name a few. Good firms use these constraints to identify a few key measures, such as cycle durations and accuracy, and use them to drive continual improvement across all departments.
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Standard work is frequently enforced by a checklist or standard operating procedure that sets the procedures and sequences for each major process.
Small details, such as assigning email accounts, phone numbers, and software and hardware access, were especially critical for retaining staff early in their tenures, according to one organization. Each new hire’s personnel file now includes a checklist, with a copy in the supervisor’s file.
Supervisors’ performance appraisals now include an assessment of how successfully they handled onboarding new workers, and everyone who resigns is required to conduct an exit interview.
Continuous improvement: standard work is for leaders too
At all levels of a business, including the C-suite and senior management in general, standard work is required. Standard work for leaders establishes a habit that, while first unsettling, establishes expectations across an organization. Expectations, together with precise criteria, are what ultimately create predictable, long-term results.
Managers at one global resources firm must now demonstrate that they spend 50% of their time educating their employees and attending safety briefings, shift huddles, improvement evaluations, and production meetings. Other meetings are only held once a week to save time, and conference rooms are no longer furnished with chairs.
Taking this a step further, a field-services organization commits to a detailed, enterprise-wide calendar for the full following year every autumn.
All conferences, monthly and quarterly management meetings, formal performance reviews, succession-plan meetings, as well as training and development opportunities, are scheduled on the calendar.
All agendas are set in stone, and all meetings are held under stringent time constraints. Internal reporting follows strict criteria for transparency and timeliness: financial results are disclosed internally every month, and data on the performance of teams and units in fulfilling annual incentive-plan goals are updated and posted on bulletin boards on a monthly basis.
The majority of industrial enterprises have access to extensive data about their operations’ performance. This resource is always improving due to technological advancements such as increased usage of automation, enhanced analytics, and linked devices.
But how can businesses make the most of their data? Instant feedback loops, daily performance discussions, and routine performance reviews are all important components of the solution.
Maintaining the willingness and ability to hardwire these performance-management processes into the rhythm of daily work isn’t sexy, but over the long run, it’s the most effective route to real, sustainable performance improvements.