Effective performance management is
essential to businesses. Through both
formal and informal processes, it helps
them align their employees, resources, and
systems to meet their strategic objectives. It
works as a dashboard too, providing an early
warning of potential problems and allowing
managers to know when they must make
adjustments to keep a business on track.
Organizations that get performance
management right become formidable
competitive machines. Much of GE’s
successful transformation under former
CEO Jack Welch, for instance, was
attributed to his ability to get the company’s
250,000 or so employees “pulling in the
same direction”—and pulling to the best
of their individual abilities. As Henry Ford
said, “Coming together is a beginning;
keeping together is progress; working
together is success.”
Yet in too many companies, the
performance-management system is slow,
wobbly, or downright broken. At best,
these organizations aren’t operating as
efficiently or effectively as they could. At
worst, changes in technologies, markets, or
competitive environments can leave them
unable to respond.
Strong performance management
rests on the simple principle that
“what gets measured gets done.” In an
ideal system, a business creates a cascade
of metrics and targets, from its top-level
strategic objectives down to the daily
activities of its frontline employees.
Managers continually monitor those
metrics and regularly engage with
their teams to discuss progress in
meeting the targets. Good performance
is rewarded; underperformance triggers
action to address the problem.
Where do things go wrong?
In the real world, the details of performancemanagement
systems are difficult to get right.
Let’s look at a few common pitfalls.
Poor metrics
The metrics that a company chooses must actually
promote the performance it wants. Usually, it can
achieve this only by incorporating several of them
into a balanced scorecard. Problems arise when
that doesn’t happen. Some manufacturing plants,
for example, still set overall production targets
for each shift individually. Since each shift’s
incentives are based only on its own performance,
not on the performance of all shifts for the entire
day, workers have every incentive to decide
whether they can complete a full “unit” of work
during their shift.
If they think they can, they start and
complete a unit. But if they don’t, they may
slow down or stop altogether toward the end
of the shift because otherwise all of the credit
for finishing their uncompleted work would
go to the following shift. Each shift therefore
starts with little or no work in process, which
cuts both productivity and output. A better
approach would 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.
Poor targets
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.
To set such targets, companies must often
overcome cultural barriers. In some Asian
organizations, for example, missing targets is
considered deeply embarrassing, so managers
tend to set them too low. In the United States, by
contrast, setting a target lower than one achieved
in a previous period is often deemed unacceptable,
even if there are valid reasons for the change.
Lack of transparency
Employees have to believe their targets encourage
meaningful achievement. Frequently, however,
the link between individual effort and company
objectives is obscure or gets diluted as metrics
and targets cascade through the organization.
Different levels of management, in an attempt
to boost their own standing or ensure against
underperformance elsewhere, may insert buffers
into targets. Metrics at one level may have no
logical link to those further up the cascade.
In the best performance-management systems, the
entire organization operates from a single, verified
version of the truth, and all employees understand
both the organization’s overall performance and
how they contributed to it. At the end of every shift at
one company in the automotive sector, all employees
pass the daily production board, where they can see
their department’s results and the impact on the
plant’s performance. The company has linked the
top-line financial metrics that shareholders and
the board of directors care about to the production
metrics that matter on the ground. Frontline
employees can see the “thread” that connects their
daily performance with the performance of their
plant or business unit (Exhibit 1).
Exhibit 1
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A senior leader at another manufacturer aligns the
whole organization around a shared vision through
quarterly town-hall meetings for more than 5,000
staff. Managers not only share the company’s
financial performance and plant-specific results
but also introduce new employees, celebrate work
anniversaries, and recognize successful teams.
Most important, if targets are missed, the senior
leader acts as a role model by taking responsibility.
Lack of relevance
The right set of metrics for any part of a business
depends on a host of factors, including the size
and location of an organization, the scope of
its activities, the growth characteristics of its
sector, and whether it is a start-up or mature. To
accommodate those differences, companies must
think both top-down and bottom-up. One option is
the hoshin-kanri (or policy-deployment) approach:
all employees determine the metrics and targets
for their own parts of the organization. Employees
who set their own goals tend to have a greater sense
of ownership for and commitment to achieving
them than do those whose goals are simply
imposed from above.
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Lack of dialogue
Performance management doesn’t work
without frequent, honest, open, and effective
communication. Metrics aren’t a passive measure
of progress but an active part of an organization’s
everyday management. Daily shift huddles,
toolbox talks, after-action reviews, and the like
all help to engage team members and to maintain
a focus on doing what matters most. Applying
the “plan–do–check–act” feedback loop, based
on pioneering research from Charles Shewhart
and W. Edwards Deming, helps teams learn
from their mistakes and identify good ideas that
can be applied elsewhere. And in many high-performing
companies, supervisors act as coaches
and mentors. One-on-one sessions for employees
demonstrate concern and reinforce good habits at
every stage of career development.
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.
Rewarding good performance is probably even more
important than penalizing bad performance. Most
companies have various kinds of formal and informal
recognition-and-reward systems, but few do enough
of this kind of morale building, either in volume or
frequency. In venues from lunchroom celebrations
to town-hall announcements, employee-of-the-month
and team-achievement awards are invaluable
to encourage behavior that improves performance
and keeps it high. One COO at an industrial-goods
company keeps a standing agenda item in
the monthly business review for recognizing the
performance of individuals and teams. Employees on
the list may find a gift waiting at home to thank them
(and their families) for a job well done.
Lack of management engagement
The words of Toyota honorary chairman Fujio
Cho—“Go and see, ask why, show respect”—are now
famous as basic lean-production principles. Yet
in many companies, senior managers rarely visit
plants except during periodic business reviews, and
they appear on the shop floor only when a major
new capital improvement is to be inspected.
Management interactions with frontline personnel
are an extremely powerful performance-management
tool. They send a message that
employees are respected as experts in their part
of the business, give managers an opportunity to
act as role models, and can be a quick way to solve
problems and identify improvements.
One company’s machinery shop, for example,
had developed such a reputation for sloppiness
and missed deadlines that managers suggested
outsourcing much of its work. When a senior
manager was persuaded to visit the workshop, he
was appalled at the dirty, cluttered, and poorly
maintained environment. 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
Too often, companies measure and manage
performance through lagging indicators, such
as compliance with monthly output or quality
targets. By the time the results are known, it
is too late to influence the consequences. The
best companies track the same metrics—but
also integrate their performance-management
systems into critical process inputs. Industrial
Internet technologies, such as the SCADA
architecture and distributed-control systems,
let manufacturing staff know within minutes (or
seconds) about variations in performance, even in
remote parts of a plant. That lets people react long
before the variation undercuts output or quality.
Some changes require almost no investment
in technology. At the end of each workday, for
example, production and functional teams can
complete a checkout form assessing how it went.
A combination of quantitative and qualitative
metrics and simple graphics (such as traffic
lights and smiley faces) provides an easy, highly
effective tool for identifying and correcting issues
or problems before the next day’s work begins.
As performance-management systems evolve,
the metrics they use will become more complex,
incorporating continuous rather than discrete
variables: “everyone showed up 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 detail
better informs decisions such as whether to add
more labor to meet a delivery date or to push out a
schedule for delivery.
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).
Exhibit 2
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The emphasis on regular, standardized processes
goes beyond explicit performance-management
activities and extends deep into every aspect of a
company’s operating models. Standard work, for
example, is based on three simple rules. First, there
should be a standard for all activities. Second,
everyone must have the knowledge and ability to
meet that standard. Finally, compliance with it
must be monitored and measured.
In many functions, the business cycle forces a
regular rhythm or cadence: the weekly payroll,
the monthly accounting close, or the quarterly
inventory review. Good companies take advantage
of these requirements to define a few central
metrics, such as cycle times and accuracy, thus
driving continuous improvement across
every function.
As part of a lean-manufacturing excellence
program, one industrial-commodities company
encourages employees to indicate “what went
well today, what didn’t go well today, what
management can do to help” on their productionarea
boards every day. Supervisors collect the
information on index cards and post them on a
lean-idea board. Representatives of each function
meet with the plant manager every morning
and accept or reject the cards or return them for
more information. Every accepted card gets an
owner and timeline for completion. Company
leaders estimate that the boards generate at
least $2 million a year in cost savings or higher
output—but the impact on employee morale and
engagement is “priceless.”
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A checklist or standard operating procedure
that defines the steps and sequences for every
key process usually enforces standard work. In
employee onboarding, for example, one company
noted that small details—assigning email
addresses, telephone numbers, and software and
hardware access—were especially important
for retaining employees early in their tenures.
A checklist is now at the front of each new hire’s
personnel file, with a copy in the supervisor’s file.
The performance reviews of supervisors now
assess how well they handled the onboarding
of new employees, and everyone who resigns
completes a mandatory exit interview.
Continuous improvement: Standard work
is for leaders too
Standard work is essential at all levels of
an organization, including the C-suite and
senior management in general. Standard
work for leaders forces a routine that,
while uncomfortable at first, develops
expectations throughout an organization.
It is those expectations, along with specific
metrics, that ultimately drive predictable,
sustainable performance.
One global resources company now requires
managers to demonstrate that they spend
50 percent of their time on a combination of
coaching their people and attending safety
briefings, shift huddles, improvement reviews,
and production meetings. To free up time, other
meetings are scheduled only on one day a week—
and conference rooms no longer have chairs.
Taking this approach even further, every autumn
a field-services organization commits itself
to a comprehensive, enterprise-wide calendar
for the entire following year. The calendar sets
dates for all conferences, monthly and quarterly
management meetings, formal performance
reviews, and succession-plan meetings, as well
as training and development opportunities. All
agendas are fixed, and all meetings are subject
to strict time limits. There is little need for
additional leeway because internal reporting
follows tight guidelines for transparency and
timeliness: financial results are published
internally every month, while data on the
performance of teams and units in meeting
annual incentive-plan goals are updated and
published monthly on bulletin boards.
Most industrial companies have access to rich
data on the performance of their operations.
The technological advances associated with
increasing use of automation, advanced analytics,
and connected devices mean that this resource
constantly improves. But how can organizations
best use their data? A crucial part of the answer
is instant feedback loops, daily performance
dialogues, and routine performance reviews.
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.