Managing Performance

Performance management is a system or methodology that aims to enhance organisational and individual performance. It can be particularly useful in helping to ensure people's work contributions and the business goals of the organisation are aligned. Performance management systems can also assist when work is allocated.

A key feature of these systems is that they integrate processes that can become disconnected from each other. For example, job descriptions can become disconnected from goals and objectives in business plans. As a result, people spend their days doing things the business plan does not require. Similarly, performance reviews can lose focus on job requirements. People end up being reviewed on things they don't actually do.

A performance management system should originate with the organisation's strategic goals and business plans.

Job descriptions operationalise these goals and plans, and provide a framework for the contributions people make. Job descriptions also support the recruitment and selection process and can be a component of employment agreements. If necessary, personal work plans can supplement job descriptions - or even replace them.

Measuring performance

There are four critical areas where organisations should measure performance. These are:

• financial performance
• performance for customers
• performance in using internal business processes
• performance in terms of organisational capabilities, learning, and growth.

There are strong relationships between all four areas.

Profitability could mean expanded revenues from existing customers, which could be the result of high levels of customer retention. This, in turn, could be the result of service quality and short cycle times. It could also be due to staff skills and expertise. It is important to identify key performance drivers and a chain of cause-and-effect relationships.

It works like this. To produce these financial results, what do we have to do for our customers? And what internal systems do we have to excel at to produce those results for our customers? In turn, what staff and organisational capabilities do we need so that those systems work well?

There is a clear causal relationship between employee satisfaction, customer satisfaction, customer loyalty, market share, and, eventually, financial performance.

In the financial area, performance measures typically include:

• profitability
• return on capital employed
• cash flow.

In the customer area, measures could include:

• perceived value for money
• speed and accuracy of service
• customer retention
• new customer acquisition
• customer profitability
• customer satisfaction index.

For internal business processes, measures might relate to:

• innovation and service development
• operational excellence
• post-sale service.

In the learning and growth area, the measures could focus on:

• staff capabilities
• information systems capabilities
• staff motivation and morale.

Performance review

The performance review component of the system assesses what people have achieved relative to what their job descriptions say they are supposed to achieve.

Performance review also enables managers to:

• recognise and reward outstanding performance
• identify training needs and prepare individual development plans (which should feed into an annual staff development plan)
• correct poor performance.

This diagram is an example of the linkages between the components of a typical system.

What to measure?

Organisations get the kinds of behaviour they measure and reward. If desirable behaviour is highlighted by what is measured, then this is often seen as positive reinforcement and cements this as the desired behaviour. Coupled with appropriate rewards, this can lead to a productive and harmonious workplace.

Measures also have the potential to encourage the wrong things. They can encourage people to do unneeded bits of work or even counterproductive work. Clearly, measures can have a major impact on organisational performance.

Here is some advice about measuring behaviour.

The selection of measures and related goals is the greatest single determinant of an organisation's effectiveness as a system. One organisation we encountered, for example, which manufactured and distributed paint to independent dealers, was losing money and market share. Its basic work flow was straightforward: sales representatives took orders from paint dealers and then placed the orders with their regional distribution centres. Those centres then supplied the paint to the dealers. The distribution centres replenished their stock by ordering paint from manufacturing.

During a discussion with the new division president, we discovered that:

• sales representatives were measured (and compensated) on the basis of their bookings (orders)
• distribution centres were measured on the basis of 'lines per load', which was the extent to which a truck or boxcar was full before it departed
• manufacturing was measured on the basis of 'yield,' which was the amount of paint produced per production line.

If each of these functions - sales, distribution, and manufacturing - is viewed in isolation (in its own 'silo'), the measures make sense. But let's look at the effect of these measures on the performance of the business.

As a result of the distribution centre's measurement system, product shipping dates were determined by when the truck or car was full rather than by when the customer needed the product. The result was delays in filling orders.

As a result of the manufacturing measurement system, large amounts of a product were produced (so that yield could be optimised) before the lines were switched to another product. Frequently, a distribution centre needed its stock replenished to meet current orders at a time when manufacturing was producing a different product. The result, again, was delays in filling orders.

In this situation, internal efficiency measures overrode customer satisfaction measures. Who suffered from this measurement system? Initially, the customers; ultimately, the company.

All organisations start with an almost overwhelming network of financial measures in place. Add to that measures driven by past problems, the shifting emphases of new managers, and new corporate programmes of quality, cycle time, and customer service. The result is a collection of largely unrelated and unmanageable measures. Often this leads to 'measurement gridlock', where managers are in a state of paralysis because they can't move performance affecting one measure in a positive direction without (seemingly) moving two other measures in a negative direction.

Without measures, we don't get the desired performance. With the wrong measures, we sub optimise organisation performance.