CEB studies show that while 80% of midsized companies (firms with revenues of up to $750 million) focus on new strategies to increase growth, many companies could hit their growth objectives by simply making the most of their current strategies.
Our research also shows that that few companies are able to do so, on average wasting 30% of performance potential.
CEB found that, in underperforming companies, performance management systems are disjointed and disconnected, detached from corporate goals, and often encourage conflicting behaviors. All of which will cause a significant drag on performance.
To overcome this, finance and HR managers must take an unwieldy mix of targets, activities, money, people, and resources, and create a cohesive system that gets everyone working together in pursuit of the right objectives (in the right way) to implement strategy.
Doing so starts with understanding what business performance management actually is and how to use it, and then how to link that process to the HR performance management process.
Five Performance Management Failures
From our work with midsized firms around the world, we found five common reasons why performance management systems break down, and uncovered interesting, often simpler, solutions.
You don’t know what it is: As basic as this sounds, in our study of over 100 midsized companies, CEB found that performance management is an umbrella term for a broad set of analytical and management tasks designed to help leaders understand and guide firm performance.
In fact, no two companies thought about performance management exactly the same way, so it’s no surprise that performance management tasks were disconnected and often encouraged conflicting behaviors.
Solution – First, define it: While virtually all companies surveyed engaged in performance management tasks, the connectedness and ultimate effect on performance varied wildly. Most often, we found that key process activities succeed only at communicating outcomes, stopping well short of influencing them or reinforcing each other.
To realize the full value of their growth strategies, midsized companies must identify where these tasks are managed and view them as business performance management tools whose purpose isn’t to measure, but to align employee behavior with organizational objectives.
You don’t prioritize objectives: Unsuccessful companies chase far too many goals and trust a “cascade process” to ensure the entire organization is contributing to the same goals (the corporate equivalent of the telephone game). This will leave workforces unaligned, disengaged, and inefficient.
As the late Steve Jobs noted, “That’s been one of my mantras—focus and simplicity. Simple can be harder than complex. You have to work hard to get your thinking clean to make it simple. But it’s worth it in the end because once you get there, you can move mountains.”
Solution – (Um) Prioritize… ruthlessly: Simplify and focus performance management to a few vital goals. Good performance management begins with focus. Successful companies improve performance by being ruthlessly clear about the key causes of success, focusing employees’ efforts, and creating the momentum to achieve a few clear, transparent goals.
It’s too complex and insufficiently connected to your strategy: Many companies go irrevocably off track by setting targets that only tangentially align to long-term goals, fail to track completion of needed tasks, and ultimately fail to incent the right behaviors.
Solution – Focus on behaviors and milestones, not just high level metrics: The best companies put in place tracking mechanisms that test how aligned metrics are to future goals, track task completion as well as metric success, measure the effect of that success, and reward those employees who encourage the right outcomes in the right way.
It’s not human: Performance management systems must adapt to reward networked performance, encourage a new set of competencies, and enable collaboration across the enterprise. Only 23% of HR executives believe their performance management processes accurately reflect employee contributions.
Solution – Align business performance management to HR performance management: Performance management systems have to adapt to reward networked performance, drive an enhanced set of competencies, and enable collaboration across the enterprise. To achieve high performance, the best managers establish a climate of trust, create incentives for joint MBOs, and reward those who encourage organizational value over personal achievement.
It doesn’t create a climate that allows employees to adapt: Managers at unsuccessful companies are too overwhelmed with data, and too focused on financial results and fixing past variances, to see changes in their operating environment.
Even if managers do see needed changes, they rarely have the organizational decision-making ability needed to adjust and reallocate midstream. And by focusing on data over insight, they inadvertently obscure the ability to sense changes in the environment.
CEB analysis found that 95% of midsized company data isn’t useful, which means the vast majority of reported data is obfuscating, not clarifying.
Solution – Create an adaptable review system: Successful firms set escalation and divestment triggers ahead of time; reduce their metrics to the highly relevant; ensure their reviews look at changes to the operating environment before metrics; and regularly report on human capital, market, and operational factors, as well as financial factors.