PERFORMANCE MANAGEMENT:GOAL SETTING AND METRICS

PERFORMANCE SUCCESS: GOAL SETTING AND METRICS

Let’s first look at a few fundamental flaws in how many organizations approach performance. As stressed by Smith (1999), ‘‘Performance begins with focusing on outcomes instead of activities.’’ Yet most people in most organizations do the reverse. With the exception of financial results, most goals are activity based instead of outcome based. Such goals read like ‘‘develop plans to reduce errors’’ or ‘‘research what customers want.’’ These are activities, not outcomes. They do not let the people involved know when they have succeeded, or even how their efforts matter to their own success and that of their organizations.

Performance Fundamentals and Obstacles

A variety of obstacles and bad habits explain this misplaced emphasis on activities instead of out- comes. At their root lie the old assumptions, financial-focus, internal orientation, and silo organization models we reviewed above. These obstacles and bad habits include:

Natural Human Anxieties

Most people get nervous about the specificity with which their personal success or failure will be measured. We like some flexibility to say we did the right things and that any lack of desired outcome is due to extenuating circumstances. A common tactic is to declare any outcome outside our complete control as unachievable. The problem with this is that for most people in an organization this leaves a narrow set of activities. The further you are from the front line to the customer, the more tempting and common this tactic becomes.

Difficulty Expressing Nonfinancial Outcomes

It is not easy to state nonfinancial goals in an outcome-based fashion. Yet so many performance challenges are first and best measured in nonfinancial ways. It is hard work and personally risky to move beyond the goal of completing the activities and expose your performance to a measure of how effective that activity is where it counts, in the eyes of customers, employees, and strategic partners. The basic anxiety and aversion to setting real outcomes as goals will always be around, particularly when new and different challenges confront us. A key to success is to control the anxiety rather than letting it control you.

Flawed Assumptions

In many instances, people falsely assume performance outcome-based goals exist when they don’t. People in organizations, especially the ones who have achieved a degree of success, often claim they already know what the critical outcomes are and how to articulate them, when in reality they don’t. Or people will elude the responsibility to state outcomes by claiming the outcomes themselves are implied in the activities or plans afoot. Or they will refer to the boss, expecting he or she has it all under control. All of these excuses are mere ruses to avoid the responsibility to specifically and expressly articulate the outcomes by which any effort can be monitored for success.

The Legacy of Financial Management

The financial scorecard has dominated performance business measurement in the modern corporation. As reviewed in the Section 1, the financial-only approach to performance management fails to account for performance outcomes that matter to customers, employees, and strategic partners. It produces organizational cultures that are short-term focused and have difficulty breaking out of the silo ap- proach to work. Why? Because functional organizations are uniquely suited to cost accounting. With the introduction of activity-based accounting by Cooper and Kaplan, organizations were given the chance to move toward a process view of work and still keep their numbers straight. That can help, but it is not enough. Until organizations seriously set and achieve outcome-based goals that are both financial and nonfinancial and link to one another, those organizations will continue to manage performance suboptimally.

The Intrusive Complexity of the Megaproject or Megaprogram

Also standing in the way of outcome-based performance management is the grand illusion of a complete solution to a firm’s information systems. The promise of information technology systems that provide organizations with an integrated approach to transaction management and performance reporting has been a major preoccupation of management teams ever since computers, and personal computers in particular, have become both accessible and affordable (most recently in the form of enterprise resource planning [ERP] systems).

SAP, Oracle, and PeopleSoft are a few of the more popular ERP software providers who have experienced phenomenal success in the 1990s. While the drive to implement new systems was ac- celerated by the now-infamous Y2K problem, the promise of integrated and flexible information flow throughout an organization had great appeal. These systems were also very much a part of the broader ‘‘transformation’’ programs that many organizations were pursuing at the same time. Many compre- hensive transformation frameworks and methodologies that have emerged over the past decade were

built on the success that business process reengineering had in the early 1990s. These programs redesigned the people, process and technology of an organization to bring about the performance promise of transformation. Reengineering programs require at least two years to complete and are delivered through massive teams following very detailed methodology scripts. Completing the activ- ities alone is often exhausting and risky. But their promised paybacks are huge, ranging from industry leadership to a chance to survive (and hopefully thrive once again).

Because of the long timeframes associated with the effort and with being able to see the reward, the value received from the effort is difficult to measure. There is a time lag between the team’s implementation activities and the outcome. This is true of many things strategic. Consulting teams (and executive sponsors) are often onto their next assignments long before outcomes can be realized as they were defined in the business case.

A focus on performance outcomes for strategic initiatives most often gets lost or mired in the operational systems that are used in most companies. These systems are designed to support the tactics of an organization, which are very often bounded by the time cycles inherent in the formal budgeting and planning systems. All of these realities overwhelm the manager trying to create per- formance change. The bigger and more complex the organization, the more complicated the improve- ment of formal performance-management systems.

Many of the large consulting firms (certainly the ones showing annual growth rates in the 30– 35% range during the past decade) play to the formal side of organization performance, bringing frameworks and methodologies that require large consulting teams that provide comprehensive so- lutions to performance management. At the same time, many corporate executives and managers are in need of ‘‘having it all integrated’’ for the promise of accelerated decision making and improved information flow.

Each of these goals has merit and the results can provide large payback. The problem is that in far too many situations, the payoff does not come because of the sheer complexity of the solutions. Much of the implementation cost and business case payback for these endeavors deals with taking activities out of the process. With the advent of the Internet, completely new business models are being pursued for connecting products or services with customers. The sheer size and cost of these approaches require a focus on the formal systems.

So to the list of obstacles to making performance measurable we add this significant pressure to focus on large, complex projects. As consulting firms and their clients have gained experience with ‘‘transformation’’ over the past decade, they have added more emphasis on the informal systems and the people aspect of change. However, their business models still require large teams that will continue to have a bias toward changing the formal systems rather than working at the informal.

Overcoming the Obstacles: Making Performance Measurable

So what can you do to overcome this formidable list of obstacles? Getting focused on performance outcomes rather than activities is the place to begin. But it is not enough on its own. You will need more to sustain your focus. There are three additional aspects to performance management:

1. Picking relevant and specific metrics

2. Using the ‘‘four yardsticks’’

3. Articulating SMART goals

Let’s take a brief look at the most important aspects behind each of these attributes.

Picking Relevant and Specific Metrics

Sometimes metrics are obvious; other times, the best measures seem elusive. Revenues, profits, and market share are universally recognized as effective metrics of competitive superiority and financial performance. But no universally recognized measures have emerged for such challenges as customer satisfaction, quality, partnering with others, being the preferred provider, innovation, and being the best place to work. Management teams must learn to avoid getting stuck because of the absence of an already accepted standard of measure. They must be willing to work together to pick measures that make sense for their particular challenges.

A good set of measures will have a proper blend of qualitative and quantitative metrics. Consider a company’s aspirations to build partnering relationships with key suppliers or customers. Certain threshold goals for the amount of business conducted with each potential partner can provide quan- titative and objective performance outcomes. However, it is easy to imagine an outcome where these measures are met but a true partnering relationship is not achieved. Partnership implies a variety of subjective and qualitative characteristics such as trust, consulting each other on critical matters, sharing knowledge, and relying on each other for difficult challenges. Using metrics around these important outcomes will require special candor and honesty from both partners to track behaviors, learn from results, and motivate improvement for both parties in the relationship. Using these types of subjective measures is acceptable and may in fact provide superior results. But you must understand the difficulties associated with such use and overcome them.

Here are several additional pieces of guidance about selecting measures that, while obvious, are often sources of frustration.

• Many metrics require extra work and effort. This will be true for almost all measures that do not already exist in an organization. So if the challenge is new, the best measures will most likely also be new.

• If the measure is new, you will not have a baseline. Organizations and managers must be willing to use their gut feeling as to their baseline performance level. Researching ranges of normal or best-in-class measures can give clues. It is not important to be exact, only to have a sufficient measure to allow the group to move.

• Some measurement criteria will demand contributions from people or groups who are not under your control or authority. In fact, most serious challenges in an organization will require all or many departments to contribute. It will take extra work to get all groups or departments aligned with both the goals and the measures.

• Some metrics are leading indicators of success, while others are lagging indicators. Revenues, profits, and market share are common examples of lagging indicators and therefore are routinely overused. Leading indicators must also be developed to get at the drivers behind the financial success.

The key is to work hard enough at it to make good measurement choices and then stick with them long enough to learn from them. Organizations and managers must overcome the anxieties and frustrations that come with outcome-based performance measures and learn how to select and use the best measures. The following section on the four yardsticks can help you become increasingly comfortable in choosing and sticking with the best measures of progress.

Using the Four Yardsticks

All performance challenges are measurable by some combination of the following:

• Speed / time

• Cost

• On-spec / expected quality

• Positive yields

The first two are quantitative and objective and the second two a blend of objective / subjective and quantitative / qualitative. Becoming adept at the use of these yardsticks will take you a long way toward overcoming the anxieties and obstacles inherent in performance outcome-based goals.

Speed / Time Process management is the most common application of this metric. We use it anytime we need to measure how long it takes to complete some activity or process. It is one of the measures that usually requires extra work. Most processes in an organization cross multiple department boundaries, but not neatly. The extra work comes in the need to be specific about begin- ning and ending points. The scope you place on the process end points will depend on your goal and level of ambition behind the process. For example, an order-generation and fulfillment process that is designed to be both the fastest and totally customer-driven will need to go beyond receipt of delivery and include process steps that measure your customers’ use and satisfaction levels. If the process you want to measure is complex, you also must define the specific steps to the process so that you will understand where to concentrate efforts and where your efforts are paying off.

There are six choices you need to make when applying a speed / time metric:

1. What is the process or series of work steps you wish to measure?

2. What step starts the clock?

3. What step stops the clock?

4. What unit of time makes the most sense?

5. What number and frequency of items going through the process must meet your speed re- quirements?

6. What adjustments to roles and resources (e.g., systems) are needed to do the work of mea- surement and achieve the goals?

Some of the more fundamental processes in organizations in addition to order fulfillment include new product / service development and introduction, customer service, integrated supply chain, and the hiring / development / retention of people.

Cost Cost is clearly the most familiar of the four yardsticks. But here too we can point to nuances. Historically, organizations have focused mostly on the unit costs of materials or activities. These units paralleled organization silo structures. This approach to costing still makes sense for certain functionally sensitive performance challenges. On the other hand, many of today’s process- based performance challenges demand the use of activity-based costing instead of unit costing.

On-Spec / Expected Quality Product and service specifications generally derive from production, operational, and service-level standards, legal and regulatory requirements, and customer and competitive demands. Another way of viewing specifications is through a company’s value prop- osition, which includes the functions, features, and attributes invested in a product or service in order to win customer loyalty. Some dimensions of quality are highly engineered and easily defined and measured. Others can become abstract and very hard to measure unless the specifications are stated and well defined.

This is key when using this family of metrics. When customer expectations are unknown or poorly defined, they cannot be intentionally achieved. You cannot set or achieve goals related to aspects of performance that you cannot even define. The approach to quality and continuous im- provement reviewed above therefore, emphasizes the need to let the customer define quality, to consider any deviation from that a defect, and to set specific goals about reducing defects on a continual basis.

Positive Yields This final yardstick category is designed to deal with more abstract or unknown dimensions to customer expectations. It is also a catch-all category whose measures reflect positive and constructive output or yield of organizational effort. Yields are often prone to subjective or qualitative measures, and their purpose is to get at the measurement of newer performance chal- lenges such as alliances or strategic partnering, ‘‘delighting customers’’ or core competencies. While it is hard to reduce these aspirations to specific or quantifiable measurement, the subjective or qual- itative measures in this area can be very effective as long as they can be assessed and tracked with effective candor and honesty. (Note how this brings us back to Kanter’s ‘‘new assumptions’’ and Synectics’ high-performance organization attributes.)

Good performance goals nearly always reflect a combination of two or more of the four yardsticks. Moreover, the first two yardsticks (speed / time and cost) measure the effort or investment put into organizational action, while the second two (on-spec / expected quality and positive yields) measure benefits you get out of that effort or investment. The best goals typically have at least one performance outcome related to effort put in and at least one outcome related to the benefits produced by that effort.

Articulating SMART Performance Goals

People setting outcome-based goals can benefit from using the SMART acronym as a checklist of items that characterize goals that are specific, relevant, aggressive yet achievable, relevant to the challenge at hand, and time bound. Thus, goals are SMART when they are:

• Specific: Answers questions such as ‘‘at what?’’ ‘‘for whom?’’ and ‘‘by how much?’’

• Measurable: Learning requires feedback, which requires measurement. Metrics might be objec- tive or subjective, as long as they are assessable.

• Aggressive (yet Achievable): Each ‘‘A’’ is significant. Aggressiveness suggests stretch, which provides inspiration. Achievable allows for a more sustained pursuit because most people will not stay the course for long if goals are not credible. Setting goals that are both aggressive and achievable allows people and organizations to gain all the advantages of stretch goals without creating illusions about what is possible.

• Relevant: Goals must relate to the performance challenge at hand. This includes a focus on leading indicators, which are harder to define and riskier to achieve than the more commonly relied-on lagging indicators around financial performance (i.e. revenue, profits).

• Time bound: The final specific measure relates to time and answering the question ‘‘by when?’’ You cannot define success without knowing when time is up.