PERFORMANCE MANAGEMENT:THE CHANGE IMPERATIVE

THE CHANGE IMPERATIVE

After summarizing the fundamental forces of change that so often determine the nature of today’s performance challenges, this section reviews a series of key concepts and ideas useful in managing performance itself. These include:

• The balanced scorecard: a change in what performance means and how its is measured

• New mental assumptions for managing performance and change

• Disciplines of learning and performing organizations

• Work as process and competition as time based

• Characteristics of high performance organizations

• The trend toward impermanent organizations and alliances

Forces of Change

If you are young enough, the world of change is all you have. For others, managing performance is very different today than in years past. Regardless of your age and experience, you should have a picture of the fundamental forces at work that shape and determine the challenges ahead of yourselves and your organizations. One of our favorite frameworks comes from John Kotter, a professor at Harvard Business School. Figure 1 shows Professor Kotter’s summary of the economic and social forces driving the need for major change.

These forces are fundamental because they will not be going away any time soon and many market responses to them are irreversible. Globalization and internet technologies are but two ex- amples of changes with permanent and lasting impact.

New market and competitive pressures represent both danger and opportunity. Organizations eve- rywhere are attempting to capitalize on the opportunities and to mitigate their risks from the dangers. The economic headline stories we read about and listen to every day are all in some way responses or reactions (or the lack thereof) to the fundamental forces.

Frameworks like Kotter’s help and encourage readers to look at the external environment for the drivers of change. They give clues as to what is important, how organizations might adapt and lead and, if probed, possible clues about what’s around the corner. Naturally, organizations must continue to look at themselves as well. But far too many organizations under perform as a result of only looking inward for both the causes and solutions to better performance. The ability to understand change and adapt to it more quickly than others is among the most important dimensions of managing performance for organizations to master as we enter the 21st century.

A Changing View of Performance Itself: The Balanced Scorecard

The forces of change have altered what performance itself means. Gone are the days when financial results were all that mattered. In today’s world, organizations must deliver a combination of financial and nonfinancial performance outcomes. Readers who do not understand the new scorecard of per- formance will fall into the three main traps of a financial-only approach to performance management:

1. Unsustainability: Achieving sustained organizational performance demands outcomes and results that benefit all of the constituencies that matter. Shareholders provide opportunities and rewards to people of the enterprise to deliver value to customers, who generate returns to shareholders, who in turn provide opportunities to the people of the organization, and so on. If you substitute citizens or beneficiaries for customers of the enterprise, you can apply this concept to profit and not-for-profit organizations. Focusing solely on financial measures will create shortfalls in customer service, employee satisfaction, or product / process quality. The wise executive looks at financial measures as lagging measures and seeks other more direct measures of contributing performance to serve as leading measures.

2. Demotivation: Executives at the top are motivated by performance measures because they also receive big paydays from achieving them. But today’s competitive environment requires tre- mendous energy and contribution from people throughout the organization. For most people in the organization, financial measures are a too-distant indicator of success or failure, to which many have contributed. Concentrating solely on the financial dimension of measurement is not motivating. It can go further toward being demotivating if people suspect that leaders are concentrating on financial measures out of self-interest.

3. Confusion: People need to see how and why their contributions make a difference. Financial goals alone will not reach or connect with very many individuals or groups. These people can become confused and resort to activity-based goals to fill their void.

This new scorecard was first popularized by Kaplan and Norton (1995). All organizations have multiple constituencies such as shareholders, customers, employees, and strategic partners. Each of these constituencies has performance needs and concerns that must be met if the organization hopes to survive and thrive. Kaplan and Norton’s scorecard emphasizes the need to convert an organization’s strategy into a series of linked performance metrics and outcomes across a 4D logic that suggests that a firm’s financial results directly arise from results that matter to customers, which in turn arise from results of internal processes, which in turn arise from results that matter to the people of the organization in terms of learning and growth.

Smith (1999) fundamentally improved on Kaplan and Norton’s thinking by suggesting that the balanced scorecard can be both more balanced and more integrated by replacing the linear logic of people-to-process-to-customer-to-shareholder with a reinforcing, integrated logic wherein results for each constituency both leads and lags results for others. Accordingly, managing performance in a sustainable way looks more like Figure 2, which depicts a philosophy for never-ending success.

When viewed in this way, financial and nonfinancial goals all reinforce and link to one another. Moreover, the goals support a narrative or story of success that will not fall victim to unsustainability, demotivation, and confusion.

New Mental Assumptions for Mastering Performance and Change Managing both financial and nonfinancial performance in a world of change demands that readers know how to manage change. Having said that, the first and foremost principle of managing change (see Smith 1996) is to keep performance the primary objective of managing change, not change. Far too many people and organizations do the opposite. If readers are to avoid this trap, they must work hard to connect real and sustainable performance achievements to the changes underway in their organizations.

With clear and compelling performance objectives in mind, readers must avoid a variety of world- views that do not respond to the challenges at hand in today’s fast moving world. Kanter (1983) foresaw many of the new and different ways for people and organizations to picture and respond to change. She called for a ‘‘necessary shift from segmentalist to integrative assumptions.’’ Today, we might paraphrase her thoughts as shifting from ‘‘stovepipe’’ to ‘‘horizontal’’ views of work and organization (see Smith 1996). Here are what Kanter described as ‘‘old’’ vs. ‘‘new’’ assumptions:

• Old assumption #1: Organizations and their subunits can operate as closed systems, controlling whatever is needed for their operation. They can be understood on their own terms, according to their internal dynamics, without much reference to their environment, location in a larger social structure, or links to other organizations or individuals.

• Old assumption #2: Social entities, whether collective or individual, have relatively free choice, limited only by their own abilities. But since there is also consensus about the means as well as the ends of these entities, there is clarity and singularity of purpose. Thus, organizations can have a clear goal; for the corporation, this is profit maximization.

• Old assumption #3: The individual, taken alone, is the critical unit as well as the ultimate actor. Problems in social life therefore stem from three individual characteristics: failure of will (or inadequate motivation), incompetence (or differences in talent), and greed (or the single-minded pursuit of self interest). There is therefore little need to look beyond these individual charac- teristics, abilities, or motives to understand why the coordinated social activities we call insti- tutional patterns do not always produce the desired social goods.

• Old assumption #4: Differentiation of organizations and their units is not only possible but necessary. Specialization is desirable for both individuals and organizations; neither should be asked to go beyond their primary purposes. The ideal organization is divided into functional specialties clearly bounded from one another, and managers develop by moving up within a functional area.

Here are the new assumptions that Kanter puts forward as alternatives that are more responsive to the external pressures in our changing world:

• New assumption #1: Organizations and their parts are in fact open systems, necessarily de- pending on others to supply much of what is needed for their operations. Their behavior can best be understood in terms of their relationships to their context, their connections—or non- connections—with other organizations or other units.

• New assumption #2: The choices of social entities, whether collective or individual, are con- strained by the decisions of others. Consensus about both means and ends is unlikely; there will be multiple views reflecting the many others trying to shape organizational purposes. Thus, singular and clear goals are impossible; goals are themselves the result of bargaining processes.

• New assumption #3: The individual may still be the ultimate—or really the only—actor, but the actions often stem from the context in which the individual operates. Leadership therefore consists increasingly of the design of settings that provide tools for and stimulate constructive, productive individual actions.

• New assumption #4: Differentiation of activities and their assignment to specialists is important, but coordination is perhaps even more critical a problem, and thus it is important to avoid overspecialization and to find ways to connect specialists and help them to communicate.

The contrast between old and new is sharp. In the old-assumption world, the manager was in control of both the external and the internal. In the new assumption-based world, uncertainty domi- nates and the need to be fluid and lead by influence rather than control has become the norm. An organization cannot become a strong 21st-century performer if it remains dominated by the old assumptions. It will not be able to change to adapt to new market needs, new technologies, or new employee mindsets. The old model is too slow and costly because it produces unnecessary hierarchy and unneeded specialization.

It takes a very different mindset and perspective to thrive in a world dominated by the new assumptions. One cannot be successful at both in the same ways. Success in each requires a different mental model.

Disciplines of the Performing and Learning Organization

A variety of new mental models and disciplines have arisen in response to the shifting assumptions so well described by Kanter. Peter Senge is perhaps best known for triggering the search for new disciplines. He suggests five disciplines that distinguish the learning organization from old-world organizations that do not learn (or perform) (Senge et al. 1992):

• Personal mastery: learning to expand personal capacity to create the results we most desire and creating an organizational environment that encourages all of its members to develop themselves toward the goals and purposes they choose.

• Mental models: reflecting upon, continually clarifying, and improving our internal pictures of the world and seeing how they shape our actions and decisions.

• Shared vision: building a sense of commitment in a group by developing shared images of the future we seek to create and the principles and guiding practices by which we hope to get there.

• Team learning: transforming conversational and collective thinking skills so that groups of people can reliably develop intelligence and ability greater than the sum of individual members’ talents.

• Systems thinking: a way of thinking about, and a language for describing and understanding, the forces and interrelationships that shape the behavior of systems. This discipline helps us see how to change systems more effectively and to act more in tune with the larger processes of the natural and economic world.

Each of these disciplines requires a commitment to practice to improve our views and skills in each area. Critically, readers who seek to master these disciplines must do so with an eye on per- formance itself. Readers and their organizations gain nothing when efforts seek to make people and organizations become learning organizations in the absence of a strong link to performance. Orga- nizations must be both learning and performing organizations.

Work as Process and Competition as Time Based

Innovation, quality, and continuous improvement have emerged as primary challenges for organiza- tions to apply learning and performance disciplines in the face of change. Innovation draws on and responds to the technological drivers so present in today’s world. But innovation also applies to nontechnological challenges. Indeed, for at least the past two decades, competitive success has gone to those who add value to products and services through information, technology, process improve- ment, and customer service. They must continually ask themselves how to do better and how to do it faster. The old-world adage of ‘‘if it ain’t broke, don’t fix it’’ has been replaced by ‘‘if it ain’t broke, fix it!’’

At the heart of this reality is quality and continuous improvement. Quality measures itself from the eyes of the customer and views all work as process. Performance of processes is measured by defects as defined by customers, whether internal or external. Defects themselves have many dimen- sions. But, with the publication of Competing against Time (Stalk and Hout 1990), organizations throughout the world were put on notice that speed was now a reality of success. Whether internal or external, customers want error- and defect-free products and services and they want them fast. Or, we should say, faster. Organizations who master innovation, quality, and continuous improvement never settle for today’s results. They continually seek to improve and do so by setting and meeting goals for reducing defects and errors and increasing speed of processes.

High-Performance Organizations

Many commentators have concluded that organizations cannot succeed in this new world without a fundamentally different set of characteristics. Figure 3 shows contrasting lists of characteristics from a survey of writers, thinkers, and executives.

Synectics, an innovation firm, has captured the above list in a slightly different way. Figure 4 contrasts the spirit of innovation in high-performing vs. low performing organizations.

The Impermanent Organization

Finally, we wish to comment on the trend toward impermanent organizations and alliances. More and more often, organizations respond to performance and change challenges by setting up temporary alliances and networks, both within and beyond the boundaries of the formal organization. It could turn out that this model of the temporary organization and alliance formed to bring a new innovation to market will in fact become the norm. Some have suggested this as one very viable scenario, which Malone and Laubacher (1998) dub the ‘‘e-Lance economy.’’ Malone and Laubacher put forward the idea of many small temporary organizations forming, reforming, and recombining as a way of deliv- ering on customer needs in the future. While they concede that this may be an extreme scenario, it is not an impossible one. Their research is part of an ongoing and significant series of projects at MIT around the 21st-century organization. Another research theme is the continued importance of process management in the future, putting processes alongside products in terms of performance- management importance. One view is certain: 20 years from now, very different business models than the ones we know today will have become the norm.