An effective performance management system is built like a house: it should have a foundation, supportive pillars and a basic roof. There can easily be upgrades to the roof, as well, though they are not requirements of having solid shelter. In this article we will explore the foundation.
The foundation of an effective performance management program is alignment of metrics to corporate strategy. Each year the company likely goes through a cycle of planning for the coming year or years. The company will determine its strategic direction and set targets; then, it will set budgets around those targets for the coming year. Most companies stop the planning process right about here.
This is where most performance management systems are weakest. Companies often do not extend the planning cycle to include alignment of divisional and departmental metrics to strategy. This alignment of direction and purpose is the means by which a company achieves strategic goals. If each division and department are not aligned with that stated direction, reaching the strategic objective becomes a matter of luck and brute force; it is no longer a matter of intention. There is an excellent expression: plan the work and work the plan. If there is a disconnect between the plan and those expected to execute toward that plan, how could we reasonably expect that the plan will be realized?
How will a department or division know which measures to track in order to be sure it is doing its part to contribute to strategic success? Many companies miss this mark: according to a study by the Cranfield School of Business, 90% of managers fail to implement and deliver their organization’s strategy. The corporate wizards may create an excellent strategy, but they may not communicate that strategy down through the organization.
There is a famous exchange in the Lewis Carroll children’s story, “Alice’s Adventures in Wonderland”, that is often quoted in regard to the company’s ability to set direction and the risk of failure to do so:
“Would you please tell me which way I ought to go from here?” asked Alice.
“That depends a good deal on where you want to get to.”
“I really don’t know,” replied Alice.
“Then it doesn’t matter which way you go,” said the cat.
If strategic direction and goals are not communicated throughout the company, how is it possible that an employee on the shipping dock floor will know whether it is better to have a delayed shipment or to spend the additional funds on an expedite when an order has not been completed on time? The employee cannot know whether the company has a strategy of cost savings or customer satisfaction unless the employee is told that this is the strategy.
Moreover, strategy is not static. Strategy is fluid. It responds to the competitive environment and, when done well, evolves as strategic goals are achieved. Consequently, communicating strategy and strategic goals to employees is not a one-time initiative. As in Figure 2, the goals have to be communicated into the organization, and a method to instill, institutionalize, as well as refresh the goals as the organization evolves.
Communicating strategy to employees is part of the annual planning cycle of the company and should include not a one-way flow of information from the top down. Rather, communicating strategy throughout the company should be a dynamic, multi-directional process that asks and answers several questions:
- Given the company’s strategic goals, how can each division and department contribute?
- Which specific measures will track that performance
- How can we measure strategic success across departments and divisions?
- Do we have the right measures to provide an early warning system?
- Does everyone in the company understand that performance measurement is a tool for business improvement, not blame?
- How are we measuring our suppliers, on whom our strategy is often dependent?
In the upcoming articles in this series, we’ll explore each of these questions more closely as each coincides with one of the pillars of our performance management ‘house’. At the end of the planning process, the company should be able to articulate concretely the objectives and targets of each division and each department and how those targets align with the company’s strategy. Conceptually, the table above is the framework that would articulate these goals and targets and the accountability for each.