Performance management: Why keeping score is so important, and so hard

Raffaele Carpi, John Douglas, and Frédéric Gascon

The elements of a good performance-management system are simple, but integrating them into a business’s fundamental operating system is more difficult than it seems.

Raffaele Carpi is a partner Effective performance management is Yet in too many companies, the in McKinsey’s Lisbon essential to businesses. Through both performance-management system is slow, office, John Douglas is an alumnus of the Houston formal and informal processes, it helps wobbly, or downright broken. At best, office, and Frédéric Gascon, them align their employees, resources, and these organizations aren’t operating as based in Montreal, is a senior vice president of systems to meet their strategic objectives. It efficiently or effectively as they could. At McKinsey Recovery and works as a dashboard too, providing an early worst, changes in technologies, markets, or Transformation Services. warning of potential problems and allowing competitive environments can leave them managers to know when they must make unable to respond. adjustments to keep a business on track. Strong performance management Organizations that get performance rests on the simple principle that management right become formidable “what gets measured gets done.” In an competitive machines. Much of GE’s ideal system, a business creates a cascade successful transformation under former of metrics and targets, from its top-level CEO Jack Welch, for instance, was strategic objectives down to the daily attributed to his ability to get the company’s activities of its frontline employees. 250,000 or so employees “pulling in the Managers continually monitor those same direction”—and pulling to the best metrics and regularly engage with of their individual abilities. As Henry Ford their teams to discuss progress in said, “Coming together is a beginning; meeting the targets. Good performance keeping together is progress; working is rewarded; underperformance triggers together is success.” action to address the problem.

108 The great re-make: Manufacturing for modern times Employees have to believe their targets encourage meaningful achievement.

Where do things go wrong? Poor targets

In the real world, the details of performance- Selecting the right targets is both science and art. If management systems are difficult to get right. they are too easy, they won’t improve performance. Let’s look at a few common pitfalls. If they are out of reach, staff won’t even try to hit them. The best targets are attainable, but with a Poor metrics healthy element of stretch required.

The metrics that a company chooses must actually To set such targets, companies must often promote the performance it wants. Usually, it can overcome cultural barriers. In some Asian achieve this only by incorporating several of them organizations, for example, missing targets is into a balanced scorecard. Problems arise when considered deeply embarrassing, so managers that doesn’t happen. Some manufacturing plants, tend to set them too low. In the United States, by for example, still set overall production targets contrast, setting a target lower than one achieved for each shift individually. Since each shift’s in a previous period is often deemed unacceptable, incentives are based only on its own performance, even if there are valid reasons for the change. not on the performance of all shifts for the entire day, workers have every incentive to decide Lack of transparency whether they can complete a full “unit” of work during their shift. Employees have to believe their targets encourage meaningful achievement. Frequently, however, If they think they can, they start and the link between individual effort and company complete a unit. But if they don’t, they may objectives is obscure or gets diluted as metrics slow down or stop altogether toward the end and targets cascade through the organization. of the shift because otherwise all of the credit Different levels of management, in an attempt for finishing their uncompleted work would to boost their own standing or ensure against go to the following shift. Each shift therefore underperformance elsewhere, may insert buffers starts with little or no work in process, which into targets. Metrics at one level may have no cuts both productivity and output. A better logical link to those further up the cascade. approach would combine targets for individual teams with the plant’s overall output, so In the best performance-management systems, the workers benefit from doing what they can to entire organization operates from a single, verified support the next shift as well as their own. version of the truth, and all employees understand

Modern practices 109 both the organization’s overall performance and Lack of relevance how they contributed to it. At the end of every shift at one company in the automotive sector, all employees The right set of metrics for any part of a business pass the daily production board, where they can see depends on a host of factors, including the size their department’s results and the impact on the and location of an organization, the scope of plant’s performance. The company has linked the its activities, the growth characteristics of its top-line financial metrics that shareholders and sector, and whether it is a start-up or mature. To the board of directors care about to the production accommodate those differences, companies must metrics that matter on the ground. Frontline think both top-down and bottom-up. One option is employees can see the “thread” that connects their the hoshin-kanri (or policy-deployment) approach: daily performance with the performance of their all employees determine the metrics and targets plant or business unit (Exhibit 1). for their own parts of the organization. Employees who set their own goals tend to have a greater sense A senior leader at another manufacturer aligns the of ownership for and commitment to achieving whole organization around a shared vision through them than do those whose goals are simply quarterly town-hall meetings for more than 5,000 imposed from above. staff. Managers not only share the company’s financial performance and plant-specific results Lack of dialogue but also introduce new employees, celebrate work anniversaries, and recognize successful teams. Performance management doesn’t work Most important, if targets are missed, the senior without frequent, honest, open, and effective leader acts as a role model by taking responsibility. communication. Metrics aren’t a passive measure

Exhibit 1. Leaders adapt and cascade performance indicators to all staff levels.

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110 The great re-make: Manufacturing for modern times of progress but an active part of an organization’s they appear on the shop floor only when a major everyday management. Daily shift huddles, new capital improvement is to be inspected. toolbox talks, after-action reviews, and the like all help to engage team members and to maintain Management interactions with frontline personnel a focus on doing what matters most. Applying are an extremely powerful performance- the “plan–do–check–act” feedback loop, based management tool. They send a message that on pioneering research from Charles Shewhart employees are respected as experts in their part and W. Edwards Deming, helps teams learn of the business, give managers an opportunity to from their mistakes and identify good ideas that act as role models, and can be a quick way to solve can be applied elsewhere. And in many high- problems and identify improvements. performing companies, supervisors act as coaches and mentors. One-on-one sessions for employees One company’s machinery shop, for example, demonstrate concern and reinforce good habits at had developed such a reputation for sloppiness every stage of career development. and missed deadlines that managers suggested outsourcing much of its work. When a senior Lack of consequences manager was persuaded to visit the workshop, he was appalled at the dirty, cluttered, and poorly Performance must have consequences. While the maintained environment. Employees reported majority of employees will never face the relentless chronic underfunding for replacement parts and “win or leave” pressure typical of professional tools, and asked the manager what it would take to sports, weak accountability tells people that just save their jobs. He told them to “clean up the shop showing up is acceptable. and give me a list of what needs to be fixed.” Both sides lived up to their commitments, and in less Rewarding good performance is probably even more than a year the shop became a reference case for important than penalizing bad performance. Most efficiency within the company. companies have various kinds of formal and informal recognition-and-reward systems, but few do enough Building a strong performance- of this kind of morale building, either in volume or management system frequency. In venues from lunchroom celebrations to town-hall announcements, employee-of-the- The best companies build performance- month and team-achievement awards are invaluable management systems that actively help them to encourage behavior that improves performance avoid these pitfalls. Such systems share a number and keeps it high. One COO at an industrial- of characteristics. goods company keeps a standing agenda item in the monthly business review for recognizing the Metrics: Emphasizing leading indicators performance of individuals and teams. Employees on the list may find a gift waiting at home to thank them Too often, companies measure and manage (and their families) for a job well done. performance through lagging indicators, such as compliance with monthly output or quality Lack of management engagement targets. By the time the results are known, it is too late to influence the consequences. The The words of Toyota honorary chairman Fujio best companies track the same metrics—but Cho—“Go and see, ask why, show respect”—are now also integrate their performance-management famous as basic lean-production principles. Yet systems into critical process inputs. Industrial in many companies, senior managers rarely visit Internet technologies, such as the SCADA1 plants except during periodic business reviews, and architecture and distributed-control systems,

1 Supervisory control and data acquisition.

Modern practices 111 let manufacturing staff know within minutes (or Sustainability: Standard work and a seconds) about variations in performance, even in regular heartbeat remote parts of a plant. That lets people react long before the variation undercuts output or quality. Regardless of changes to metrics and targets, the best companies keep the cadence of meetings Some changes require almost no investment and reviews constant, so they become an in technology. At the end of each workday, for intrinsic part of the rhythm of everyday example, production and functional teams can operations (Exhibit 2). complete a checkout form assessing how it went. A combination of quantitative and qualitative The emphasis on regular, standardized processes metrics and simple graphics (such as traffic goes beyond explicit performance-management lights and smiley faces) provides an easy, highly activities and extends deep into every aspect of a effective tool for identifying and correcting issues company’s operating models. Standard work, for or problems before the next day’s work begins. example, is based on three simple rules. First, there should be a standard for all activities. Second, As performance-management systems evolve, everyone must have the knowledge and ability to the metrics they use will become more complex, meet that standard. Finally, compliance with it incorporating continuous rather than discrete must be monitored and measured. variables: “everyone showed up on time today” will become “the team achieved 93 percent on the In many functions, the business cycle forces a schedule-performance index using 90 percent of regular rhythm or cadence: the weekly payroll, the labor-performance index.” The extra detail the monthly accounting close, or the quarterly better informs decisions such as whether to add inventory review. Good companies take advantage more labor to meet a delivery date or to push out a of these requirements to define a few central schedule for delivery. metrics, such as cycle times and accuracy, thus

Exhibit 2. A regular performance-review cadence allows issues to be identified and resolved in an appropriate time frame.

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112 The great re-make: Manufacturing for modern times driving continuous improvement across One global resources company now requires every function. managers to demonstrate that they spend 50 percent of their time on a combination of As part of a lean-manufacturing excellence coaching their people and attending safety program, one industrial-commodities company briefings, shift huddles, improvement reviews, encourages employees to indicate “what went and production meetings. To free up time, other well today, what didn’t go well today, what meetings are scheduled only on one day a week— management can do to help” on their production- and conference rooms no longer have chairs. area boards every day. Supervisors collect the information on index cards and post them on a Taking this approach even further, every autumn lean-idea board. Representatives of each function a field-services organization commits itself meet with the plant manager every morning to a comprehensive, enterprise-wide calendar and accept or reject the cards or return them for for the entire following year. The calendar sets more information. Every accepted card gets an dates for all conferences, monthly and quarterly owner and timeline for completion. Company management meetings, formal performance leaders estimate that the boards generate at reviews, and succession-plan meetings, as well least $2 million a year in cost savings or higher as training and development opportunities. All output—but the impact on employee morale and agendas are fixed, and all meetings are subject engagement is “priceless.” to strict time limits. There is little need for additional leeway because internal reporting A checklist or standard operating procedure follows tight guidelines for transparency and that defines the steps and sequences for every timeliness: financial results are published key process usually enforces standard work. In internally every month, while data on the employee onboarding, for example, one company performance of teams and units in meeting noted that small details—assigning email annual incentive-plan goals are updated and addresses, telephone numbers, and software and published monthly on bulletin boards. hardware access—were especially important for retaining employees early in their tenures.   A checklist is now at the front of each new hire’s personnel file, with a copy in the supervisor’s file. Most industrial companies have access to rich The performance reviews of supervisors now data on the performance of their operations. assess how well they handled the onboarding The technological advances associated with of new employees, and everyone who resigns increasing use of automation, advanced analytics, completes a mandatory exit interview. and connected devices mean that this resource constantly improves. But how can organizations Continuous improvement: Standard work best use their data? A crucial part of the answer is for leaders too is instant feedback loops, daily performance dialogues, and routine performance reviews. Standard work is essential at all levels of Maintaining the willingness and ability to an organization, including the C-suite and hardwire these performance-management senior management in general. Standard processes into the rhythm of daily work work for leaders forces a routine that, isn’t sexy—but over the long run, it’s the while uncomfortable at first, develops most effective route to real, sustainable expectations throughout an organization. performance improvements. It is those expectations, along with specific metrics, that ultimately drive predictable, sustainable performance. Copyright © 2017 McKinsey & Company. All rights reserved.

Modern practices 113