Performance Management: Why Keeping Score Is So Important, and So Hard

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. 3HUIRUPDQFH /HYHO LQGLFDWRU $FWLRQ &(2 ƒ (%,7'$ ³2XUNH\YDOXHGULYHULVSURGXFWLRQ´ *HQHUDO ³:HPXVWLGHQWLI\ERWWOHQHFNVDQG ƒ $QQXDOSURGXFWLRQ PDQDJHU UHFXUULQJHTXLSPHQWSUREOHPV´ 2SHUDWLRQV ƒ 'DLO\SURGXFWLRQ ³&RPSUHVVRUWULSLVDPDMRUUHFXUULQJSUREOHP PDQDJHU ƒ &RPSUHVVRU2(( :HQHHGWRUHVROYHURRWFDXVHV´ 7DUJHWVPXVW EHWDLORUHGWR HDFKOHYHOWR ƒ 6KLIWSURGXFWLRQ ³5RRWFDXVHLGHQWLILHG:HQHHGWRWUDLQRSHUDWRUV EHPHDQLQJIXO 6XSHUYLVRU ƒ 6WDIIWUDLQLQJ WRIROORZFOHDQLQJSURFHGXUHV´ 2SHUDWRU ƒ 623 DGKHUHQFH ³2.ZHZLOOIROORZWKHVHSURFHGXUHV´ (YHU\RQHXQGHUVWDQGVDQGGRHVVRPHWKLQJ (DUQLQJVEHIRUHLQWHUHVWWD[HVGHSUHFLDWLRQDQGDPRUWL]DWLRQ 2YHUDOOHTXLSPHQWHIIHFWLYHQHVV 6WDQGDUGRSHUDWLQJSURFHGXUH 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

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