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, though they are not requirements of having solid shelter.

Each year the company goes through a cycle of planning for the coming year or years.  The company determines its strategic direction and sets targets; then it sets budgets around those targets for the coming year.  Most companies stop the planning process right about here.   

The company with an effective performance management system will instead drive its strategic objectives right through the organization down to the shop floor.  A solid performance management system will provide the company with a framework in which to insure that strategic targets are part of an intentional plan for continuous improvement in each department.

Measures

The foundation of an effective performance management program is alignment of metrics to corporate strategy.  Each division and department in the company should review the strategic objectives and clearly define its role in achieving them.  There should be measurable links from corporate strategy to division measures, department measures and shop floor measures.

These measures that are used at each level of the company should be process oriented.  There is a fundamental difference between results measures, e.g. number of on-time shipments, and process measures, e.g. fill rate or perfect order index measures.  The company achieves its strategic objectives through execution of core processes which are generally cross-functional.  Since results measures tend to focus only on a single department, they are often too limited in scope to provide a view into how well a process is performing end-to-end.  In order to track whether the processes are performing at the level needed, the measures themselves must be process oriented. 

The measures that a company uses to track progress toward strategic success should also be balanced.  Metrics should be balanced along several axis:  balance across functions, balance across constituencies, and balance across the degree of predictability.  This is to say that corporate scorecards need to reflect cross functional measures, customer and employee measures (possibly other community measures), and both leading and lagging measures.  This last axis is perhaps most important.  Relying too heavily on financial measures (lagging indicators) disarms the company’s ability to predict trouble in a process before the financial impact is realized.

Culture

The last pillar in the company’s performance management system is its culture.  If the company’s culture is imbued with a punitive approach to measurement and root cause analysis, the company will never have an effective performance management system.  It is essential to drive accountability for measurement and root cause analysis to the shop floor, and thereby link strategic objectives throughout the company.  If the employees most closely tied to execution of a process are not measuring the results and identifying root cause and improvements of issues, the company will not realize gains in those areas.  Moreover, if the culture uses measurement to cast blame, the employees who are measuring will likely find ways to ‘game’ the metrics in order to avoid looking ‘bad’.  Instead, cultivating a culture of measurement for the sake of business improvement and not personal punishment will unleash truly powerful continuous improvement.

Once the company has built its foundation and walls, it should consider extending the performance management system out to external partners, vendors, and even customers.  This is often done after the company has a ‘habit’ of performance management and continuous improvement within its own four walls.   Once it begins to extend measurement externally, it can realize exponential gains toward its strategic objectives. 

Until now, we have discussed the elements of a performance management system that are required if the system is to be fully functioning and effective at helping the company to achieve its strategic objectives.  There are, of course, some optional elements, as well.  Specifically, the company can enhance the system with incentive programs, and it can use technology to improve the process of performance management itself.

Incentive

Incentive programs can be developed with either employees or with suppliers.  If done well, the incentive plan can unleash incredible improvements to process performance.  Naturally, if done poorly, incentive programs can not only prevent improvements, but degrade the performance of processes and deliver results that are directly counter to strategic objectives. 

Technology can be a tremendous asset in automating the performance management process and amplifying the information that is gained.  However, as with poorly implemented incentive programs, technology that is over-laid onto a poorly defined and poorly executed performance process will only generate poor results more quickly!

Both incentive programs and technology should be options that are considered only after the company is confident in its performance management system.  The performance management system should demonstrate a history of providing the company with a tool to track progress against strategic objectives, and an early warning system to take corrective action when processes are veering off course.  Once the company has this tradition of measurement and continuous improvement, it will likely avoid the potential pitfalls of incentive programs and technology.

In the coming months, we will present a series of articles exploring in more detail each “building block” of a successful performance management structure.