I argue that organizations have been doing performance management for decades - well before it received its recent popular references in the media. Organizations have been doing performance management arguably even before there were computers! So why is it emerging as a popular buzz phrase now?
The Debut of Performance Management at the Enterprise Level
If you had done a Google search a few years ago on the term "performance management," the results would have predominantly referred to the human resources and personnel departments' attention to monitoring and improving individual employees. Do that Google search today, however, and the shift is toward the performance of the organization or enterprise in its entirety.
Some would argue that this shift where performance management regularly appears in the media was due to the IT research firms observing that business intelligence software vendors - the type with functionality more toward data mining and analyzing data rather than producing the raw transactional data - were integrating the analytical information across multiple departments. For example, a computer manufacturer's purchasing system detects a temporary vendor part shortage that, in turn, is directly signaled to its customer order entry agents to influence their customers to select alternative product variations, perhaps with a discount or deal as inducement, until the part shortage is resolved. The risk of a missed sales opportunity is eliminated. This "demand shaping" is more powerful than "demand management." This type of communication from the purchasing function deep in the bowels of the production function to a call center agent deep in the sales function would have rarely existed a few years ago.
Others might argue the increasing appearance of performance management at the organizational level arose from the same IT research firms observing those same business intelligence (BI) software vendors providing strong combination suites of at-a-glance visual dashboards and scoreboards. Further, these reporting tools are now linked to strategic planning, managerial accounting and forecasting tools - and they are extremely scalable to handle millions of records for products and customers.
These are certainly factors, but I believe the emergence of performance management in the media and marketplace has deeper root causes.
Even Deeper Root-Cause Forces
I have previously written that a better way to understand what performance management is about is to understand what problems it solves - the immense forces on management - such as these:
- Failure by executives to execute their well-formulated strategy. CEO firings are at record levels due to this frustration.
- Lack of trust among managers to achieve results is an increasing concern. Consequently, there is an escalation in accountability of managers and employee teams for results with consequences.
- Change is constant. Increasing rapid decisions by employees (without time for higher management input) leveraging trade-off and predictive analytics and their need to understand the strategy.
- Mistrust of the managerial accounting system and its flawed and/or incomplete product, channel and customer profitability reporting.
- Poor customer value management. Surveys report customer retention as the CEO's number one concern.1
- Dysfunctional supply chain management with lack of trust among the traditional adversarial relationships between buyers and sellers along the chain who should ideally be collaborating.
- Balancing risk appetite with risk exposure to optimize financial results with anticipatory risk mitigation actions.
- Unfulfilled ROI promises from large transactional systems (e.g., enterprise resource planning or ERP).
The effective performance management technology goes well beyond query and reporting - it addresses and resolves all of these issues. The result is rather than just monitoring the dials of its performance dashboards, organizations move those dials. The purpose of performance management is not just managing but improving performance.
But there is a more deep-seated root cause than the forces just described. It involves a growing gulf related to managers' ability to agree with each other and the uncertainty of future external influences on their organization.
Figure 1 is a modified and simplified framework developed by Ralph D. Stacey, Ph.D., a scholar in organizational management.2 The framework proposes that different managerial approaches are required based on where a problem resides in the two dimensional matrix with the axis "level of managers' agreement" and "degree of uncertainty."
Figure 1: Performance Management Drives Improvement. Source: http://www.plexusinstitute.org/edgeware/archive/think/main_aides3.html
The lower left and upper right zones are easiest to understand:
- Bottom-left zone: (Zone number one) Simple and rational - MBA programs typically focus here. Past data is gathered and used to predict the future spiced with modifiers (often intuition). Managers reach consensus and the expected outcomes are confidently predictable. Actions are selected and monitored with variance analysis from plans used for mid-course control.
- Upper-right zone: (Zone number four) Chaos, anarchy and decision avoidance - Breakdown occurs here because traditional methods of planning, debating, negotiating and committing don't work. Organizations get balkanized and either make strategic mistakes breaking from the past or take no action due to lack of confidence. Innovation and creativity should prevail in this zone, but often comes up short. Some automobile manufacturers are currently trapped in this zone. The combination of high uncertainty and unachievable consensus is radioactive.