How do you make applying performance management fun? I recently saw how it can be done - in an enjoyable but effective way. And who else would make implementing performance management fun but Southwest Airlines (SWA), the air carrier that built its business on making flying fun. I learned how it is doing that at the recent CFO magazine Corporate Performance Management conference in San Francisco. I was privileged to be one of the conference presenters. My talk was more of the Isaac Newton approach. You know: The world is a big machine, and what executives want is to have the levers, pulleys and dials to drive their organizations to higher value. But the presentation by Laura Wright, senior vice president and chief financial officer of Southwest Airlines, described what I was saying but with a much more human approach.
The Early "Underdog" Days at Southwest Airlines
Wright initially explained the background that led to Southwest's pursuit of its flavor of performance management. From 1970 to the mid-1990s, SWA, the underdog to the major air carriers, operated with a survival instinct. It followed its strong culture of legendary high customer service while remaining a low-cost airline. In the late 1990s, however, its fast growth and geographic expansion beyond airports exclusively located in Texas caused continuous cost creep. Profit margins declined. Worse yet, its growth success was reducing its underdog spirit. Some sort of change was needed. Led by the finance department, it began to automate reporting systems so that relevant information could get to the right people at the right time.
Then 9/11 occurred.
It threw the airline industry into a tumble. People reduced their flying, and unplanned costs related to airport and airline security climbed. Southwest's stock price dropped. Managers believed they were losing control and clarity. They made changes but did not know whether their changes were working. Wright said that at that point, "We could not fix what we could not see."
Financial Recovery Based on the Measures that Matter
So Southwest examined its business to determine the measures that matter - the vital ones that drive shareholder value. It summarized them into four aggregate metrics that only Southwest could humorously call the SWA Magic Numbers. It created a companywide program titled "Knowing the Score" and everywhere constantly posted the actual measures against the targets on scoreboards like in a football stadium.
But would Southwest stop there? How could it make the seriousness of accountability fun? Southwest did it its own way. First, it tied the measures to all the employees' incentive bonus plans. That got employee interest. But to make it fun, the company created a cartoon character, like in "The Incredibles" animated film, for each Magic Number using a sports theme. The characters are:
- "Nick" for net income.
- "Marge" for net income margin.
- "Cass" for the unit cost per available passenger seat mile.
- "Roy" for return on invested capital.
Reinforced with funky newsletters and cascading nonfinancial operational "leading key performance indicators (KPIs)" tailored to each department, all SWA employees can now see with a line of sight how what they each do contributes to the SWA Magic Numbers. Every day by looking at the scoreboard and their own departments' customized KPI reports, every SWA employee can answer the question, "How am I doing on what is important?"
The lesson? A performance management system does not need to be administered with a Darth Vader approach: "Whose air supply should I cut off?" It can be done in a fun way.
Applying KPIs to Drive Change
Organizations are increasingly experimenting with balanced scorecard techniques; however, there is little consensus about what it should look like or how it should be designed. But the application of strategy maps and scorecards is moving from an art form to a craft. The more advanced and experienced scorecard users are becoming increasingly vocal that these key measures must include not only accountability but also consequences.
This means that somehow employee teams' performance on KPIs should be tied to rewards and recognition. Stay tuned. More organizations are experimenting with linking KPIs to employee bonus pay. Performance management is not only about improving an organization's direction and speed to create higher value, but improving traction as well. KPI linkage to employee compensation introduces that traction.