There is no consensus as to what performance management is. Different IT research firms define it differently. Different consulting firms and software vendors describe it to fit their unique competencies rather than what their customers may require. Because my impression is that most of these organizations view performance management far too narrowly, such as only better budgeting and control, I think it is better to discuss what performance management does rather than have arcane debates about defining what it is.
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.
The Widening Zone Number Three of Complexity, Uncertainty and Change
Neighboring the simple and rational zone number one is zone number two, complicated but not excessively complex. In this zone further to the upper left is where politics and coalition building occurs because there are broad differences about "how to get there" rather than the expected outcome. To the bottom right in zone number two cause-and-effect linkages are not known or reliable, so this is where shared vision and mission of a future state beats preset project planning. The executive teams' ability to inspire employees and continual sense-and-respond to react are key.
My belief as to why there is an accelerating interest in performance management is an expanding gulf of zone number three, the zone of complexity, uncertainty and change. This is the gathering storm location threatening all organizations. It borders near the chaos and anarchy zone. In zone number three's upper left region unsubstantiated agenda building overrides fact-based decision-making. In the lower right region blind muddling by the group overrides visioning, inspiration and good risk management. As markets become more intensely competitive, managers are faced with more and more high-stakes decisions that are increasingly populating zone number three. As a result, success in managing zone number three requires both making the right decision in the first place and then executing on that chosen path.
The collective suite of integrated methodologies that comprise performance management (e.g., strategy mapping, scorecards, customer value management, risk management, etc.) provides solutions for zone number three. Performance management shifts problems and decision-making in zone number three toward the direction of zone number one - making them simpler problems. Here is how:
- A shift in emphasis toward applying analytics of all flavors, including predictive analytics with what-if and economic trade-off scenarios, bolsters proactive decision-making.
- Gathering all information onto an enterprise-wide and common information platform with scalable real-time information replaces disparate and disconnected data sources.
- Cross-functional communication and collaboration amongst employees and automated rule-based decisions replace self-serving silo and bunker mentality.
- The work processes, priorities, initiatives and target-setting of managers and employee teams are aligned with the strategic intent of the executive team. These replace pet projects, minimal (or nonexistent) accountability, and internally competing performance metrics that are suboptimal and degrade maximizing stakeholder needs - such as for shareholders or customers.
- Economic measures of customer profitability and potential customer value are made visible to support differentiated service levels, offers or deals to achieve maximum profit yield from the sales and marketing budget.
- The vital few measures that matter (KPIs) are focused on rather than the trivial many (PIs) to distinguish the signal from the noise.
- Exception reporting, alert messaging, and at-a-glance visual reporting improves traction and accelerates speed in the strategic direction set (and constantly and necessarily reset) by the executive team.
Organizations need top-down guidance with bottom-up execution. Truly effective performance management, not simply the narrow financial view of better budgeting and control, shifts decisions that are currently waffling in zone number three into zones two and one - and away from the dreaded zone number four of chaos and anarchy. Zone number three of complexity is expanding due to the forces described earlier, and effective performance management brings rationale thinking to convert once perceived complicated problems (i.e., zone number two) into simple ones (zone number two).
Understanding what performance management does is more important than trying to define what it is.
- Gartner. "Bank CEOs Rate Business & Technology Concerns." 2004. www.gartner.com.
- Stacey, Ralph D. Complexity and Creativity in Organizations. San Francisco, CA: Berrett-Koehler Publishers, Inc., 1996.