In-Depth
Survey Explores Performance Management in Practice
A new survey examines how over 200 organizations use performance management to improve revenue performance, forecast-to-plan ratio, and customer satisfaction.
by David White and Max Gladstone
Making breakfast one morning, a groggy man removes a frying pan of scrambled eggs from the stove, pours himself a cup of coffee, and leans back -- accidentally resting his hand against the stove's red-hot coil.
Pain shoots through his forearm. Burnt skin blisters, and he recoils from the stovetop, only to realize that he's already several feet away.
The body does not always ask the brain's opinion before responding to a threat. A man who touches a hot stove and pulls his hand back does not "think" before he does so: the nerves in his hand, arm, and spine recognize the danger of such overwhelming heat and react before their cry of help reaches the brain. Once the immediate threat is resolved, the brain makes top-level decisions that the nerves of the arm and hand cannot, and directs the body to cool the wound, care for the blistered skin, and apply a loose bandage.
A well-managed enterprise behaves in a similar fashion. Moment-to-moment operational decisions do not always rise to the level of senior management; if they did, small disasters would metastasize into calamities while personnel waited for directions. However, information about events in one corner of the enterprise must be available to the entire organization. Otherwise, operational decisions may not receive the proper follow-up: a burned hand will not be cared for, leading to nerve damage and disability.
Performance management software can serve as a spinal column that connects high-level planning to moment-to-moment operations. Technology alone is not enough, however: the entire organization must be structured to use this technology if information is to reach the right people fast enough to let them make the right decisions.
The Aberdeen Group surveyed 207 organizations to determine how they used performance management to improve revenue performance, forecast-to-plan ratio, and customer satisfaction. The top 20 percent of survey respondents based on these metrics (the "Best-in-Class" of the study) improved revenue performance by 38 percent year-over-year and achieved a 92 percent customer satisfaction rate. Meanwhile, the Laggards (the bottom 30percent of respondents to the survey) saw their revenues drop by 15 percent while only achieving a customer satisfaction rate of 74 percent. The Best-in-Class also reported a forecast-to-plan ratio of 87 percent; Industry Average respondents (the middle 50 percent of Aberdeen's respondent pool) reported a 65 percent ratio. Tellingly, Laggards did not measure forecast-to-plan at all.
When asked about the external pressures that drove them to invest in performance management, the Best-in-Class indicated that their top pressure was the need to improve the timeliness and accuracy of operational decisions -- they needed to make better decisions, faster. The Best-in-Class understand the importance of getting their hand off the stove before they suffer permanent damage!
Aberdeen's research reveals that the Best-in-Class organizations are more likely than other organizations to approach performance management by first identifying the information they need to run their business, and then making sure that information is regularly monitored (Figure 1).
Many organizations understand the high-level performance metrics that are important to their operations, but such metrics tend to change slowly over time. "Operational" performance metrics, by contrast, are short-term indicators of performance that may change dramatically from moment to moment and are critical for guiding tactical business operations. Three-quarters (75 percent) of Best-in-Class companies continually review such operational performance metrics to ensure they remain relevant in a shifting economy, and are almost twice as likely as Laggards to make the measurement of, and management to, such metrics a part of their daily operations.
Selecting key metrics is only half of the challenge: a manager must also encourage their employees to improve performance based on those metrics. One powerful way to encourage personnel to consider performance metrics in their work is to tie personal or team-based incentives to specific KPIs. A student whose grades depend on her or his ability to answer a certain type of word problem, for example, will study that word problem extensively; a worker who knows that their bonus depends on regularly measured performance statistics will work to improve those statistics. Best-in-Class organizations are significantly more likely than their competitors to tie role-based incentives to performance data in order to improve the performance of the organization (Figure 2).
However, managers should keep in mind that once particular performance goals are associated with role-based incentives, employees will work to achieve those goals, sometimes at the expense of other business priorities. Workers given a bonus for spending a certain amount of time on the phone with clients, for example, will find a way to spend more time on the phone, whether or not this leads to closing more business. Operational KPIs must be chosen carefully, and should be subject to change if they are no longer helpful due either to changes in the business or to employees gaming the system.
The Best-in-Class also understand that performance management will only take root and flourish in organizations which incorporate performance data into their culture. Personnel appreciate knowing the truth about their department and their business; hard numbers can serve as a challenge for struggling employees to overcome and as laurels for top-performing groups. As a result, Best-in-Class organizations are 76 percent more likely than Laggards to drive their performance management culture with regular official communication (Figure 3).
How do these principles apply to our hapless chef? The skin and the nerves beneath it constantly measure a set of KPIs including temperature, pressure, and damage of surrounding tissue. When these metrics change dramatically, local nerves command the body to respond (by pulling back from the stove, in our chef's case), then pass information about the danger up the "chain of command" to the spinal column, from which it is distributed throughout the body. The endocrine system responds by producing endorphins to dull the pain, the memory permanently connects that searing pain with stovetops to prevent similar mistakes in the future, and higher cognitive functions act to care for the wound.
The body operates in this manner constantly: an empty stomach gives rise to feelings of hunger which affect the entire body, ultimately driving the brain to seek out food. Nor is this behavior solely subconscious. Any goal adjusts the "performance metrics" of the whole body: a sprinter in preparation for a race focuses her mind, and as a result her body readies itself for a physical competition -- increasing heart rate and decreasing her sensitivity to pain.
Organizations looking to make the most out of their performance management initiative should behave in the same manner, First, rank the organization's priorities and determine how to collect performance data that supports those priorities. Weave that performance data throughout all business decisions, big and small. Regularly review the organization's priorities in case they have changed because of an evolving market, a technological breakthrough, or a shift in human capital. Finally, communicate the importance of performance management to all team members. Individual human beings are not as mechanistic as a nerve cell: they must understand the reasons behind their actions in order to perform at the best of their ability.
With a combination of sensible technology deployment and good management, your organization can keep its hand off the stove.
Editor's Note: The full results of the survey are available until October 1, 2010. Access is free; a short registration step is required.
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David White is senior research analyst for business intelligence, and Max Gladstone is research associate at The Aberdeen Group.