What is Performance Management?

image You have a business unit.  You need to manage its performance.  Seems simple enough, but what is “performance management” really?

Performance management consists of three principal steps: 1) set expectations/goals, 2) measure performance/outcomes, 3) adjust to improve.

Before and during the industrial age, most performance management was either driven by Key Performance Indicators (KPIs) or through soft (personal) management.  For instance, during the industrial age, a KPI could be “how many times did you punch a hole in a widget?”  Keep track of average performance and, when deviations occur, you know something’s afoot.  However, with rapid evolution in the workplace came evolution in what needs to be managed and how.

Let’s Classify

Performance management divides roughly into three categories: micro, short-cycle, and long-cycle.  The most effective way to manage performance is a hybrid approach containing elements of all three.

Long-Cycle Performance Management – generally manifests through annual performance reviews and is the dominant approach on the market…  unfortunately.  When it is the only performance management process, it can be extremely inefficient, creates politics, leads to a single high-stakes discussion at the end of the year, and is generally universally hated (WSJ: Yes, Everyone Really Does Hate Performance Reviews).  To address the problem, some companies started having semi-annual “check-ins” and some even quarterly reviews.  Having quarterly reviews is better, but not by much and it is four times as time-consuming.  Some added regular one-on-ones, but if you have a team of eight and your one-on-one’s take an hour each, that’s a full day.  To add to the mess, as technology progressed, a lot of vendors, rather than make performance appraisals simpler, took existing paper-and-pen processes, created electronic records management systems for the appraisal process, and overcomplicated them… a bit like I just did with this sentence with a ridiculous number of commas, even if all are grammatically appropriate…  As a result, annual reviews are rarely efficient and, most of the time, are seen as part of unnecessary corporate bureaucracy.

However, it’s not all bad.  Usually, long-cycle performance management is part of a larger suite from providers like SuccessFactors, Workday, and Kenexa offering integration with recruitment, on-boarding, compensation, benefits, etc.  And as a result, quite often, because the performance management module in such systems is exclusively long-cycle, it ends up instead helping with talent development, which can be quite positive…  but that’s not performance management.

Also, some decisions are generally best made in long cycles: bonus payouts, promotions, or seasonal decisions.  So long-cycle performance reviews, while grossly overcomplicated, can be an important element of a company workflow.  They just don’t work very well (if at all)…  they need something…  which brings us to:

Short-cycle Performance Management – as it became cheaper and easier to iterate in the workplace, agile operational methodologies started gaining ground (Wikipedia: Agile).  The approach is simple: iterate quickly, adjust often, keep track of customer needs.  With short-cycle methodologies, we can have short-cycle performance management tools, which focus on weekly or bi-weekly reports.  The idea behind these tools is not to create new workflows, but to optimally overlay the natural rhythm of the company with the goal of being able to keep track and making adjustments on the go.  Not a novel idea in principle, but new to the market.

FairSetup is part of this movement – a short-cycle live-360 appraisal system (FairSetup:We are an Agile Appraisal System) that calculates impact by getting teams to record how everyone meets expectations.  There are other systems out there, but, unlike FairSetup, they take a different approach that doesn’t lead to impact calculation (really an estimate of value creation).

And many are really not short-cycle systems, but are instead:

Micro Performance Management – tools that provide functionality to address immediate needs of a specific function or process on a day-to-day basis.  For example, Wrike, PivotalTracker, BaseCamp are different flavors of project management.

PivotalTracker is designed for agile software development teams.  BaseCamp moves more into project management geared towards specific workflows.  Wrike is a more general-purpose flexible project management system.  And if we start talking about HR-focused systems, there is work.com (formerly Rypple.com, purchased and rebranded by Salesforce in 2012), which seeks to drive social interaction.

However, such systems make it challenging to assess output in a manner that allows for cross-functional analysis and, where enterprise is concerned, often limit themselves to rewards like “Amazon Gift Cards”…  more on why that’s sub-optimal later.

Optimal Performance Management

Evolution is pushing performance management into decentralization: small agile teams of mutually accountable talent and compensation with a strong tie to outcomes.  At the present time, however, most companies already have long-cycle appraisals and switching is a pain.  And while there has been a lot of activity on the market around micro management, short-cycle management hasn’t fully matured yetimage.  At this point, it seems that the optimal approach is to ensure appropriate function-based micro tools, a short-cycle performance management system to keep regular track of progress over time, and long-cycle appraisals that sum up the history over a cycle to make major decisions.

At the end of the day, however, we are moving slowly, but surely, to value-based compensation.  That is, rather than trying to trick employees into feeling good with Amazon or Starbucks Gift Cards, we are moving towards an age when every employee will be an entrepreneur – if they do great work and lead to great outcomes, they will have great compensation.  In other words, talent will have more and more skin in the game, and so will be more engaged in a partner modality, rather than an employee.  We believe that impact calculation is the way to achieve this.

In the meantime, larger companies will gradually move into more agile workflows introducing agile/short-cycle performance management to supplement existing processes.  You know the ball is rolling if Raytheon started moving to agile.

In any case, performance management is a beast: it may look simple, but it requires thought and consideration.  That said, when designed properly, the outcomes are incredibly rewarding.

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