By Mckinsey & Company ,click here to read the full article.

The elements of a good performance-management system are simple, but integrating them into a business’s fundamental operating system is more difficult than it seems.

Effective organizational performance management is essential to businesses. Through both formal and informal processes, it helps them align their employees, resources, and systems to meet their strategic objectives. It works as a dashboard too, providing an early warning of potential problems and allowing managers to know when they must make adjustments to keep a business on track.

Organizations that get performance management right become formidable competitive machines. Much of GE’s successful transformation under former CEO Jack Welch, for instance, was attributed to his ability to get the company’s 250,000 or so employees “pulling in the same direction”—and pulling to the best of their individual abilities. As Henry Ford said, “Coming together is a beginning; keeping together is progress; working together is success.”

Strong performance management rests on the simple principle that “what gets measured gets done.” In an ideal system, a business creates a cascade of metrics and targets, from its top-level strategic objectives down to the daily activities of its frontline employees. Managers continually monitor those metrics and regularly engage with their teams to discuss progress in meeting the targets. Good performance is rewarded; underperformance triggers action to address the problem.

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What do things go wrong?

In the real world, the details of organizational performance management systems are difficult to get right. Let’s look at a few common pitfalls.

1. Poor metrics

The metrics that a company chooses must actually promote the performance it wants. Usually, it can achieve this only by incorporating several of them into a balanced scorecard. Problems arise when that doesn’t happen. Some manufacturing plants, for example, still set overall production targets for each shift individually. Since each shift’s incentives are based only on its own performance, not on the performance of all shifts for the entire day, workers have every incentive to decide whether they can complete a full “unit” of work during their shift.

2. Poor targets

Selecting the right targets is both science and art. If they are too easy, they won’t improve performance. If they are out of reach, staff won’t even try to hit them. The best targets are attainable, but with a healthy element of stretch required

3. Lack of transparency

Employees have to believe their targets encourage meaningful achievement. Frequently, however, the link between individual effort and company objectives is obscure or gets diluted as metrics and targets cascade through the organization. Different levels of management, in an attempt to boost their own standing or ensure against underperformance elsewhere, may insert buffers into targets. Metrics at one level may have no logical link to those further up the cascade.

4. Lack of relevance

The right set of metrics for any part of a business depends on a host of factors, including the size and location of an organization, the scope of its activities, the growth characteristics of its sector, and whether it is a start-up or mature. To accommodate those differences, companies must think both top-down and bottom-up. One option is the hoshin-kanri (or policy-deployment) approach: all employees determine the metrics and targets for their own parts of the organization. Employees who set their own goals tend to have a greater sense of ownership for and commitment to achieving them than do those whose goals are simply imposed from above.

5. Lack of consequences

Performance must have consequences. While the majority of employees will never face the relentless “win or leave” pressure typical of professional sports, weak accountability tells people that just showing up is acceptable.

Building a strong performance-management system

The best companies build performance-management systems that actively help them avoid these pitfalls. Such systems share a number of characteristics.

1. Metrics: Emphasizing leading indicators

Too often, companies measure and manage performance through lagging indicators, such as compliance with monthly output or quality targets. By the time the results are known, it is too late to influence the consequences. The best companies track the same metrics—but also integrate their performance-management systems into critical process inputs.

2. Sustainability: Standard work and a regular heartbeat

Regardless of changes to metrics and targets, the best companies keep the cadence of meetings and reviews constant, so they become an intrinsic part of the rhythm of everyday operations.

3. Continuous improvement: Standard work is for leaders too

Standard work is essential at all levels of an organization, including the C-suite and senior management in general. Standard work for leaders forces a routine that, while uncomfortable at first, develops expectations throughout an organization. It is those expectations, along with specific metrics, that ultimately drive predictable, sustainable performance.

Most industrial companies have access to rich data on the performance of their operations. The technological advances associated with increasing use of automation, advanced analytics, and connected devices mean that this resource constantly improves. But how can organizations best use their data? A crucial part of the answer is instant feedback loops, daily performance dialogues, and routine performance reviews. Maintaining the willingness and ability to hardwire these performance-management processes into the rhythm of daily work isn’t sexy—but over the long run, it’s the most effective route to real, sustainable performance improvements.

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Organizational performance management: Why keeping score is so important, and so hard插图2

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