Performance Management’s Value

Yesterday a colleague asked me “Is there any tangible value in deploying a performance management system?” The question took me by surprise because she wasn’t asking if there was any value in automating using a software package but rather whether there was any documented value in performance management itself. I assured her that performance management had lots of value.

In fact, for at least a decade there has been academic research and industry case studies that have shown that organizations with performance management initiatives perform better than their peers who use only traditional financial measurements. One often-quoted research report surveyed 113 companies around the world and compared the performance of their stock prices relative to their closest competitors. The report found that 82% of those with formal performance management systems did as well or better than their competitors while 31% of those without formal systems underperformed.

The value of performance management goes beyond an organization’s stock price. Organizations have reported increased customer satisfaction leading to higher retention rates, improved employee engagement for increased productivity, reduced overhead and administrative costs, and better collaboration yielding more successful and timely projects. Citing these and many other reasons, two thirds of the more than 150 respondees to a Pepperdine University study reported that they had received “significant benefits” from using a performance management system.

In this vein Dr. Veronica Martinez of the Cranfield University School of Management has published an interesting study entitled “What is the Value of Using Performance Management Systems?”  The study includes the top benefits and challenges from a performance management deployment at an anonymous major European electricity supplier. While there were no real surprises in the top eight positive effects, I found the list of challenges interesting and I think it reinforces some of the reasons that my colleague was wondering if performance management is actually valuable. Here are my reactions to the top 5 issues:

1. Time consuming
Organizations often spend more time updating the data stored in their performance management system than making actual decisions based on them. For many, replacing their homegrown system with an off-the-shelf package that includes both manual and automated data entry helps alleviate this burden. However, often the problem is that the organization is using too many measures; focusing on a smaller number of key performance indicators can help. See this Web seminar for some thoughts on how to do this.

2. Demands considerable financial investment
When using manual systems with too many measures, this complaint is essentially the same as “Time consuming” above. For those that have tried to deploy an off-the-shelf package, the costs related to the software and the services required to deploy it can be prohibitive. As I’ve argued elsewhere, the key is to take an incremental approach to performance management. This both reduces costs and increases the likelihood of success.

3. Bureaucratic – too many measures make PMS bureaucratic
I’ve already commented on having too many measures but performance management systems can also seem bureaucratic when they are mandated and used to control people instead of when they are motivational and used to align people.

4. Over-complicated measures – difficult to understand and manage.
This issue is worth an entire blog entry on its own but often stems from an organization’s focus on a measure’s value without also carefully considering and documenting how it’s calculated, the desired target value, how to judge the different between the actual and target, and many other factors.

5. Misleading prioritization – ‘red’ measures can divert attention from most critical measures.
This confusion can result from an organization publishing measures without explicit ties to strategic objectives. Without that context, stakeholders don’t know what priorities are impacted by the red measure. Also, it’s common for an organization to start scoring their measures before everyone understands why they are being measured or even what the important objectives are. Again, without this context, stakeholders can’t set appropriate priorities.

Interestingly, despite these issues, every one of the respondees to the survey said that they would deploy performance management again as the benefits far outweighed the challenges. The system helped them be better managers – and presumably left more time for walking around.