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When Performance Measurement Goes Bad

In the previous post Why Performance Measurement is Key to Organizational Success , I wrote on Why performance measurement is powerful. Measurement done right can transform your organization.

Not only can it show you where you are but can also get you to wherever you want to go. In this article I will look at When Performance Measurement Goes Bad.

Achieving and sustaining success in today’s hyper-competitive environment is the ultimate challenge for any company and business leader.

Everything seems to be moving at the speed of lighting. Unprecedented change, complexity, volatility and risk are all threatening the competitive advantage of the organization.

To survive in this environment, organizations should not just perform excellently but perform excellently consistently. There is very little room for error.

Successful organizations have managed to capitalize on the powerfulness of performance measurement.

They are using performance measurement to manage their strategy, systems, processes and resources more effectively and more consistently and ultimately improve their competitive advantage.

Performance measurement is the lens through which the organization views its strategies, processes and results.

Since business is so dynamic these days, focusing on the wrong measures will result in the organization missing on its critical success factors.

Transformation will only come when people begin to see the organization through a new lens. Because measurement is the lens through which most performance is viewed, if your lens is out of focus or focused on wrong things, then bad things are guaranteed to happen.

It is therefore imperative that organizations do not take their performance measurement systems for granted.

In some organizations, the leaders are aware that certain problems exist within their measurement systems but are doing nothing about it because they are failing to pinpoint the root causes, much less the solutions.

In other cases, a complete lack of understanding of the measurement system itself has led to dysfunctional measurement systems.

Managers of these organizations spend considerable amounts of time and resources trying to fix what they don’t know is broken and then find that the problems are never solved which eventually leads to ignorance and a defective measurement system. You cannot fix something that you don’t understand.

“Measurement dysfunction” occurs when the measurement process itself contributes to wrong behaviour that is contrary to what is in the best interests of the organization.

For example, an accountant performing some sort of cowboy accounting to hit the bottom line target so as to earn a bonus or salesman exploiting a customer to hit sales target also to earn a fat pay cheque.

Although specific numbers might improve, the actual performance that is really important will worsen.

Take for example Lehman Brothers, Enron, WorldCom and Tyco. These companies had some of the most egregious examples of dysfunctional measurement systems in the history of the business.

You might think that these companies are the only fallen giants. Think twice because there are still a dozen companies around the globe who are still manifesting the same practices on a daily basis.

Their measurement systems are self-promoting and self-protecting; used to justify pet projects or to maintain status quo; and measurement used to prove rather than improve.

To avoid falling victim of dysfunctional measurement systems, managers should be able to identify the root causes of dysfunctional performance measurement systems within their organizations.

How you use your measurement system sometimes determines the nature and extent of the problem. There are two major types of measurement, based on how they are used: (1) Informational measurement, and (2) Motivational measurement.

Usually, when measurement is used as a source of information to improve management and the work that is done, it is enormously beneficial.

However, problems begin when measures are tightly linked with rewards or threats of punishment. In this case, the informational value of the measurement system is completely lost.

For example, explicit or implicit statements such as “If you do this or achieve this, you will get this” tend to normally drive inconsistent behaviours and results because of varying rewards/punishments.

Tying rewards to measurement systems, if not done correctly, has the potential to cause more dysfunction. This is because pay is pegged on results that are easy to measure rather than on the right results.

Measuring too much as well as measuring too little can cost the organization in the long run. This is because too often, measurement becomes an end in itself and is disconnected from the larger purposes of the organization.

Measurement is about measuring that which matters only and not everything just for the sake of measuring.

Some organizations are still making the mistakes of making every function, team or area have its own scorecard or measures of success.

This automatically results in the organization having literally hundreds of different sets of measures which become increasingly difficult to monitor and improve.

Also, as a result of today’s Big Data and data mania collection, some companies have become buried in their own “data mines”.

Much of this data collected is never acted upon because the company don’t know what to do with it, and don’t have the right capabilities and resources to analyse it and deliver meaningful insights that can aid decision making.

The implications of this uncontrolled data collection is higher costs of measurement. Organizations should therefore assess the high costs of measurement, both in terms of actual cost and opportunity cost before embarking on a data collection frenzy.

In conclusion, although organizational performance measurement is a powerful force used for creating and delivering value, without a vision for both the positive and negative sides of performance measurement, management might be lulled into a false sense of complacency, thinking that any problems can be taken care of through routine maintenance.

It is therefore a big mistake for them to take their eyes off the measurement system. Doing so would be like going on a very long road trip but without a map to guide you until you reach your final destination.

Thanks for sharing:

Related posts:

  1. 17 Reasons Why Performance Measurement is Critical
  2. Achieve Transformational Performance Measurement
  3. 5 Reasons Why Performance Measurement Fails
  4. Improving Enterprise Performance Measurement
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The Art of Risk Management

This is the title of the article by BCG published a few years ago. The article discusses the principles that should govern the approach to risk management by companies of all shapes and sizes.

The authors make several points with which I agree. Here are some excerpts:

  • Risk management is essential in today’s volatile economy. In a continuously changing economic environment, companies cannot assume a stable risk landscape.
  • Stop thinking of risk management as primarily a regulatory issue. Embed risk management in the mindset of the broader organization.
  • Risk management is a value-creating activity that is an essential part of the strategic conversation inside the company. The goal of that discussion should not be to eliminate or minimize risk but to use it to create a competitive advantage.
  • Risk management starts at the top. The organization needs to demonstrate that it has made risk management a high priority and an integral part of the decision-making process by appointing a dedicated risk leader who reports back frequently to the CEO and the board to discuss the latest trends and any changes in the company’s risk scenarios.
  • Risk cannot be managed from an ivory tower. Risk Management should not exist in isolation from the rest of the organization, with an insufficiently granular understanding of the actual business-specific risks the company faces. To avoid this outcome, integrate risk management into the company’s entire routine management processes, including planning, capital allocation, controlling, and reporting.
    • Understand the scope of the risks the company faces.
    • Plan for how the company will manage those risks.
    • Act to mitigate the risks or take advantage of strategic opportunities.
  • Avoid relying on black boxes. Although sometimes appropriate, over-reliance on complex metrics or models can muddy the risk management process, turning it from a transparent management activity into a frustrating black box. The appropriate level of complexity is company-specific and depends on the industry, business model, availability of data, level of experience, and mandatory legal requirements.
  • Align risk management with a company’s overall business strategy. Companies need to identify all relevant risks – not just those that can be easily quantified. Some of the relevant risks for a company may be those that are qualitative and especially difficult to quantify.
  • Risk management is more than a policy; it is a culture. The objective of a company’s risk-management system should be not only to enforce new policies but also to create a risk-aware culture that addresses risks proactively, not reactively, and manages them to create new sources of competitive advantage.
  • Effective risk management depends on the free flow of information throughout the organization. Unless employees at all levels of the organization are actively involved in the risk management process, it will be difficult to maintain the unrestricted flow of information. This can result in the most important data getting buried in one part of the organization unavailable to other parts of the business.
  • Risk management deals with uncertain futures. As a result, the goal should not be to develop precise metrics or future outcomes but to strive for a general understanding of the probabilities and potential impact of various trends or scenarios on business performance and enable decision-makers to confront the uncertain nature of risk and act accordingly.
  • Risk management is never about finding “the answer.” Rather, it is about continually refining the organization’s assumptions about the future and its understanding of the implications of those assumptions for the company’s business. Assumptions about risk often change quickly, so the relevant parameters, probabilities, impacts, and correlations should be revisited frequently.
  • It is possible to prepare for unknown risks by building an organization that so excels at crisis management that it is resilient even in situations in which it is blindsided by unprecedented challenges. For example, through developing the ability to detect, capture, and exploit information patterns as well as to think outside existing frameworks and risk landscapes.
  • Avoid the downside, but don’t forget the upside. Companies should use risk management also to identify new opportunities and to exploit them systematically. For example, scenario planning should be used to define not only worst-case scenarios but also best-case scenarios. Think in advance about how a company can make the best use of the latest market developments and trends and ultimately make the right decisions.

I enjoyed reading the article and highly recommend it.

Thanks for sharing:

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Leading in Uncertain Times

One of the biggest challenges facing business leaders today is making the right decisions that will ensure their organizations succeed, survive, and remain competitive in an increasingly uncertain and complex environment.

A recent post, The best way to lead in uncertain times may be to throw out the playbook, by Strategy+Business has several good points.

The article is about the COVID-19 pandemic, how global companies navigated through the crisis, and how best to prepare for future disruptions. Here are some key points and my comments.

  • Rather than follow a rigid blueprint, executives must help organizations focus on sensing and responding to unpredictable market conditions.
    • Comment: Senior leaders play a vital role in providing clarity about the organization’s strategic direction, creating alignment on key priorities to ensure the achievement of enterprise objectives, and ensuring the business model is continuously evolving to create and capture value in the face of uncertainty. They must not rest on their laurels and stick to the beliefs and paradigms that got them to where they are today and hope they will carry them through tomorrow. Regulatory changes, new products, competition, markets, technologies, and shifts in customer behavior are upending many outdated assumptions about business success. Thus, the businesses you have today are different from the ones you will need in the future hence the importance of continuously sensing changes in the global economy. Employees and teams often feed off the energy of their leaders and tend to focus their attention where the leader focuses attention. If the leader is comfortable with current business practices and rarely embraces the future or challenges the status quo, then the team is highly likely to follow suit.
  • When it became clear that supply chains and other operations would fracture, organizations began scenario planning to shift production sources, relocate employees, and secure key supplies.
    • Comment: Instead of using scenario planning to anticipate the future and prepare for different outcomes, it seems most of the surveyed organizations used scenario planning as a reactionary tool. Don’t wait for a crisis or a shift in the market to start thinking about the future. The world is always changing. As I wrote in The Resilient Organization, acknowledge that the future is a range of possible outcomes, learn and develop capabilities to map out multiple future scenarios, develop an optimal strategy for each of those scenarios, then continually test the effectiveness of these strategies. This does not necessarily mean that every change in the market will impact your business. Identify early warnings of what might be important and pay closer attention to those signals. In other words, learn to separate the signals from the noise.
  • The pandemic forced the organization’s senior management team to re-examine how all decisions were made.
    • Comment: Bureaucracy has for a very long time stood in the way of innovation and agility. To remain innovative and adapt quickly in a fast-changing world, the organization must have nimble leadership and an empowered workforce where employees at all levels can dream up new ideas and bring them to life. Identifying and acting on emerging threats and potential opportunities is not the job of the leader alone but every team member. To quote Rita McGrath, in her book Seeing Around Corners, she writes, “Being able to detect weak signals that things are changing requires more eyes and ears throughout the organization. The critical information that informs decision-making is often locked in individual brains.” In addition to the internal environment, the leader must also connect with the external environment (customers, competitors, regulators, and other stakeholders), looking for what is changing and how.
  • It’s worthwhile for leaders of any team to absorb the lessons of sense-respond-adapt, even if there is no emergency at hand.
  • Sensing: Treat the far-flung parts of your enterprise as listening stations. The question leaders must ask is, “What are we learning from our interactions beyond the usual information about costs and sales?” Train your people to listen for potentially significant anomalies and ensure that important information is not trapped in organizational silos.
    • Comment: Cost and sales data are lagging indicators that reveal the consequences or outcomes of past activities and decisions. Although this information can help leaders spot trends by looking at patterns over time, it doesn’t help understand the future and inform what needs to be done for the numbers to tell a different story. In addition to lagging indicators, pay attention to current and leading indicators and understand the relationship between these indicators and outcomes.
  • Responding: Improve communication across intra- and inter-organizational boundaries. Leaders should view business continuity as an essential function that acts as connective tissue for the enterprise.
    • Comment: In addition to creating mechanisms that allow the free flow of information both inside and outside the organization, decision-makers should also be comfortable receiving information that challenges their personal view of the world, even if it’s not what they want to hear. Create a culture of psychological safety where people are not afraid to share bad news for fear of getting punished, but rather are acknowledged and rewarded for speaking up. Leveraging the diversity of thought enables leaders to anticipate the future as an organization, decide what to do about it collectively, and then mobilize the organization to do what’s necessary.
  • Adapting: Challenge assumptions, and question orthodoxies. There’s always the temptation to mitigate threats simply by applying existing practices harder and faster. One way to get at those deeper issues and encourage double-loop learning is to ask, “What needs to be true for this to be the right approach?”
    • Comment: In an increasingly uncertain environment, it’s difficult to survive and thrive with an old business model or outdated technologies. Many businesses fail because they continue doing the same thing for too long, and they don’t respond quickly enough and effectively when conditions change. As a leader, stay curious and connected to the external environment, look for market shifts, understand what needs to be regularly refreshed and reimagined, adopt new technologies and capabilities, and adapt in ordinary times but also during times of transition. Unfortunately for many leaders, it’s just more convenient for them to continually downplay the fact that conditions are changing than take the appropriate course of action that drives business success.

How are you preparing your organization for potential future disruptions?

Thanks for sharing:

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The Collaborative Organization

These days the term collaboration has become synonymous with organizational culture, creativity, innovation, increased productivity, and success.

Let’s look at the COVID-19 pandemic as an example. At the peak of the crisis, several companies instructed their workers to adopt remote working as a health and safety precautionary measure.

Two years into the pandemic, they are now asking their employees back to the office full time or are planning to adopt a hybrid model.

The need to preserve our collaborative culture and accelerate innovation are two of the top benefits being cited by organizational and team leaders for bringing workers back.

Collaboration is indeed essential for the achievement of team goals, functional objectives, and the overall success of the organization.

Today’s breakthrough innovations are emerging from many interacting teams and collaborative relationships.

When teams, functions, and organizations collaborate, the whole is greater than the sum of its parts; group genius emerges, and creativity unfolds.

But, what makes a successful collaboration? What are the key enabling conditions?

  • It extends beyond the boundaries of the organization. Business success is a function of internal and external relationships. Instead of viewing your business in vacuo, understand that you are part of an ecosystem. External to your organization, who do you need to partner with to enhance your value creation processes, achieve/exceed your objectives, or successfully execute your strategy?
  • Ensure the objectives are clear and there is shared understanding by everyone. Unclear objectives are one of the topmost barriers to team and organizational performance.
  • Foster a culture that encourages opinions and ideas that challenge the consensus. People should feel free to share their ideas and not hold back for fear of others penalizing them or thinking less of them. Collaboration is hindered when one or two people dominate the discussion, are arrogant, or don’t think they can learn anything from others.
  • Groups perform more effective under certain circumstances, and less effective under others. There is a tendency to fixate on certain topics of discussion amongst groups which often leaves members distracted from their ideas. To reduce the negative effects of topic fixation, members of the group should be given periods to work alone and switch constantly between individual activity and group interaction.
  • Effective collaboration can happen if the people involved come from diverse backgrounds and possess complementary skills to prevent conformity. The best collective decisions or creative ideas are often a product of different bodies of knowledge, multiple opinions, disagreement, and divergent thought processes, not consensus or compromise.
  • New technologies are making collaboration easier than ever, enabling us to increase our reach and broaden our network. Although new technology helps, it will not make your organization collaborative without the right culture and values in place. First, define what you want to achieve through collaboration then use these tools to promote creative collaboration.

How else are you championing collaboration within your organization to create value and succeed?

Thanks for sharing:

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