Performance Measurement Revisited

Accenture, Deloitte, Microsoft, and others have rejected traditional performance management systems, opting for approaches they believe better foster employee development and organizational success. Even General Electric (GE), which under iconic former CEO Jack Welch implemented a ‘rank and yank’ system, has now opted for more collaborative and supportive performance evaluations.

These sophisticated companies have recognized that traditional PMM may not effectively drive employee engagement and performance. Consequently, they have adopted continuous feedback models, with the flexibility to adapt to changing strategic needs, to better support employee performance.

For most organizations, however, PMM systems remain an important tool, critical to facilitating effective control and correction by comparing the current levels of individual and team performance with desired levels. PMM metrics also enable the leadership to convey the organization’s strategy to all its employees in terms they can understand, thus making the strategy concrete and meaningful and enhancing performance.

The obvious downside is that occasional, typically annual, performance evaluations cannot accurately represent the multiple actions and achievements of a year’s work, nor can the organization use these encounters to portray the various strategic shifts that might occur through the year.

A 2014 study from Dr. Jutta Tobias at Cranfield University School of Management Centre for Business Performance, and colleagues, attempted to resolve the PMM paradox by focusing on the issue of ‘fit’—that is how, in the light of changes in either the business environment or the business strategy, PMM systems can be designed to allow for new or revised measures and metrics.

The study pointed out that, if the metrics to be assessed are set only once or even twice a year, several factors can affect their efficacy and cause them to inhibit rather than help performance improvements. For example: emphasis on innovation can be at odds with traditional PMM practices; ​the introduction of new models for delivering value—such as service offers to complement products; new strategies involving ​blending various outcomes; regulatory interventions; or a shift in the make up or role of supply chains or customer orientation—may all require different metrics to be assessed. ​

These factors and others highlight the need for PMM systems to adapt and evolve in response to the dynamic business environment. The authors of the study propose a ‘Performance Alignment Matrix’ as a means to resolve the paradox of misalignment in PMM systems. The matrix aims to promote better strategic fit by outlining a structured approach for companies to adapt their PMM systems in response to changes in the business strategy or circumstances, ensuring that what is measured and rewarded is aligned with current objectives.

The authors recommend these strategies for adapting PMM systems and practices as business conditions evolve:

• Regular updates: PMM systems should be regularly reviewed and updated to reflect changes in business strategy, organizational goals, and the external environment so that metrics remain relevant.​
• Flexible frameworks: Implementing flexible PMM frameworks that can easily accommodate new metrics and measures and allow for quick adaptation without overhauling the entire system. ​
• Stakeholder involvement: Engaging managers, employees, and other stakeholders in the process of updating PMM systems can provide insights into necessary changes and help ensure buy-in and effective implementation.
• Continuous monitoring: Establishing continuous monitoring mechanisms to detect changes in the business environment early, allowing timely tuning of PMM systems. ​
• Training and communication: Providing training and clear communication about changes in PMM systems to ensure everyone understands the new metrics and their importance.
• Integration with strategic planning: Integrating PMM systems with strategic planning processes to ensure changes in strategy are immediately reflected in PMM.​
• Use of technology: Leveraging technology to automate and streamline the process of updating PMM systems.
• Feedback loops: Creating feedback loops where performance data is regularly analyzed and used to inform further adjustments to PMM systems.

By adopting these strategies, PMM systems can remain dynamic and responsive and be an effective tool for driving better performance. And, rather than ditching PMM systems, organizations can use them to achieve their strategic objectives amidst changing business conditions.

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Access the full article: ‘Is performance measurement and management fit for the future?’  Steven A. Melnyk, Umit Bititci, Ken Platts, Jutta Tobias, Bjørn Andersen. Published in Management Accounting Research, 2014. https://doi.org/10.1016/j.mar.2013.07.007.