In my opinion, world-class performance management requires two building blocks: KPIs to track progress towards company-set goals, and structured management forums to ensure accountability and ownership throughout the firm. Let’s start with the KPIs.
The KPI structure must facilitate a breakdown/division of management’s high-level targets (e.g., top line growth, margin development, an agile balance sheet) into manageable plans that can be implemented throughout the organization. Companies can struggle to link everyday shop-floor behaviour to long-term targets.
The following three aspects are crucial to a strong KPI structure:
- Firstly, the plans must be very concrete and answer specific questions such as which geographies or product groups should drive growth, and to what extent and at what profitability levels? Which products should be ramped down? How should products and services be priced? And many, many more such questions.
- Secondly, these plans must be linked to company targets by using both ‘top-down’, and ‘bottom up’ thinking. Such a breakdown can include, e.g., strategic cornerstones or must-win-battles, the underlying KPIs, and concrete action plans on how to achieve the company vision. In order to align performance and profitability measures, Lean Six Sigma methods can work as a structured operational KPI and measuring framework. E.g., SQDC (Safety, Quality, Delivery, Customer/Cost) dashboards will aid in ensuring that all performance aspects are covered. Although KPIs may differ, it must be clear exactly how they will impact financial, country, business unit and overall company-level performance.
- Thirdly, employees must understand how individual action plans feed into overall KPIs and targets. Everyone within the organization must understand how their behaviour impacts the realization of operational plans and must feel empowered to improve their behaviour so as to realize the required performance.
Structured management forums enable continuous learning
The second building block, structured management forums, must exist across teams, shifts, factories, plants, and business units so as to enable continuous learning. Middle management will drive the search for improvements and must repeatedly set new feasible stretch targets over time as the organization develops. These forums are to be managed by exception and must have proper escalation procedures to ensure that sufficient time is spent on adding value for customers.
The targets and KPIs need to be cascaded and aligned across and between the different organizational layers in order to secure overall strategic targets and link them to daily work. The usage of visual dashboards throughout the day will alert everyone to ongoing performance, providing them with root cause analyses of problems and the corrective actions that need to be taken.
- How do we cascade our strategy into KPIs by using measurable financial and operational targets?
- How can links be created between financial and operational targets, and are these links clear to all employees?
- How well does our performance system create new insights and support continuous improvement throughout the organization?
- How have we ensured the responsibility and accountability of management, company units and shop-floor employees with respect to the performance management system’s results?
Finally, please remember, the aim of a performance management system is to ensure that people work smarter, not harder!