By Prof. Koen Vandenbempt – (University of Antwerp & Antwerp Management School)
The field of performance management has evolved a lot since the early days of narrowly controlling the financial outcome of organisations. Best-practices nowadays focus on implementing a performance management system that enables, empowers and facilitates the entire organisation to take ownership of realising the intended strategy. Especially, the well-known ideas of Kaplan & Norton have fuelled a new and more strategic look at performance management. Their waterfall perspective translates strategy into objectives which are further translated in four interrelated perspectives (financial, customer, internal processes and learning & growth). Nicely compiled in a “strategy map”, it at least gives the impression of turning strategy into something that can be ‘managed’ like a machine: objectives are linked to broad key success factors for which indicators can be built (with targets and measures, of course). On paper, this well thought through sequence of steps has a compelling message. In reality, we see that the story is much more difficult…
I’m not arguing against an integrated system of corporate performance management as described above. On the contrary, I strongly belief that it brings the much needed focus and discipline in organisations and – on average – will bring better results compared to companies operating more “blindly” and unfocused. What I do want to do is discussing the limits of a formalised perspective on corporate performance management and in the same effort indicating what might be more effective as a perspective on corporate performance management. To do so, I start by outlining three inherent tensions of corporate performance management. These tensions shape together the limits of formalised systems of management (like corporate performance management). Next, I use a metaphor of “the red queen” (from Alice in Wonderland) to indicate the real challenge in corporate performance management. From here, a number of managerial implications are formulated.
1. Inherent tensions in Corporate Performance Management
Every formalised system has its own number of weaknesses and strengths and is probably never perfect. I’m not arguing for perfection, but rather arguing for a better understanding of the inherent tensions that formalised systems in organisation ‘must’ tolerate. In the case of corporate performance management, I want to highlight three of these tensions: (1) the tension between deliberate action & intention on the one hand and mindlessness on the other hand; (2) the tension between what can be measured and what is difficult to measure and (3) the tension between the short term and the long term in performance management.
The first tension (deliberate action & intention versus mindlessness) relates to the different managerial levels in an organisation and their respective roles in corporate performance management as well as the life cycle of the corporate management system in use. Systems of performance management (see above) are the exponent of managerial thinking, actions and intention. Especially, when implementing Corporate Performance Management there is a lot of reflection, deliberation and choices. This mindful managerial action is in sheer contrast to the level of mindfulness when performance management systems are ‘in use’. In many cases, the system (with all its reporting lines and measures) tends to routinize action and thought and its functioning becomes more or less ‘automatic’. The drawback relates more to the low level of mindfulness in the use of the system. This is definitely a period of low reflection: are the keys success factors still useful? Are indicators measuring what they should be measuring? Is our strategy still valid given changes in the environment? All relevant questions that are often neglected by the buzz of the day.
The second tension is a classic one. Are we measuring what counts in business or are we measuring those things that are easy to measure? Sure, the strategy maps of Kaplan & Norton do focus on elements that ultimately drive the performance of an organisation (customers, employees, learning, etc.). But in most organisations, eventually, what is easy to measure often plays the dominant part in performance management and by this shadowing what really counts. What often aggravates the situation is that KPIs in one way or another are tied to incentives. And incentives do drive behaviour just as behaviour (individual, team, departments, …) drives performance.
The third tension builds further on the two previous ones and relates to the difficulty of performance management systems to ‘manage’ both the short term and long term. This tension brings us to the main paradox of strategy: how to ensure short term profitability without sacrificing the long term agility of a company (or the other way around). A general observation is that the short term performance is much more on the managerial radar compared to the long term adaptability of organisations. We all know that mindlessness pursuing short term KPIs might lead the organisation to go astray in the long run…
2. The predictable surprise… : change and the Red Queen Effect
As long as markets, customers and technologies are relatively stable, these tensions do not pose a real ‘threat’ to the overall effectiveness of the corporate management system. Many industries enjoy long periods of this ‘relative stability’. However, in an ever more interconnected and dynamic world, we see that all industries – eventually – fall victim to fundamental changes. Moreover, these changes are often only clearly observable with hindsight. This means that they tend to have a long incubation period before becoming visible and ‘manageable’. Under these circumstances, corporate performance management is not an easy task. Existing key success factors, indicators & targets do still make sense in the short term but tend to miss the mark on a longer term. Front-line employees and managers probably do feel and sense changing customer preferences and changes in competitive environment but have a hard time to forcefully communicate this up the organisational ladder. These weak cues of changing realities often are unable to penetrate the corporate immune system and thus to challenge the status quo – including of the corporate performance management.
The real danger in measuring corporate performance is that these changing realities are not enacted upon and that organisations are slowly and quite undetectably drifting away. Eventually, these organisations will realise that they are in a ‘different’ world where old recipes for doing business do not longer yield the intended results. In the worst (but not most unlikely) case, it is like waking up in a new world with other ‘business’ rules.
It is exactly here that the metaphor of the Red Queen Effect is applicable. The Red Queen is a character in the animated movies of Alice (Alice in Wonderland & Alice Through the Looking Glass) and has been translated first to ‘evolutionary biology’ and then to business situations. At one point in the movie, Alice is having a discussion with the Red Queen:
“Well, in our country,” said Alice, still panting a little, “you’d generally get to somewhere else — if you run very fast for a long time, as we’ve been doing.” “A slow sort of country!” said the Queen. “Now, here, you see, it takes all the running you can do, to keep in the same place. If you want to go somewhere else, you must run at least twice as fast as that!”
The last part indicates that difficulty faced in situations of strategic drift: organisations will not survive by playing the business game better; they will have to play the game differently. In these situations, it is clear that we are experiencing the negative effects of the Red Queen.
3. Some recommendations
What are the implications of the Red Queen for organisations? Sure, one might argue that tackling this ‘problem’ is beyond the scope of the mandate of corporate performance management in organisations. However, given the impact of any type of corporate performance management on the functioning of an organisation, I tend to disagree. As indicated above, it influences behaviours, has an impact on motivation, creates reporting lines, enforces structure and brings focus in the organisations (amongst others).
I do not believe that we need to make even more complicated systems of corporate performance. It will simply not work, given the inherent tensions described above: one cannot combine flexibility and stability in the same system. What I do argue is the following: how the system of corporate performance management is being used, is crucial in avoiding the negative effect of the Red Queen… And this is the (sole) responsibility of senior management. In case it is used ‘in a mindless way’, the corporate performance management is probably the silent killer of the organisation. When used in a mindful way, it will live up to its expectations (short term: profitability; long term: agility).
Making organisations more mindful is not an easy task. However, every senior manager should evaluate his organisation/unit using the following five questions (based on Weick & Sutcliffe, 2007). Scoring well on these questions, makes your organisation more resilient and better equipped to manage the unexpected (see also the Red Queen effect).
- How well is your organisation preoccupied with learning from ‘mistakes’? ‘Mistakes’, near-misses and things that did not go as planned are often a first indication that the industry is changing. It requires courage and perseverance to break through the structural secrecy of organisations.
- How reluctant is your organisation to simplify its comprehension and management of the business? The popular management principle K.I.S.S. (Keep it Simple, Stupid) states that most organisations work best if they are kept simple. In more complex environments and markets, we should probably move from KISS to KISIS – Keeping It Simple Is Stupid. We need to complicate our own thinking in order to grasp what is happening around us.
- How sensitive is the organisation towards its core operational processes? As indicated, organisations are pools of untapped knowledge. When we are sensitive to what is happening at the front-line of our organisations, we might be able to read the weak cues of change more rapidly.
- How resilient is your organisation when something has gone wrong? Does your organisation have enough energy, motivation & drive to bounce back? How resourceful are we?
- Do people with knowledge of the operations and front-line events have to power to act, to drive decision-making? In changing markets, the people at the top of the organisation seldom have the knowledge on what is happening at the front-line of the organisation. The key question is: Are the people with knowledge but without the formal power taking the decisions?
These are five simple questions organisations can ask themselves to judge their capacity to beat the negative effect of the Red Queen. Just by reading them, it is clear that there is no simple answer. Moreover, organisational transformation is probably needed to ensure the long term adaptability of a company. Also, where traditional corporate performance management tends to get very formalised, dealing with long term agility will always be less structured. The implications cannot be underestimated: as a manager you will have to be ‘ambidextrous’: on the one hand you need to focus on KPIs to ensure short term profitability and on the other hand you will need to allow a certain degree of foolishness and trial & error in order to enact change in the long term.
Koen Vandenbempt is Professor of Strategy at the University of Antwerp and the Antwerp Management School. He is also a visiting Professor at the Institute of Business Studies (Moscow, Russia), James Madison University (USA) and Goa Institute of Management (India). In his research and as an advisor he works on themes of strategic change and innovation. Furthermore Koen Vandenbempt is also the independent director of the Antwerp World Diamond Centre (AWDC).
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