Performance management
February 2008
Kate Sayer takes the fear out of organisational improvement...
When you mention the words ‘performance management’ many people will think of either performance measurement or individual performance. Indeed, it is relevant to talk about the performance of individuals, but this article will focus on the collective aspects of this. How do you improve the performance of an organisation?
Performance measurement gets bad press as it conjures up images of targets, and of teams and individuals behaving in a way to meet the target, but failing to achieve the objective. This is not helping to improve the organisation’s performance; in fact it is detrimental. We all have stories of situations where targets were introduced, which led to a decline in performance. For example, call centres often set a target requiring employees to handle a certain number of calls per hour. As a customer you will not be impressed if the call is handled quickly, but your query has not been resolved. The target does not relate to the desired outcomes for that activity – the target only relates to one factor in the process of getting to the outcomes.
So performance measures often miss the point, but can be quite powerful as they do change people’s behaviour. Jumping in and introducing a few key performance indicators in your organisation is therefore not likely to result in performance improvement. So where should you begin?
The organisation’s strategy should articulate what a good performance is for your organisation at a high level and it should be possible to translate this into lower level goals. So organisations that implement their strategy should be delivering their objectives and performing well. This sounds simple, but implementing strategies is actually very hard to achieve. The figures from the corporate world show that only 10 per cent of companies actually implement their strategy, so this is likely to be similar for charities. See figure 2 and figure 3 for some examples of charities that are addressing these challenges. These are summaries of chapters from CFDG's Role of the Charity Finance Director, published in February 2008.
Current processes
In order to implement their strategy, most organisations follow a traditional planning process, going from the strategy into business planning, then a one-year budget. They send out budget packs to managers in their departments and then gather all the information back to the centre. There are frequently problems as the budget is built around the departmental structure and budget-holders – not the strategy itself. The aim is to achieve the plan, even though the external environment may change, thus rendering aspects of the plan irrelevant. Variance reporting helps to focus managers on the plan, pulling them back to this, even if it is now irrelevant.
As a result of this process, there is little incentive to improve performance. People’s behaviour is affected by the process, for example, they will put in budgets for expenditure that are larger than they really think they need, so that they are not short of resources later in the year when unforeseen events arise. They spend more close to the end of the financial year to use up budget allocation. Departments are competing against each other when they are putting in their bids or budgets, and this can generate conflict. The incentive is to bid successfully, rather than make resource allocation decisions for the good of the whole organisation. Decisions will be passed up the line to the top of the hierarchy and generally take too long. Rather than focusing people’s attention on the future, the whole process encourages people to look backwards and justify their variances. An emphasis on the financial year as the timeframe distorts the focal length to a short-term fix, rather than an overall strategic direction. In addition, the emphasis has been shifted to the achievement of narrow financial measures, rather than the delivery of strategic outcomes.
Strategy-focused organisations[i]
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Figure 1: Definitions of terms
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In order to achieve improvements in performance, you need to understand what a good performance is for your organisation, and this should be articulated in the strategy of the organisation. Kaplan and Norton developed the balanced scorecard approach to help organisations translate strategy into action. The approach may not provide all the answers, but it is a useful part of the charity toolkit in performance management.
A crucial difference about the balanced scorecard approach was that it was aiming to deliver sustained profitability for businesses, rather than short-term results within a financial year. Kaplan and Norton also understand that the world was changing – our biggest assets are now are people and knowledge rather than plant and equipment. This emphasis makes the approach particularly relevant to charities.
In addition, companies that adopted this approach found that they needed to really understand what success would look like to their customers. So you start from the perspective of your beneficiaries or donors.
One of the key aspects of the balanced scorecard approach is the strategy map. This works back from the strategic themes and goals for an area of activity, identifying critical success factors (what we need to do well in order to achieve the desired outcomes for this area). Thus, you really need to think about the levers of performance. What are the activities that we need to get right in order to satisfy our beneficiaries or funders? What internal processes do we need to excel at in order to deliver that success? What knowledge and skills do our people need in order to deliver this service?
This results in a more outcome-focused approach and can help to ensure that your charity is forward-looking, rather than backward looking.
Learning organisations
An important aspect to the balanced scorecard approach which is often lost to readers of the Kaplan and Norton books is that the purpose of the performance measurement is to learn from it. As an organisation, you develop plans based on hypotheses of cause and effect relationships, but we cannot be certain that our actions will lead to the desired outcomes. We should be prepared to hold our minds open and use the data we gather about performance indicators to provide us with greater understanding of the cause and effect relationships. In this sense, the purpose of performance measurement is to provoke dialogue in the organisation about what works and does not work so well, so that plans can be adapted and varied to improve the final outcomes.
Complexity theory helps us to understand the context for this approach. As organisations we do not operate within a closed system – our organisations, beneficiaries, staff, volunteers are all affected by external events and our environment. It is not possible to manage our organisations as if they were machines – it is not actually as simple as finding a few levers and then calibrating these perfectly to deliver the best performance possible (Strategic Management in a Complex World, Boulton and Allen, Cranfield University, 2004).
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Motivating people
Performance measurement systems are often introduced into organisations because their leaders want to improve performance and they believe that measuring performance will improve performance. ‘What gets measured gets done’. And indeed, this is borne out in practice, but can actually lead to poor performance, because people adjust their behaviour to focus too much on the particular targets set for them at the expense of the overall objectives of the activity. Meg Wheatley[ii] writes about self-organising teams that develop their own targets and measures rather than responding to ones imposed on them. You have to believe that people want to do well and allow dialogue about ways towards successful outcomes. Rather than fixing on a leadership model that shows a single leader holding the vision and pouring it into people as receptacles, you should allow much more local variation. As a leader, you are more likely to demotivate people by introducing performance models.
Performance management is a delicate task and a tool that needs to be used with care. Wheatley draws out the difference between measures and genuine feedback (see figure 4 below).
Our natural instinct leads us to attempts to close the system and to control all events within the system. This may lead us to ignore much information outside the organisation that may be telling us that we need to change our approach. Traditional approaches to performance measurement try to pin down good performance and introduce rigid measurement frameworks. Wheatley and other writers are saying that we need to respond and adapt, allow variation and seek to learn.
Making performance happen
A picture of an improved performance management model would have frontline managers who understand the strategy and their role in delivering it; managers who feel responsible and are accountable for delivering the strategy; and conversations about progress towards outcomes (figure 2 and figure 3 above are good examples of this), not about how much of the budget has been spent. With a shared vision and determination to make it happen, we may actually see performance management delivering results.
[i] When Kaplan and Norton wrote their second book about implementing a balanced scorecard approach, they titled it The Strategy-Focused Organization.
[ii] Finding our Way: Leadership for an Uncertain Time, Berrett-Koehler Publishers Inc. 2005
Author: Kate Sayer
Kate sayer is a partner with Sayer Vincent and has specialised in charities for 25 years. Kate has written several books on charity finance and is a member of the Charity Commission SORP Review Committee and the Charity Tax Group. She is visiting lecturer at Cass Business School for the diploma in charity finance
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