Download (direct link):
While it can be tempting for the corporate center to impose one scorecard on all its business units, this is shortsighted. Any gains in comparability across businesses are more than offset by the losses in understanding the unique drivers of value in each unit. The ideal model is to have custom-tailored scorecards cascading down in each business, so that each manager can monitor the key value drivers most important to him or her. Once managers know what data they want to review in the scorecards, they need to establish how they will get the data in a timely, complete, and accurate way for each review. Companies differ in the degree to which they decide to automate this process. Some choose elaborate software solutions, whereas others get by with more informal systems. In either case, the process should be as streamlined as possible so that reviews do not precipitate a data collection crisis each time they occur. Accuracy of the data in the scorecards is critical so that people feel they are being measured fairly. Further, management must figure out how it will capture qualitative data on a continual basis.
Exhibit 6.6 Sample Performance Scorecard for a Business Unit
Gross margin Selling expense General & admin, expense Net income ROIC
Sales per square meter Inventory turnover Staff turnover
Store opening milestone New category launch Customer satisfaction
Actual Target Last year Actual Target Last year
30 35 25 150 160 140 O
At least 95% of projected
80-95% of projected
Less than 80%
Scorecards are the ''what" of performance reviews; the calendar is the "when." Reviews need to happen as part of a structured, repeating cycle, as this makes them an on-going part of management's agenda for the business. The length of the cycle should be chosen with care. While the default choice for most companies is one year, crucial KPIs may be best measured over a longer or shorter cycle depending upon their lead times. Finally, managers should coordinate the performance review calendar with other important events, such as capital budgeting and individual performance reviews.
Carrying out business performance management apart from the normal flow of events often leads to a corresponding loss of impact.
The style and tone of performance reviews also affects their success. In some companies, performance reviews don't have any real impact because they are only "show and tell" presentations where no challenging questions are asked and no underlying issues addressed. One approach to enable true problem solving in performance reviews is to have peer groups meet on a regular basis. In such meetings, managers with similar degrees of responsibility in different areas of the business unit or of the corporation can share experiences.
If done well, business performance management is not an added burden on already busy managers. Instead, it can save time and effort by providing managers with clear objectives, motivation to achieve them, and support along the way.
Managing Individual Performance
In individual performance management, two value creation imperatives meet. One imperative is making managers think like owners by linking managers' rewards to behavior that creates overall shareholder value. The other is that in an increasingly knowledge-based economy, management talent is itself an important source of value, and therefore companies must attract and retain talent by offering attractive incentives. Companies need a process that will link individuals' behavior to overall value creation activities and incentives that will motivate and reward strong individual performance.
Just as in business performance management, the process of people performance management should include target-setting and performance reviews. Targets for an individual should link to the KPIs for which he or she is accountable, so that there is consistency between what the business is asked to achieve and what the individual is asked to achieve. Exhibit 6.7 shows how different layers of management within the company can be reviewed using measures that cascade down the organization, ranging from total returns to shareholders for top management to operational value drivers for mid-level managers. Targets related to accountability for group performance should also be included when collaboration is important to a given job.
Performance reviews for individuals should be held regularly and feature challenging, candid feedback. High-performing companies tend to move swiftly when they find that people are underperforming, either retraining them, moving them, firing them, or pushing them to leave through peer pressure. Making the consequences of low performance visible is important so that everyone in the organization realizes the seriousness of living up to targets.