Are you creating a true culture of performance – or just talking about it? In today’s business environment, performance reigns supreme. Investors demand high-quality results from management – and activist shareholders have become increasingly vocal about it. Internally, managers and employees alike are judged on how well they get the job done. But what exactly does performance really mean? And how is your company managing it? Do your people know how their actions influence performance? Is the information they use meaningful? Or are they being judged on metrics that aren’t always relevant to their jobs?  Talking about a “performance-driven culture” is easy. Everybody seems to have one – or so they say. But truly integrating performance into the fabric of your organization is more than just building a culture around it – establishing it as a critical business process that delivers significant value is another story. Too many organizations talk the talk, but very few walk the walk.
It may seem like a subtle distinction, but it’s important. The companies we have seen that have developed a disciplined, holistic approach to performance management have shown an ability to consistently create shareholder value. So in which details does the devil lie? Accuracy and Relevance, not Precision and Homogeny
The demands of external reporting encourage an emphasis on precision. These measures are usually also reasonably consistent across all stakeholders. But when it comes to performance management, precise numbers and homogeneous measures aren’t always effective. Performance management is not about financial statement precision, but more about understanding the basis of the measures and the indicators to where they are heading. This is where a lot of companies drop the ball. Instead of focusing on precision, think in terms of accuracy. An effective performance management process requires a certain degree of simplicity. You don’t always need to get the most precise numbers for what you’re trying to measure. But you do need to develop an accurate picture of your business and how each measure affects the attainment of your desired objective. Additionally, one of the most important components of an effective performance management framework is translating high-level goals and strategies into specific performance measures relevant to each employee. You don’t need to turn every engineer or marketing executive into a mini-CFO. But you can teach them the things that really matter to the bottom line. Finance can help create the right targets for everyone and explain how their daily tasks contribute to the bottom line. Sometimes incentives are based on things that aren’t relevant to an individual’s job – or are beyond his or her control. Rewarding a computer programmer based on, say, the company’s annual revenue growth or stock price performance doesn’t make much sense. Providing more specific metrics for that programmer --- like response time to CRM software issues or percentage of on-time completion to IT projects --- which support drivers of revenue growth is more actionable. Performance, by definition, requires measurement. Not just one or two measurements, but a broad range of metrics – both financial and operational – that assess the health of the organization as well as the level of value creation. So how do you determine the right measure of value? Why rely on rearview mirrors when you could clearly see out of the windshield?
Many companies have long recognized the limitations of using purely financial measures for decision-making criteria. To this end, many have pursued the use of Balanced Scorecards with the goal of providing a broader set of information to manage the company. Balanced Scorecard advocates, however, often fail to discern that the overall “balanced” metrics may be just as backward looking as financial information. As part of their performance management process, companies often rely heavily on historical information or lagging indicators to make decisions. Implementing a Balanced Scorecard that merely shows lagging indicators will not allow the company to make timely decisions nor achieve greater performance. Companies would be better served to use information on current operations that drives, or can be correlated with, future performance or leading indicators. Identifying leading indicators is both a science and an art. For starters, you need to make a distinction between lagging and leading measures. Lagging measures are a historical reflection of financial performance. Leading measures are the drivers and forward-looking indications of how well the company is able to execute to achieve specific levels of performance. Leading measures around operations and markets are key to predicting future business developments in a rapidly changing economy and tell a more holistic story. Leading measures are the ones that ultimately keep people accountable. Take a baseball game, for example. Say Team A beat Team B 10-0 last night. We can’t use this information to determine each team’s performance and outcome for tonight’s game. The final score of last night’s game, 10-0, is a lagging indicator. It is quantitative, and similar to financial indicators such as quarterly revenues or net profit. It shows the results over a given time period, but by itself, cannot be used to predict future performance. However, having additional information, such as which players are on the injured list or which pitchers will be starting and their records, are leading indicators. The status of the players reveals information that provides a much better predictor of tonight’s game outcome. As the above example illustrates, performance measures do not start and stop with basic information. Traditional financial measures should be combined with balanced operating measures for a full view of performance. And to make it actionable, leading indicators must accompany the traditional lagging measures. I’ve got measures, what now?
Finance can be a crucial business collaborator because of their ability to understand these underlying drivers and the driver’s relationship to financial measurement. By supplying better information, and by helping the business unit leaders and C-suite executives interpret the data, the finance organization can be an important catalyst in boosting performance across the company, and enhancing shareholder value. And enhancing the CFO’s credibility as well. Creating a world-class reporting environment usually speaks of ‘one version of the truth’. This doesn’t mean, however, that everyone walks and talks the same financial statement measures. They do, however, add up sales and other financial information the same way. The organization must agree to the idea of using both leading and lagging indicators for performance management and accountability. A few specific strategies and metrics must be defined and mapped to measures that can translate into actionable steps that individual departments within the organization can influence. There needs to be an open dialog between finance and the business. And it doesn’t need to take place at an elaborate off-site meeting or other formal settings. Sometimes a quick chat at the water cooler will do the trick. But whatever the format, the key is to keep the lines of communication open at all times. Lessons from the top performers
At top-performing organizations, these things are second nature. By taking a holistic approach, there’s a well-defined culture and recognized process built upon performance and accountability. There’s simplicity in the numbers, yet rigorous commitment to reward, and just as much passion about fixing weaknesses when something goes wrong. But it needs to start at the top. Great performance is the result of getting a lot of little things right each day. But you can’t just mandate how performance is measured; otherwise they become a ‘flavor of the month’ strategy. The organization must be aligned when defining what information they need to make important business decisions and then agree to the metrics and measures that can effectively measure their performance. The CFO can play a crucial role in getting the ball rolling. The finance staff might not make the most important business decisions on revenue growth and strategy, but they can help tee up the discussion of what’s working and what’s not. The Finance organization can also help keep everyone honest by asking the tough questions and making sure that the company looks both externally and internally when evaluating its progress in adding shareholder value. This publication contains general information only and Deloitte Consulting LLP is not, by means of this publication, rendering business, financial, investment, or other professional advice or services. This publication is not a substitute for such professional advice or services, nor should it be used as a basis for any decision or action that may affect your business. Before making any decision or taking any action that may affect your business, you should consult a qualified professional advisor. Deloitte Consulting LLP, its affiliates, and related entities shall not be responsible for any loss sustained by any person who relies on this publication. Written in association with the Economist Intelligence Unit (EIU)
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