Information Transparency

Transparency is key to the effectiveness of a b2change organization’s information processes. (This is also true in decision making, which we will consider later in this chapter.) Metrics need to be visible to those who influence them, who are affected by them, and whose performance can be improved by knowing them. Keeping measures secret not only makes it difficult for individuals to correct their behavior but also takes away a potential motivator of change.

In traditional organizations, information about competitors and the business environment goes to senior management, who ponder it and, if it is disturbing enough, launch a change initiative. In a b2change organization, this information goes to all employees in order to create a culture and a structure where organization members are connected to the environment.

Employees need to be encouraged to ask, “What are we going to do about these new technologies? How can we reduce our costs? How can we respond to the rise of competitors overseas? What capabilities do we need to counter a competitor’s new products?” Well-informed employees will push for constant change; they will not sit in a cocoon of ignorance that is only irregularly punctured by management’s change programs.

Of course, there are limits to how public business information can be, but as a general rule, the more public the results are, the more effectively they can be used to improve current performance and the more they can be a motivator of change. This is, of course, particularly true with respect to information that compares an organization’s performance with competitors’ performance. There is nothing like competition when it comes to motivating an organization to perform better.

Communicating Information to Employees

Encouragingly, there is evidence that organizations are providing more performance information to their members than in the past.¹ Table 5.1 presents data on this point. From 1987 to 2005, there is a significant increase in the information that Fortune 1000 firms provide to their employees, particularly with respect to data about business unit results and business plans and goals. According to these data, most (but not all) employees now get information about corporate performance, business unit performance, and business plans. They are much less likely to get information about new technologies and competitors’ performance. The failure to share data about the performance of competitors is a serious omission, given the role it can play in motivating performance and change.

Often it is difficult for individuals to understand how they can influence the results of a large organization; thus giving them information about the performance of their own business unit is critically important. Doing so allows managers to establish meaningful goals for individuals—goals that individuals can understand and influence. It also allows all members of an organization to talk about the business and the business strategy in a meaningful way. Everyone is encouraged to understand how their particular unit is operating and to make needed improvements.

There are numerous ways to communicate with employees. B2change organizations leverage one of the most underutilized forms: face-to-face communication. This is particularly the case when the subject of the communication is organization strategy, business results, and improvement opportunities. Too many traditional firms have become lazy, communicating only through email or press releases. These methods are cheap, but they are inadequate for a b2change organization.

For there to be meaningful employee involvement and understanding, managers need to talk about business data face-to-face, stress what is most relevant, and answer questions. There is no doubt that this costs money and takes time, but managers in a b2change organization know it is precisely the kind of investment that needs to be made. Communicating is a necessary process for creating a change capability, and senior management must assume the responsibility for it. The top management team at Deploy Solutions, for example, recognizes this. They spend one to two hours every week discussing what information will be useful to the employees and how to present it effectively. This is a big investment in education and motivation, an investment that helps create a capability for ongoing change.

Where it is possible to get employees together for town hall meetings, it is well worth doing. Wal-Mart, for one, has used Saturday business reviews as a key technique for driving its business. At a smaller company, Planar Systems, the CEO routinely asks questions and debates strategy in town hall meetings. In addition to these meetings, he holds a monthly meeting with fifty to sixty managers in a room where everyone can see each other and where they constructively discuss operations and strategy. Because it is a technology company, Planar also uses email and encourages employees to “ask the expert” about the business. Face-to-face meetings and town hall sessions are not practical in all organizations because of geographical dispersion. Possible substitutes include video, voice mail, and email.

Samuel J. Palmisano, CEO of IBM, has run what IBM calls “jam sessions.” They focus on IBM’s values and other issues. IBM, like many companies, faces the challenge of maintaining their strong identity while adapting to a changing business environment. It runs jam sessions to sense which of its traditional values and practices need to be updated. These are not just one-way communication sessions—they are also an information-gathering activity.

One of IBM’s major jam sessions was a three-day live intranet debate. At the heart of the session was the question, “What should IBM preserve from the old IBM culture, and what do we need to change?” It had broad participation—over fifty thousand employees logged in and posted ten thousand comments. The session was only one step in a transformational change, but a positive one, and it helped IBM reinvent itself as part of its transition from a hardware to a service company (over 60 percent of its revenue now comes from services).

.  .  .

Here is a list of the seven most important characteristics of a good information system. Compare them to what your organization does, to determine how close you are to having a b2change information system. Good information systems:

1. Provide comprehensive data on key processes
2. Integrate data across departmental boundaries
3. Monitor capabilities as well as performance
4. Are linked to goal setting and rewards
5. Include information on competitors
6. Provide trend data on the business environment
7. Make measurements visible throughout the organization

Measuring Individuals

Virtually every organization has a performance management system that, among other things, is intended to provide data about how well individual employees are performing.² The systems that are actually in place in organizations vary enormously in what they are supposed to accomplish, what measures they use, what is communicated about the results of the appraisal, and what is actually measured. Measurement of individual performance is an area where organizations seem to be constantly changing their practices, usually in response to dissatisfaction with their existing system. Organizations always seem to hope that the next system they develop will be the answer.

There are three major reasons organizations have so much trouble with the measurement of individual performance. First, there are many design options, so there are many opportunities to make design mistakes. Choosing the right tool is only one of many design decisions that need to be made. Second, in most circumstances both the evaluator and evaluated are uncomfortable with the process and have not received any training in how to do it. Third, in many situations the measurement of performance is a difficult task that requires complex judgments.

One option that b2change organizations should consider, given the difficulty of measuring individual performance, is simply not to use measures and information processes that focus on individual performance—in other words, to not do it. In most U.S. and European organizations this is not a realistic option. Legal requirements and cultural beliefs support the notion that individual performance should be measured and should have an impact on compensation and promotion. Despite these constraints, b2change organizations have options that most other organizations do not.

As you’ll recall, two of the structural elements of the b2change organization are teams and small, close-to-the-customer units. These elements, when combined with the elimination of individual job descriptions, shift the performance focus away from hard-to-execute individual measures toward group measures. Thus b2change organizations can consider the possibility of not measuring individual performance in situations where the way work is designed renders it difficult or impossible to develop adequate metrics of individual behavior. This is likely to be true, for example, in a highly interdependent work arrangement such as a software design team or a process production team that is operating a chemical plant or a paper machine. In these cases it is difficult and dysfunctional to separate the performance of individuals from the performance of the total team. If you are a sports fan, think football, doubles tennis, soccer, or basket-ball—not track and field or golf.

We will look at measuring team performance later in this chapter, but what about organization designs where individual performance can be managed? In these situations, we believe it is very important to measure individual performance, but clearly it’s better not to do it at all than it is to do it poorly. With this point in mind, here are a set of practices that b2change organizations can use to make the individual measurement process run smoothly and produce good data.

Conduct Top-to-Bottom Appraisals. B2change organizations not only conduct performance appraisals well, they start at the top of the organization. All too often the senior executives in an organization are not appraised and do not appraise their subordinates. The result is that performance appraisals become something senior executives tell middle management to do to lower-level employees. Needless to say, this sets up a negative dynamic in the way people think about and conduct appraisals. Among other negatives, employees see no senior management role modeling, and senior managers are not held accountable for their performance. For these reasons, the performance appraisal process needs to start with the board of directors doing a thorough and rigorous appraisal of the CEO and to cascade down from there.

CEO Michael Dell provides a good example of taking assessment at the top seriously. His appraisal includes a survey that collects data from a broad range of employees. Recent results showed that a large number of employees felt Dell was impersonal and was emotionally detached from the workforce. What happened next says a great deal about Dell’s efforts to continuously improve his performance and that of the organization.

Dell immediately faced his top management team and offered a frank self-critique, acknowledging that he is very shy and that this can make him appear aloof and unapproachable. He vowed to change and followed up by showing a videotape of that talk to every manager in the company. Further, he put some desktop props in place to help remind him and others of the change he was committed to. For example, he put a bulldozer on his desk to remind him not ram ideas through before testing them with others.

In addition to the behavior changes that may result from Dell’s efforts, the symbolism of his being appraised is very important. It sends a message to the entire organization that improvement is expected and is standard operating procedure for everyone in the organization, not just the lower-level employees.

Measure Appraisal Effectiveness. B2change organizations evaluate how well appraisals are done by managers. This makes a significant statement about their importance to the organization, gives managers feedback about how well they conduct the appraisals, and motivates them to do a good job. Systematic measurement of appraisals should include three elements: an audit of the quality of the written documents produced in the process, a gathering of survey data on how the individuals who are appraised feel about the appraisal event, and measures of the timeliness of the appraisal meetings and reports.

Set Goals in Advance and Keep Them Current. B2change organizations establish specific and quantifiable goals for acceptable levels of performance. Managers and their subordinates sit down before the performance period begins and establish what measures will be used in the evaluation and what levels of performance are challenging but achievable. Research suggests that the more interactive the goal-setting activity is, the more likely people are to accept the goals, be motivated by them, and see performance appraisal as a fair and reasonable process.³

When managers set goals, they need to keep in mind that the difficulty of the goal is a key determinant of performance. Easy-to-achieve goals tend to lead to poor performance, but so do goals that are too difficult. When goals are set low, individuals settle for low levels of performance. When goals are set too high, people give up because they do not believe they can achieve them, or they cheat in order to give the impression of achieving them. Goals that are perceived to be achievable but challenging should be the objective because they are the most motivating and produce the highest levels of performance.

You may have thought of a potential problem that goal setting creates for b2change organizations. Most organizations set annual goals. Annual goals presume a reasonable stability for the next twelve months. That stability may occur, but b2change organizations never work on the assumption of stability. They engage in frequent reviews of goals.

The Orvis Company reviews each individual’s key performance measures every month. It is a big investment, but a necessary one. It’s not that common that goals need to be changed, but Orvis is always monitoring the environment, and the reviews ensure that the company does change goals when the environment demands it.

Listen to the Individuals Being Appraised. B2change organizations allow the people who are being appraised to respond and provide input at the end of the performance appraisal period. They can present their version of how well they have performed their work assignments against preset goals. Our research supports the value of giving people this opportunity before their appraiser reaches a performance judgment.⁴ It leads to more accurate appraisals and to individuals believing they have been fairly appraised.

Use Objective Performance Measures. Many appraisals fail because the performance measures consist of vague ratings with such terms as “excellent,” or poorly defined general traits or personality dimensions such as “reliable,” “communication skills,” “customer focus,” and “leadership.” These traits are difficult to judge and almost always lead to communication breakdowns and misunderstandings between appraisers and individuals who are being appraised. B2change organizations adopt a balanced scorecard of behavior- and outcome-based measures that quantify, or at least clearly identify, what performance and behavior are being judged. For example, rather than assessing the general dimension of reliability, the appraisal should focus on whether critical work has been completed on time and whether preset goals were met.

Here is a simple example of how agreement between rater and ratee can be increased when the appraisal focuses on observable behaviors and the business outcomes they produce. Assume that growth is an important business objective for a company; given this, the behaviors that lead to growth need to be identified and each person assessed against those behaviors. For instance, a saleswoman in the company might be appraised on such behaviors as the proportion of her sales that come from new products, the number of suggestions she made for product innovation, or her opening of new sales territories and customer accounts. These types of specific measures establish the strongest link between the organization’s business strategy and the appraisal process. They also provide objective data on which to base an appraisal.

Employ Meaningful Ratings. B2change organizations reject the notion of ranking subordinates and using rating scales that require the rater to place a fixed percent in each category. Traditional organizations, in keeping with their stability-oriented and bureaucratic assumptions have come up with a variety of measurement schemes that go way beyond the precision that is necessary or justified by the process. For example, they rank order hundreds or thousands of people from 1 to whatever the total number of individuals is. It is like trying to measure the length of an object to the closest thousandth of an inch using an ordinary straight ruler; the data needed to compare people so precisely just isn’t available.

B2change organizations do need to rigorously assess the performance of their members and ask whether they are better off retaining the individuals or replacing them with somebody from the outside. In most situations, a three-tier rating system (some version of, “walks on water,” “swims,” “drowns”) typically provides all the information needed to handle pay increases and to identify candidates for promotion and dismissal. In certain instances, a fourth category (“too new to judge”) is needed for employees who are new to the job and just learning how to perform it.

PECO Energy Corporation is one company that uses only three categories: “great,” “OK,” and “needs improvement.” This simple system provides all the information the company feels it needs to manage its employees. It replaced a five-point scale that had produced ratings that were more complicated but not more useful.

One rating practice that b2change organizations should never use is forced distributions. Many organizations (for example, GE, EDS, and Accenture) require their managers to identify a certain percentage of employees who are failing, often 5 to 10 percent, and a certain percentage who are doing particularly well, often 15 to 20 percent. Jack Welch used this practice at GE, and he has argued that others should use it as well.⁵ He also goes on to say that in his view, organizations should fire the employees who fall in the bottom category.

The forced distribution approach ignores the reality that in some work groups there are no poor performers and in others there are no good performers. It causes managers to disown the appraisal event and essentially to say, “I was just following the rules” when they deal with a “poorly” performing employee. Further, it moves the organization significantly away from a virtuous spiral environment. Instead of employees asking how they can improve it, the method fosters competition and survival of the luckiest or most political.

Given these problems, why do companies use the forced distribution approach? The answer is simple but not particularly flattering to many managers. It represents an easy answer to solving a classic problem: rating inflation. Just as in universities where professors tend to give high grades to everyone, many managers find it easier to be generous with high ratings, and, as a result, many organizations suffer from top-heavy performance appraisal scores. Instead of dealing with the problem as a failure of leadership, some companies adopt a dysfunctional bureaucratic solution, mandating a result. Because it is a leadership problem, the best solution rests in creating effective leadership rather than in the top-down bureaucratic mandate of a forced distribution system.

Managers need to be held accountable for the ratings that they produce. It has to be clear that ratings must be justified by operating results that are correspondingly high. It often helps to set up cross-organizational meetings in which managers have to justify their ratings to their peers and top executives. Capital One and Intel call these “cross-calibration” meetings. Both companies have effectively used them to control rating inflation and to develop consistency in how managers use the rating scale.

Overall, the best solution to rating inflation is not a bureaucratic rule; it is a set of behaviors and processes that are put in place and modeled by the leadership of the organization. In other words, senior executives need to be leaders, not bureaucrats.

Assess Skills and Competencies. From a change perspective, it is particularly important for an organization to develop good measures of an individual’s skills, knowledge, and competencies. Without these indicators it is difficult to know what the human capital resources of an organization are and, therefore, what type of changes and performance an organization is capable of. Knowing the characteristics of the human capital that can be deployed is vital in developing and implementing new strategies. At the very least, such knowledge can help a company decide how many existing employees can contribute to a new strategy, how much training needs to be done, and what kind of hiring is necessary to yield the skill mix the organization needs to move forward.

Information about skills and competencies also is critical in diagnosing what the problem is when strategies run into difficulty. As we discussed in Chapter Three, it may well be that the strategy is not flawed but that the organization simply doesn’t have the capability to execute it. The skills of the individuals who are charged with executing the strategy may be at the core of an organization’s performance problem.

Change, even minor change, almost always requires individuals to learn new skills. This requires a performance appraisal system that helps individuals understand what skills they need, provides them with a development plan that allows them to acquire those skills, and, of course, sets the stage for their being rewarded when they develop the new needed skills. Thus a performance management system that evaluates the skills of individuals and gives them advice on their development is a critical support process when virtually any type of change is called for.

Discuss Development and Rewards Separately. B2change organizations separate the discussion of pay for performance from the discussion of development needs and activities. This means that the appraiser and the person being appraised should hold two separate discussions—one that covers past performance and the resulting pay increase or bonus, and a second, separated by at least a week, that reviews the future development and career situation of the individual.

Use the Web. Information about the assessment of individuals needs to become a matter of record in the organization. The best way to do this is an intranet-based system that profiles each individual in the organization, including his or her task assignments, performance goals, and recent results. It also needs to include information about skills, competencies, and plans to develop new skills.

Intranet systems can also facilitate an efficient internal labor market—something that is more important to b2change firms than to traditional firms, as b2change firms expect ongoing redeployment of talent. When employees can access information about the skills needed for various kinds of work—and the programs available to teach those skills—they can take the initiative in their development.

When managers can access information about the skills of employees, they can seek out the talent they need. Having a searchable database of skills is much more efficient than the traditional word-of-mouth, hit-or-miss approach that is used by most organizations to fill new openings.

Some of the major professional service firms (for example, PricewaterhouseCoopers, McKinsey) do a good job of using information systems that profile the skills of individuals. They have online profiles of all their professional staff. These profiles can be accessed by managers looking for individual skills that fit a project team or a job opening. For example, if somebody needs an accountant who speaks Russian and understands international accounting practices, he or she can go to a database and see if any employees have this particular skill set.

SAS, the very successful software company, has an extensive skills database that helps managers analyze the fit between the skills the organization has and the skills it will need in the future. This helps them manage change as well as assess how likely it is that SAS can make specific changes.

Measuring Teams

As we indicated earlier in this chapter, b2change organizations tend to prefer processes for measuring teams. Some of the most important, and most complicated, performance measurement systems are those that focus on groups of individuals who have responsibility for a particular business process, customer, or geographical area.

In many respects, the same principles that apply to measuring individual performance are appropriate for team performance. Measuring team performance is particularly important when a team has a high level of interdependence, such that individuals on the team need to work together closely to produce a product or a service. In these cases, it is critical that the team as a whole be assessed and that the process focus on both its performance level and its capability level. It is also important that the results of any assessment be given to the team so that it has the chance to improve its performance.

Assessing the performance of the members of a team may or may not be desirable, depending on the situation. Doing so can take attention away from the performance of the team as a whole. B2change organizations often have the team members assess each other. This can be quite powerful both as a team-building activity and as a motivator of performance improvement by individuals. But—and this is an important but—peer assessment requires the right measures and methods. It is not something that should be “just done.”

In most cases, it is not possible to generate a profit-and-loss statement for a team. Instead of being responsible for a whole business, a team is usually responsible for part of a business or a particular customer segment. Nevertheless, it may be possible to get at least some financial numbers as well as production numbers for a team. Obviously these are desirable, as they help team members see the team’s impact on the performance of the organization. Financial data also make it easier to set performance goals for the team and to reward the team based on its contribution to the overall performance of the organization.

Measuring Business Units

One of the advantages of having business units in organizations involves measurement. It is often possible to generate a profit-and-loss measure for business units. This is an obvious advantage from both a current operating perspective and a change perspective. It allows an organization to get good feedback about how each of its parts is operating and can provide a powerful incentive to improve performance and to change. As we will discuss in later chapters, this is particularly true when rewards are tied to business unit performance.

When measuring business units (or organizations for that matter), it is important that performance be measured not only in terms of financial performance but also in terms of capabilities and competencies. In the B2Change Model, competencies and capabilities are a firm’s means of creating value. Measuring them is as important as counting inventory. To do an adequate job of measuring competencies and capabilities, each business unit needs to identify what its most important competencies and capabilities are and how they can be measured. Again, in the B2Change Model, such measurement is expected; it’s tied into the ongoing strategizing process and isn’t some optional or an off-to-the-side activity.

It’s a good idea to be explicit in identifying the link between individual skills, business unit competencies and capabilities, and financial performance. One of the advantages of having business units is that these links are more obvious and hence easier for employees to act on than are corporate level links.

At the risk of being tedious, we must make one more point: as we noted earlier, it is critical that the results of business unit assessments be shared with employees. The sharing process is central to creating motivation to perform well and to change when performance falters. Poor performance rarely leads to any motivation to change if employees don’t understand what performance is needed or have information about results. Indeed, often individuals’ resistance to change in traditional firms is a direct result of their not understanding why change is necessary and how their behavior can affect performance.

Measuring Organizational Performance

Public companies spend a great deal of money and time preparing financial statements that they issue to their shareholders. B2change organizations do more; they make an active effort to share these results with all of their employees. Sharing performance results with all employees has a number of advantages, most notably that employees understand the business better and as a result understand when and how they need to change.

The major issues surrounding the reporting of organizational performance go beyond whether organizations share financial results with their employees. One set of issues, which was addressed by the Sarbanes-Oxley Act, involves the accuracy of the financial reports that are issued. Clearly, transparency and better audit controls are needed, but from the point of view of organization change, the most important issue concerns something that is not reported to investors: intangibles.

Measuring and Reporting Intangibles. What is not reported to the public are metrics that reflect on the intangibles that influence organizational performance and the value of a company. Organizations are not required to report on intangibles, and most do not report either internally or externally on metrics other than accounting metrics. In many cases, this is because they simply don’t have the measures; in other cases, it is because they have chosen not to. Yet measures of intangibles are often precisely the kind of leading indicators that a b2change organization needs.

B2change organizations crave data on employee motivation, satisfaction, and involvement, but reject the traditional survey approach because it can be too slow and infrequent. Rather, they utilize the intranet to obtain regular (weekly or monthly) online pulse surveys that measure reactions to change as well as motivation, understanding of the business strategy, and involvement. The results are instantly available and used by organization members to implement change.

The balanced scorecard approach to measuring and reporting organization performance has had a positive impact on internal and external reporting. Although the implementation of this approach varies enormously from company to company, it always includes nonfinancial metrics: customers’ perspectives, internal processes in the organization, and the learning and growth activities of the organization. The details of what is measured under these three nonfinancial areas vary significantly from organization to organization, as they need to reflect a company’s particular identity and strategic intent.

It is beyond the scope of this discussion to go into detail about the types of measures and measurement areas that are appropriate for different types of organizations. It is appropriate, however, to note that b2change organizations develop and utilize lead indicators that focus on their organizational capabilities and core competencies.

Measuring Capabilities and Competencies. An example of how an organization can use metrics of organizational capabilities is described by Dave Ulrich and Norm Smallwood in a 2004 Harvard Business Review article.⁶ They asked the InterContinental Hotels’ executives to assess their company on both the actual state and the desired state of their capabilities. The results showed that for the firm to execute its current strategy there needed to be a great improvement in collaboration and speed. In the areas of shared mind-set and accountability, however, the company was already at a satisfactory level. This analysis provided momentum toward change, particularly when the results were broadly shared within the organization. Unlike financial analysis, which often shows only that “you need to change,” analysis of capabilities shows what you need to change and can be an indicator of performance long before the financial numbers show what is happening.

B2change organizations need to think hard about which competencies and capabilities are important enough to warrant measurement at the business unit or organization level. The organization’s strategic intent should drive this decision. Kaplan and Norton’s Strategy Maps provides a disciplined way to decide which capabilities to measure.⁷ A completed “strategy map” shows how key competencies and capabilities lead to the implementation of strategy.

The important point is that a b2change organization must measure and constantly monitor its make-or-break competencies and capabilities. Measurement is necessary from the point of view not only of strategy development but of process improvement. As work on quality has shown, it is very difficult to improve a process without good metrics on how the process is operating and how it performs. Providing the results of metrics to individuals who are responsible for the key capabilities in an organization can be a powerful source of motivation to improve those capabilities, particularly when the metrics are used for goal setting and are tied to rewards.

Only if capabilities are measured and their outcomes known is it possible to increase their effectiveness. In addition it is difficult to alter them when an important change in the environment calls for improved levels of performance. Good measurement of capabilities is important both from an operating performance perspective and from a change management perspective.

Using Budgets as Performance Measures

We have reserved a discussion of budgets as part of organization performance measurement until now because they don’t fit in a b2change organization. Most traditional organizations use budgets to measure organizational performance as well as individual group and unit performance. But more often, budgets are used to exercise control and become a force against change for several reasons.

First, they are set once a year and difficult to change after they have been set. This is particularly true when they are very detailed and specify all possible expenses. In the past, annual recalibration of spending levels may have made sense because it matched the pace of change, but today it doesn’t. Change in the business environment doesn’t wait for the earth to make a complete revolution around the sun.

Second, when managers are held accountable for the results of their budget, they are hesitant about over- or underspending them. Two all-too-common results are that badly needed changes don’t get funded and individuals spend money in categories that don’t warrant it simply because if they don’t spend it, it will be lost when the year ends. Because of the rigidity it produces, the traditional budget process has no place in a b2change organization.

Of course, budgets don’t have to be rigid and unchangeable during the year. B2change firms have two options with respect to budgets: alter the budget process so that it is more change friendly or eliminate it altogether.

One way to make budgets more change friendly is simply to put some slack in the budget and to avoid detailed budget categories and numbers. Another approach is to give individuals a budget for innovation and new initiatives that they can use or not use during the year depending on what kind of changes come along. Among the best practitioners of this method are 3M, Intel, and other technology firms, which have budgets for local innovations in particular work groups and work areas. They also have money budgeted that can be applied for by individuals or groups of employees anywhere in the corporation if the money in the particular area is not sufficient to support their change or if they are denied it but believe strongly in their innovation.

3M is a company that has received a considerable amount of publicity because it gives individuals 15 percent of their time to pursue changes that they think are appropriate. This is not a “cool idea” 3M recently implemented; it is an entrenched method 3M has used for many years. This approach has helped it continue to be a leader in new product development and innovation.

The adoption of activity-based costing methods is another good alternative. Many traditional budgets are built around categories of spending, such as salaries, supplies, and travel, rather than on a business process. There are a number of problems with this approach. All too often it means that an organization gains no understanding of the relationship between money spent and the outcomes produced. With activity-based costing, expenses reflect processes, such as hiring new employees, developing new products, and delivering customer service.

Activity-based costing complements nicely the focus on measuring competencies and capabilities described earlier. By developing activity-based costing, organizations position themselves to make good decisions about whether costs are reasonable and whether to change or alter the process. In some cases, they can benchmark the costs against the costs incurred by other organizations for similar processes.

Today a number of companies measure the cost of HR administration, as well as other administrative services, and share benchmark data. Doing so helps them evaluate their spending and performance in such areas as salary administration and training. In the case of Prudential and International Paper, activity-based costing played an important role in their decision to outsource HR administration.⁸

The second option for b2change firms is to eliminate budgets entirely. There is a group of companies in Europe that has gotten together to explore and experiment with the creation of budgetless organizations. This is not to say they eliminate measurement; but they do eliminate the detailed budgeting process that occupies so much time at certain points of the year, produces organizational rigidity and, often, generates mountains of reports that people rarely look at.

The budgetless approach is described in the book Beyond Budgeting, by Jeremy Hope and Robin Fraser.⁹ At the heart of the beyond-budgeting movement is the insight that when an organization uses a budget as a rigid control mechanism, the result is all kinds of counterproductive game playing and, what is most salient from our point of view, stifled change. A budget is in practice a fixed performance contract between one level of an organization and another. The operative word is “fixed,” which is why it is very hard to create a b2change organization without adopting some of the beyond-budgeting philosophy.

A leader in the beyond-budgeting movement is the Swedish bank Svenska Handelsbanken. The bank trusts that managers will work to optimize profit—and hence do not need a fixed contract under which they promise certain results in what we all know is an uncertain future. Managers still set cost and revenue targets—and these are very much stretch targets—but they are not judged against what they guessed they could do. Rather they are judged against the performance of a peer group within the firm, an external benchmark, or what the market has done in its sector. Hope and Fraser point out that although finding the right comparator is always an issue, you can often find comparators within the firm if you look.

Instead of engaging in an annual planning process, beyond-budgeting firms continually go through four steps:

1. Check: How are we doing?
2. Aim: Should we reset our goals?
3. Plan: How will we achieve our goals?
4. Act: Execute the plan.

Coordinating an Organization’s Metrics

It is important to have comprehensive performance measures for all parts of an organization, but simply having them is not enough. They need to be actively coordinated such that the measurement system encourages integration across the organization and drives everyone to achieve common goals. Integration of this type has to start with the strategic intent and with top management’s translating the strategy into goals, which can be cascaded down the organization.

Siebel Systems, before its acquisition by Oracle, serves as an interesting example of the coordination of goal setting and performance measurement. Siebel had a very clear strategy that emphasized sticking to its core software competency and establishing a strong focus on its customers. The firm’s number one goal was customer satisfaction. It recognized that the behavior of its employees was the key determinant of customer satisfaction. Siebel therefore used an employee relationship management software system that, among other things, focused on customer satisfaction.

Here is how the Siebel system worked. During the first week of each quarter, Siebel’s executive committee met and established the objectives for the next three months. By the seventh day of the month following the meeting, the objectives of the CEO were posted on the company’s intranet, which was accessible by all the employees in the organization. By the fifteenth, the CEO’s objectives were translated into objectives for the various functions and business units that reported to the vice presidents. By the twenty-first of the month, every employee was expected to have posted and received feedback on his or her objectives.

The net result of this approach was that by early in each quarter, all employees had produced performance objectives that were the result of a downward-cascading process, and all the objectives had metrics associated with them. Through the employee management software, anyone could view the objectives of any other employee, including those of the CEO and the members of the executive committee. Because customer satisfaction was a key focus of the committee, all employees had a customer satisfaction goal in their personal objectives.

The evaluation of individual performance at Siebel was directly tied to and subject to the same process. Each manager was responsible for evaluating his or her reports by the fifteenth of the first month of each quarter. The results of the review were posted on the Siebel performance module and were visible to the managers to whom the employee reports. This means that all managers could see the performance reviews of individuals at lower levels than theirs. The obvious advantage to the Siebel system is that employees gain insight into how their goals and targets follow from the company strategy. Because they also see company performance results, they can get a sense of how they contribute to the company’s performance.

The Siebel approach exemplifies several of the features of the b2change organization: frequent goal setting (in this case quarterly), customer focus (which is in everyone’s goals), and transparency (everyone can see each other’s goals). Missing from the Siebel approach to performance management is an assessment of the organization’s capabilities and core competencies. The company doesn’t conduct a regular assessment (as InterContinental Hotels does, discussed earlier) that looks at how well its organizational capabilities are developing and performing. Adding this to the Siebel system would seem to be an important step. It would enable an organization to regularly set performance goals and review performance, and to systematically look at the causes of organizational performance.

Particularly for organizations that experience rapid environmental change, it makes sense to look at key capabilities at least annually, ask whether these are still the right ones, and assess how effective the organization has been in developing them. This approach both enables an organization to identify where change is needed and provides a potential incentive for change. In turn decisions based on this approach can drive the allocation of dollars, performance improvement efforts, and potentially a rethinking of the organization’s strategic intent.