(Article initially published through ASTD Links Newsletter January 2013)
Underlying every business concern is a fundamental question all leaders ask, “What do we need to do better?” Ultimately, corporate survival depends on how well they can answer this question. At first glance this appears as a non-threatening question but it is a challenge to answer properly. If you don’t believe me, try providing a concise answer. Not so easy, right?
Improving performance implies doing things better but this still doesn’t provide a clear definition. In business, “doing things better” is widely interpreted including (but not limited to): doing more with less (efficiency); challenging existing thinking (innovation); doing better than others (competitive advantage); reducing costs (profitability); improving processes (quality); or increasing revenue (growth). Again, management’s focus is how to improve the performance for these activities.
Business leaders typically address these performance issues in two ways. The first is a commonly used multi-step analysis called the “5-Whys”. This simple process simply asks “why” after each problem statement to discover the root cause for a business concern. For example, if product defects are increasing you would ask, “Why are defects increasing?” Once answered you would ask “why” again after each response. The 5-Why’s is similar to your young child asking “why” after you give him/her an answer to their question…and they persist asking “why” after each response driving you crazy. The 5-Why’s approach effectively uncovers underlying “softer” issues such as having the wrong person for a job or inconsistent values and behaviors.
Financial analysis is the other most common and popular approach management uses to measure performance. Like a moth to a flame, senior leaders favor this method over any other since their job performance is usually correlated to financial results. Although familiar to management, using only financial analysis to improve performance is biased and incomplete since financial results are lagging performance indicators. In other words, they merely identify symptoms of performance gaps not the actual cause. More importantly, financially based performance decisions are impulsive reactions and rarely identify employee skills improvement, usually the actual cause for declining performance. Put simply, financial results alone are inadequate as leaders become myopic, fixing “around the edges”, rather than dealing with core fundamental issues.
So, how do you proactively improve employee performance while balancing the need for improving financial performance? The answer is applying and leveraging the tools familiar to business leaders. This means incorporating a financial analysis approach following up with the 5-Why’s qualitative analysis. Independently, each method offers valuable insight to improve performance but when used together they provide a more balanced and unbiased approach.
Financial Literacy (or at least financial familiarity)
Intuitively, all business leaders use financial analysis to measure performance and this is where you must begin when identifying employee performance concerns. Using this approach isolates targeted performance improvement objectives and allows you to communicate through a common language with business leaders.
Typically, the two thoughts about financial analysis is either you know it or avoid it. Business leaders “know it” whereas everyone else tends to “avoid it”. Business leaders will always rely on financial analysis to identify performance issues. So, if you want leaders to support performance improvement efforts then you must be able to communicate with them in a language and method they recognize.
You don’t need to be financially fluent but it is important for you to be familiar with the fundamental elements of financial reporting. Start with recognizing the differences between relevant capital investments and operational expenses. Learn how to benchmark reported financial performance (financial statements) against expected results (budgets and forecasts). For example, if financial reports state that production expense increased by 15% over budget then you’ve identified a production performance issue that may require a learning intervention.
Another aspect to being financially literate is if you are responsible in some way for the learning function, or managing a learning initiative. Business leaders are able to differentiate between types and the use of expenditures to the benefit the organization. This is critical if the learning function is to build credibility. For example, training initiatives are usually considered operational line expenses whereas technology expenditures for e-learning maybe a capital investment. Recognizing and interpreting these differences is essential to gain support for the learning function or buy-in for any learning initiative.
A business leader’s natural instinct is equating performance measurement with financial results rather than the qualitative elements that contribute to performance improvement. All organizational performance, however, is driven from employees. People are even more relevant in demanding and competitive business environments.
Regretfully, many business leaders are unable or are simply too lazy to reconcile financial results with employee performance. These connections are a challenge even for the best performing organizations but are even more elusive when leaders seek to align individual performance with organizational expectations. These are common challenges and why business leaders implement and utilize performance management frameworks such as the Balanced Scorecard.
Effective leaders not only understand organizational dynamics, but they are able to mobilize their organization around a common mission/purpose, align employee effort, and promote consistent behaviors. This is relevant for learning professionals considering that these core qualitative factors impact people and helps to focus learning efforts on the relevant performance improvement needs.
Bringing It Together
Improving performance requires a focused and balanced approach incorporating both quantitative and qualitative factors. Recognizing who and what to improve is as important as actually the improving performance process itself. The following are simple steps to follow to develop a credible employee performance improvement process.
Focus first on financial results. This is counter intuitive to what many performance specialists advise. Always plan to financially communicate performance improvement. Doing so will gain and retain the attention of business leaders and will clearly demonstrate performance improvement effectiveness. Ultimately, business leaders recognize business success through tangible financial results.
The first step is to obtain the department and/or organization’s relevant financial forecasts and reported statements. Next, identify the capital and operational expenditures that align with management’s specific performance expectations. Then compare, or benchmark, reported performance with forecasted expectations.
For example, a product leading company may focus on R&D, quality, and marketing with relevant capital equipment investment and related operational expenditures. So, if product returns begin to increase from one period over another senior management will want to know why this is happening and expect performance improvement solutions that allow it to re-focus on its product leadership objectives.
Focus on relevant tasks and responsibilities. All expenditures within an organization correlate to specific tasks and responsibilities. Identifying relevant expenditures targets specific tasks where management wants to focus and aligns with the organizations mission. This is now where the “5-Whys” now play a significant role.
Contrary to popular belief performance improvement is not complicated. Do what the consultants do by conducting a vertical investigation. Do this by first identifying a financial discrepancy (described in the previous point) and asking a clear and direct investigative question to those accountable. Continue asking “why” after each question. If product returns increased 15% compared to the previous quarter ask, “Why did it increase?” Assuming returns are defective ask, “Why is the product defective?” Continue the process by having those responsible answer these questions until you get to the root cause.
Focus attention on “people” performance. It’s now widely accepted that all performance frameworks integrate “people” elements including employees, customers, and society. Unfortunately, many business-leaders and consultants still focus on process over people performance. Naturally, for business-leaders it’s simpler managing an impersonal process rather than leading and improving people. But without a doubt, lasting performance always begins and ends with your employees.
Successful companies always leverage employee skills, knowledge, and growth. Using the product defect example, you would now ask, “What aspect of the process is causing the issue?” In many instances performance issues stem from the lack of employee involvement, development and training. Next, investigate the poor performance asking involved employees focused skill and related process questions. This where your ability to conduct a needs assessment will lead to the true cause of the employee performance issue.
Too many employee performance specialist and learning professionals still avoid financial analysis like the plague and bias perception with only qualitative data. If you are doing this then you are getting only half of the story. Improving qualitative performance without attending to financial outcomes doesn’t appropriately improve employee performance and does not build credibility among business-leaders.
Developing a more holistic performance analysis approach leverages your organization’s financial results to correctly identify the qualitative improvement opportunities management expects. When applied appropriately, this investigative approach develops a continuous performance improvement process fostering proactive behavior rather than reacting on poor performance.
Ultimately, business is about profitability. Not only do financial metrics target specific performance concerns but it also help to demonstrate performance improvement. Effective performance management focuses on relevant business objectives that directly contribute to achieving the mission. Keep in mind that successful business leaders recognize that performance improvement begins and ends with financial reporting and that people, not processes, is the true path to improved performance.
Ajay M. Pangarkar and Teresa Kirkwood are founders of CentralKnowledge.com and LearningSourceonline.com. They are renowned performance management experts and 3-time authors most recently publishing the leading performance book, “The Trainer’s Balanced Scorecard: A Complete Resource for Linking Learning to Organizational Strategy” (Wiley 2009), and award-wining assessment specialist with Training Magazine. Help them start a, “Workplace Revolution” at blog.centralknowledge.com or contact: firstname.lastname@example.org