-
Steve Sherretta
November 28, 2018
Performance Management:
Enhancing Execution Through
a Culture of Dialogue
Peter is Chief
Executive Officer for a medical supply
multinational that
recently crafted a
new strategy to counter competitive threats. The
plan
stressed the need to cut cycle
time, concentrate sales on higher-margin
products and develop new markets.
Four months
after circulating the plan, Peter did a
“walkaround” to see how things were
going.
He was
appalled. Everywhere Peter turned people,
departments
—
whole business
units
—simply didn’t “get
it.”
First
surprise:
Engineering.
The
group
had
cut
product
design
time
30%,
meeting
its
goal
to increase speed-to-market.
Good.
Then Peter
asked how manufacturing would
be
affected.
It turned out the
new design would take much more time to make.
Total
cycle
time
actually
increased.
“Our
strategic
plan
message
is
not
really
getting
through,”
Peter thought.
Second
surprise:
Sales.
The
new
strategy
called
for
a
shift
—
emphasize
high
margin
sales
rather that pushing product down the pipeline as
fast as possible.
But just
about
every
salesperson
Peter
spoke
to
was
making
transactional
sales
to
high-volume
customers; hardly anyone was building
relationships with the most profitable prospects.
Sales is doing just what
it’
s always done,
Peter
thought
.
Worst surprise: Even his top team, the
people who’d helped him craft the
strategy, was not sticking to plan.
Peter asked a team member:
“Why are
you
spending all your time making sure the new
machinery is working instead
of
developing new markets?”
“Because my unit’s chief goal was to
improve on
-
time delivery,”
he answered.
“But
what
about
company
goals?”
said
Peter.
“We
came
up
with
a
good
plan
and
communicated it very
cl
early.
But
nowhere it isn’t being carried out.
Why?”
Many organizations create good
strategies, but only the best execute them
effectively.
Fortune
magazine estimates that when CEOs fail,
70% of the time it’s because of bad
execution.
1
Weak
execution
is
pervasive
in
the
business
world,
but
the
reasons
for
it
are
largely
misunderstood.
Why is
it that
no one in Peter’s organization was acting in sync
with the strategy?
Unless
we
understand the reasons, we can’t
hope to solve the problem.
Imagine
someo
ne
hitting
a
tennis
ball.
When
the
brain
says
“hit
the
ball,”
it
doesn’t
automatically happen.
The message travels through nerve
pathways down the arm and crosses
gaps
between the nerve cells.
These gaps, or “synapses,” are
potential breaks in the conne
ction.
If
neurotransmitters
don’t carry the message across the gap,
the message never gets through, or it
gets distorted. When that happens,
either the arm doesn’t move at all, or it moves
the wrong way.
Creating a “culture of
dialogue”
Just
like
a
nervous
system,
organizations
also
have
gaps
that
block
and
distort
messages.
The
secret to effective
strategy execution lies in crossing hierarchical
and functional gaps with clear,
consistent
messages
that
relay
the
strategy
throughout
the
organization.
Sou
nd
simple?
It’s
not.
The
reason
is
that
the
“neurotransmitters”
in
organizations
are
human
beings—
executive
team members, senior managers, middle
managers and
supervisors
—
whose job it is
to make sure
that
people’s
behavior
is
aligned
with
the
overall
st
rategy.
Doing
what
it
takes
to
achieve
alignment is very
difficult.
It is what Ram
Charan calls, the “heavy lifting” of management,
and
it’s the key to executing strategy.
As
we’ll
see
later,
there
is
an
important
difference
between
companies
that
succ
essfully
align
behavior with strategy
and those that do not.
Companies that effectively execute
strategy create a
“culture
of
dialogue.”
A
culture
of
dialogue
encourages
pervasive
two
-way
communications
where
individuals
and
groups
1)
question,
challenge,
interpret
and
ultimately
clarify
strategic
objectives;
and
2)
engage
in
regular
performance
dialogue
to
monitor
behavior
and
ensure
it
is
aligned with strategy.
Three keys to managing
performance
A culture of dialogue
doesn’t happen instantly, any more
than
a fluid tennis stroke does.
It takes
practice,
persistence and hard work.
So how exactly can leaders ensure that
strategy messages go
all the way down
the line
—
that the tennis
ball gets hit correctly?
The three keys to managing
performance effectively are:
1.
Achieving radical clarity by decoding
strategy at the top.
Many
organizations
think
they
send clear signals but don’t.
In some cases, managers
subordinate broad strategic goals to
1
“Why CEOs
Fail,” by Ram Charan and Geoffrey Colvin,
Fortune
magazine, June 21,
1999.
operational goals
within their silos.
That’s
what happened with Peter’s top team.
Elsewhere, top team members often have
too many “top” priorities—we’ve seen as many as
100 in one
case
—
which results in mixed
signals and blurred focus.
Strategy decode requires
winnowing priorities down to a
manageable number
—
as little
as five.
2.
Setting up systems and processes to
ensure clarity.
Once strategy is clear,
organizations
must create processes to
ensure that the right strategy messages cascade
down the
organization.
These include: strategy-centered budget
and planning sessions; staff and team
meetings to discuss goals; performance
management meetings; and talent review sessions.
Dialogue drives all these
processes.
Each represents
a “transmitter opportunity,” where
strategic messages are conveyed and
behavior is aligned with
goals.
3.
Aligning and differentiating
rewards.
Leaders
must make sure rewards encourage
behaviors consistent with strategy,
which sounds easy but isn’t.
Differentiation is about
making sure that stars get
significantly more than poor performers.
But almost everywhere
managers distribute rewards more or
less evenly.
As we’ll see,
lack of effective
performance dialogue
is a key contributor to dysfunctional reward
schemes.
We
list
these
three
items
separately
but
they
are,
of
course,
interconnected.
Systems
and
processes depend on clarity from the
top.
Differentiation and
alignment of rewards depend on
managers
using performance systems effectively.
Dialogue is the glue that holds it all
together.
But not just any
dialogue will do.
It must
be dialogue with purpose, focused on performance.
Link to company valuation
Companies that manage performance
well
—
General Electric comes
to mind
—
have higher market
valuations.
Why?
Because, more and more,
institutional investors view strategy execution as
a
vital factor influencing stock
prices.
Just
a
few
years
ago
institutional
investors
relied
almost
exclusively
on
financial
measures
for
company
valuations.
Now
35%
of
a
market
valuation
is
influenced by
non-financial,
intangible
factors,
according to a study by Ernst &
Young.
2
The study showed that
“execution of corporate
strategy”
and
“management
credibility”
ranked
number
one
and
number
two
in
importance
to
institutional
investors
out
of
22
non-financial
measures.
John
Inch,
a
managing
director
and
analyst
at
Bear
Stearns
notes
that
in
some
sectors,
such
as
diversified
industrial
companies,
intangibles
account
for
even
more
—up
to
half
a
company’s
value.
“You
can
take
even
a
mundane asset and inject
good management and have something pretty strong,”
say
s Inch.
2
Based on a
study conducted by Sarah Mavrinac and Tony
Siesfeld for the Ernst & Young Center for
Business Innovation.
1. Achieve Radical Clarity
by decoding strategy at the top
The
first
step
in
successfully
executing
strategy
is
achieving
clarity
on
the
top
team,
which
is
frequently the source of garbled
signals.
Lack
of Clarity at the Top
A
recent
Hay
Group
study
3
shows
a
disturbing
lack
of
clarity
on
top
teams
(organizational
clarity
measures
the
extent
to
which
employees
understand
what
is
expected
of
them
and
how
those
expectations
connect
with
the
organization’s
larger
goals).
The
chart
below
shows
dramatically higher levels of clarity
on outstanding vs. average teams.
In fact the biggest single
difference between great and average
top teams and typical ones was in the level of
internal clarity.
See Figure 1.
Figure 1: Organizational
Climate and Teams
F
igure
1:
Measures
climate
organizational
dimensions
for
outstanding
top
teams
vs.
typical
ones.
For each dimension of climate
we
asked
how
the
team
was
58%
performing in reality
and how
it
should
be
performing.
Then
we
measured
the
diff
erence
or
“gap”
in
their
18%
answers.
Gaps
over
20%
hurt
performance.
The
[Change Hay/McBer to
“Source: Hay Group, Inc.” in final
version]
And a
Lack of Clarity Below
Workers at lower
levels strongly feel this lack of clarity.
Figure 2 looks at
satisfaction levels for
workers
planning to leave their organizations within two
years versus those planning to stay longer.
3
Hay Group
partnered with Richard Hackman of Harvard
University and Ruth Wageman of
Dartmouth College to identify the
dynamics of top executive teams and their impact
on performance.
From an
initial group of 48 teams, the researchers
narrowed their study to 14 teams, many from large
global organizations.
Each team member represented the head
of an organization, a major business
division, or a major geography.
This study showed that a key reason
people leave their jobs is that they feel their
companies lack
direction.
Even among employees planning to stay
more than two years at their companies,
only
57% felt their
organizations had a clear sense of
direction.
Figure 2: Key reasons why
employees leave their companies
Satisfaction with:
1. Use of my skills and abilities
2. Ability of top management
3.
Company
has
clear
sense
of
direction
Total %
Satisfied
4
years
(%)
83%
74%
57%
(%)
49%
41%
27%
Employees planning to
stay more than two
Employees planning
to leave in le
[NOTE; HIGHLIGHT SECTION
3; MAKE IT POP GRAPHICALLY]
Clarity matters
Why do
employees crave clarity?
Think about it.
What could be more
demoralizing than the realization that
your hard work is not contributing to overall
company goals? Employees want to do the
“right” thing, but they can only do so if
they know what the right things are.
Unfortunately,
as we saw in our opening vignette, companies often
don’t
communicate strategic goals
effectively.
An oil
refinery client, for example, set a
strategic goal to cut costs. To see how
well the message had gotten through, an
operations team leader held a strategy
decode session where he quizzed his team
members on what they felt was the chief
priority.
Ten team members
produced four
different “top”
objectives, including cost
-cutting,
safety, environmental compliance
and
reducing sales processing time.
The message hadn’t got through.
The team
leader
called his team together and created a
“transmitter opportunity.”
“Don’t you guys realize
that if we can’t cut our refining costs by three
cents a gallon,
they’re going to shut
us down?” he said.
“Is that all you need us to do?”
replied the team members, taken aback. United by a
clear direction
and
shared
ownership
of
the
cause,
team
members
enthusiastically
cut
costs
by
five
cents
per
gallon
over
the
following
year
while
continuing
to
maintain
good
safety
and
environmental
4
Source:
Hay
Group,
Inc.
The
results
are
from
our
Employee
Attitude
Survey,
which
sampled
some
300
companies
representing
more
than
1
million
workers.
Our
survey
queried
management,
professionals,
salespeople,
information
technologists,
and
clerical
and
hourly
workers.
The
“gap”
referred to in the table is the
“satisfaction gap” between workers
planning to leave within two years
and those planning to stay
longer.
records.
Narrowing priorities
Having too many priorities can lead to
lack of clarity.
AeroMexico, for example,
had
worked with a strategy consulting firm that
delivered a 249-page report listing
key
performance indicators (KPIs) for measuring
progress by the enterprise.
The
good news was that the
KPIs gave the top team metrics for measuring
success.
The
bad
news was that there were 100 of them, and they
weren’t prioritized.
“It was clear that
ex
ecution would suffer unless we
identified the most important
ones,
says AeroMexico CEO Arturo Barahona.
“So we discussed which ones
connected most directly with our
strategic priorities and where we were in the
business cycle, and each team member
settled
on five chief goals.”
By gaining
clarity on key objectives, the team
greatly increased the odds that signals would
transmit clearly down the line.
Getting buy-in
at the top
Hay research on teams has
shown that it’s not uncommon for team members to
nod
their heads in
agreement
when new strategies are set in meetings, then go
back to their division or department
and carry on exactly as they had
before. In effect, they end up sabotaging the
plan. That’s why
gaining buy-in is
essential to effective execution, and
dialogue
is what makes it
happen.
IBM
created
an
executive
team
consisting
of
six
Ph.D-level
technical
leaders
at
an
applied
research
unit.
Their
mission:
build
strong
relationships
with
top
research
universities
so
that
IBM
could
recruit
innovative
scientists
capable
of
developing
breakthrough
products.
The
problem was
that the , all world-class scientists, were used
to competing for research dollars
and
dismissing each other's ideas to advance their
own.
Getting them to work
jointly and be held
accountable for
business results was going to be very difficult.
In the first group meeting,
the vice president simply assigned
accountabilities to the various team
members.
could
see
the
scientists
digging
in
their
heels,
says
Harris
Ginsberg,
an
internal
leadership
consultant who attended the meeting.
should do.
Even if they'd said yes to the VP's
directives, adds Ginsberg, they would never have
followed through.
Ginsberg, who helps IBM business units
clarify and execute strategy, knew the key was to
get the
scientists
talking
to
each
other.
So
he
coached
the
vice
president
to
change
her
behaviors.
Rather than hand out directives, he
suggested ways she could stimulate team dialogue
about how
to meet objectives. Ginsberg
also counseled other team members about the need
for a
process
They
all
it.
At
the
next
meeting
the
VP
said,
mandate
is
to
create
breakthrough
products.
Without access to talent at the top universities,
we won't succeed.
How are
we going to
get it?
At first, Ginsberg recalls, she met
silence.
Finally one team
member raised her hand.
She
was willing to
and
the
senior
human
resources
people,
said
Ginsberg.
She
also
agreed
to
help
some
up-and-
coming scientists learn how to develop
relationships with universities.
A second team member said he would
The ice was
broken and all the team members
eventually took on group responsibilities.
was
all
about
dialogue,
says
Ginsberg.
the
individual
leaders
embraced
the
unifying
elements of the strategy for the good
of the enterprise, they only attended to their own
mission.
The
dialogue
helped
them
buy-in,
agree
to
some
shared
activities,
and
begin
to
work
more
collaboratively.
2. Set up systems and processes to
create clarity
Why is executing
strategy so difficult, even when the plan is
clear?
Because good
execution only
happens when employee
behavior is aligned with strategy.
And many managers
can’t,
won’t or
don’t
create
the
“transmitter
opportunities”
required
to
get
people
to
do
the
right
things.
Managers:
can’t
because
they don’t know how to talk with the
ir
subordinates about change and/or
poor
performance;
won’t,
because
they find it uncomfortable to give candid
feedback; or, simply
don’t
realize
that
successful
strategy
execution
will
never
happen
without
ongoing
performance
dialogue.
Part
of
the
solution
to
this
problem
is
creating
systems
and
processes
that
force
performance
dialogue.
General Dynamics Defense Systems (GDDS)
in Pittsfield, MA, is one company where
creating such systems has contributed
to dramatic results.
From
1999 to 2001, attrition among its
valued software engineers dropped from
20 percent to 2.4 percent. Union grievances
dropped from
57 to zero, saving
hundreds of thousands of dollars. And, best of
all, earnings and profit margins
doubled.
What GDDS did
In
1999
the
$$200
million
plus
defense
contractor
challenged
its
employees
to
improve
the
company’s
negotiating
leverage
on
bids,
and
thereby
increase
margins
and
profitability.
To
accomplish this goal,
senior management directed all departments to
chase out costs, and created
numerous
processes
to transmit the
cost-cutting strategy down the managerial ranks
right to the
shop floor, which is where
they felt many of the best cost-cutting ideas
would come from
Carmen
Simonelli, director of facilities and security,
says his department
’s goal was to push
labor
costs 5 percent below budget,
with a “stretch” goal of 6 percent.
That was ambitious given that
direct
applied
labor
costs
had
been
running
10-15
percent
over
budget.
But
Simonelli’s
team
slashed
applied
labor
hours
to
an
unthinkable
20
percent
below
budget
.
Annual
savings
amounted to about $$440,000 on a $$2
million budget, or nearly $$10,000 per worker.
How
did
they
do
it?
The
key,
Simonelli
says,
was
the
processes
the
company
put
in
place
to
enhance dialogue and carry the message
to the shop floor. For example:
The Learning Map
The company
made
it easy
for employees to
understand its broad goals by creating a “learning
map,” which graphically outlined how
each department and team linked directly to core
objectives.
All
emplo
yees saw at a glance how their
jobs fit in.
Supervisors
and assemblers in Simonelli’s
group,
for
example,
could
readily
see
that
by
reducing
applied
labor
hours
in
a
project,
GDDS
could
increase
margins,
shorten
delivery
schedules
and
raise
the
chances
for
winning
new
contracts.
The
Scorecard
Managers and direct reports
at GDDS meet one on one to create Scorecards,
which set out five to
seven personal
annual goals.
For example,
the goals for shipping and receiving supervisor
Tom
Molleurs included plans to capture
all incentive payments for early delivery and to
cut direct costs
5%.
Once a manager and subordinate reach
agreement goals, they both sign the Scorecard as
if it
were a contract.
From the worker’s perspective, this was
a dramatic shift, says Newell “Tom”
Skinner,
at
the
time
director
of
product
delivery.
“In
the
past
we
just
set
the
goals
and
beat
up
employees
to try to make them, but they probably didn’t even
know why we had that goal in the
first
place.”
Scorecards are “transmitter
opportunities ” that clarify expectations and link
day
-to-day activity to
company
goals.
And
they
work.
Molleur’s
group
ended
up
cutting
direct
costs
by
50
percent
—
not just
5 percent.
What was the key
thing that made it happen?
Molleurs points to
his
weekly progress meetings.
When they were behind schedule,
Molleurs used the meetings to
make sure
the workers understood, through the Learning Map
and Scorecards and other processes,
how
meeting
or
beating
delivery
schedules
could
increase
competitiveness
and
win
more
contracts.
Top
management
did
simple
things
to
make
sure
strategy
messages
were
getting
through.
For
example
the
president
held
monthly
“pizza
meetings”
with
everyone
whose
birthday
fell
that
month.
At these “transmitter opportunities,”
he would ask
attendees people to list
their top three
goals,
and
their boss’
top three goals.
Within
months, everyone could answer the
questions.
When
effective dialogue pushes strategic imperatives
downward in an organization, extraordinary
things happen.
Skinner extended an open invitation to
any employee who wanted to attend his
weekly budget meeting with his
supervisors.
One day an
assembler showed up and said a part
design
was
forcing assemblers
to
work
by
hand
with
“dozens
of
tiny
screws,
lock
washers
and
nut
s.”
Skinner
had
the
assembler
meet
with
process
control
engineers
for
a
redesign.
The
result: a
job that had taken 12 hours was cut to four.
“The best ideas come from
the people doing
the
job,”
says
Skinner.
Once
the
“conversation”
got
started,
it
too
k
on
momentum.
Soon,