Performance Management Underperforms

By Gina Ruiz

Jun. 30, 2006

In most companies today, performance is being managed the old-fashioned way: through annual evaluations and paper-based processes, with just a touch of homegrown automation. Goals are being cascaded from the top of the organization, but technology tools are largely absent from the process, meaning that the links between individual goals and corporate success are likely to elude many employees.

    Those are the conclusions of a survey of 218 HR leaders at companies of 2,500 or more employees conducted by Workforce Management in conjunction with Lisa Rowan, program manager of HR and talent management services at IDC, a global market intelligence and advisory firm. The survey was conducted in April. Participants were drawn from the membership of Workforce Management’s online user community.

Some key findings of the survey:
    4The happy respondents are not all that happy: Only 5 percent of the respondents are very satisfied overall with how performance management is handled in their organization; 41.5 percent are somewhat satisfied.

    4The highest level of satisfaction—66 percent—is with how the performance management process identifies top performers. The second-highest level of satisfaction—just under 66 percent—is in goal setting. The areas respondents saw as most lacking are the performance management system’s integration with succession planning, and performance management as a tool for retention.

    4Nearly 65 percent of the organizations say their performance management systems employ only a little automation.

    4Of those that are formally automated, 21 percent are using their enterprise resource planning system or HR information system to manage performance. The remainder are using either a separate “best-of-breed” system, such as SuccessFactors, or a best-of-breed system that’s part of a larger talent management suite, such as those provided by companies like Softscape or Workstream. (Best-of-breed performance management vendors focus exclusively on offering performance management or performance management in conjunction with other performance-related talent functions such as succession planning.)

    4Of those not automated today, nearly 45 percent plan to make a change in the next 12 to 18 months.

    4Of those that are automated, 26.5 percent say they plan to change their system in the next year or so.

    That’s a situation indicating “ample room” for performance management vendors who want to court new customers. Rowan says the level of dissatisfaction with the current performance management processes and the market opportunity it represents are the two most striking points in the survey.

Opportunities and unknowns
    If best-of-breed companies see golden opportunities in the dissatisfaction among respondents, they may be in for a shock: Nearly 57 percent who say they are going to automate their system plan to use their ERP or HR information system to do so. Only 6.5 percent plan to go for a best-of breed system.

    That’s a surprise, Rowan says, given the success that the best-of-breed performance management providers are enjoying.

    “The likes of SuccessFactors and others are experiencing double- and triple-digit year-over-year growth,” she says. “Where is that coming from, if companies are using their ERPs?”

    It may be, Rowan says, that the respondents aren’t yet acquainted enough with the technology tools available, aren’t really sure what they intend to do, and are pointing to their current systems as a solution until they more definitively make up their minds.

    IDC says spending on software and services for performance management in 2005 was $973 million and forecasts that spending will reach $1.8 billion by 2009 growing at a compound annual growth rate of 16 percent.

    “This particular market, as we’ve noted at IDC, is in its relative infancy,” Rowan says. “There are a lot of unknowns.”

    That uncertainty is further supported in the survey: 26 percent say they don’t know how they’ll accomplish their performance management automation project.

    What is known is that most companies are getting by with just a few technology tools at their disposal. Rowan says the systems are likely built on Word or Excel templates, with some automated features, such as notifications of performance evaluation due dates, created by the organization’s IT department.

    “You would think that Microsoft is the world’s biggest HR vendor,” says Jason Averbook, CEO of Knowledge Infusion, a talent management consultancy based in San Ramon, California.

    This rudimentary way of doing things is sure to be a source of headaches for the companies that say they integrate cascading goals into their performance management processes.

    Cascading requires identifying key specific tasks for each employee—from the C-suite down to the entry-level ranks—and establishing individual performance goals that can collectively focus an organization on the achievement of its objectives.

    Experts say automation is particularly important for larger organizations that are cascading goals. The level of coordination that is involved becomes too intricate to be done manually. Nevertheless, most respondents say that’s what they’re doing. That’s a tough task, Rowan says.

    If corporate leaders have a goal to grow revenue by 20 percent, and that is being manually translated into a goal appropriate for each member of the organization, some of the connections will be difficult to make, she says.

    “If I’m not in sales, you can put that on my evaluation as a goal, and that means you have to go through the process of translating that into a process I can control,” Rowan says. “It’s interesting that so many are doing that, with no tools to help them. It would be very, very time-consuming.”

    The survey also shows that the annual performance review is still king. Fifty-six percent of survey participants say they conduct performance reviews once a year; 18 percent say they carry them out semiannually.

    One surprise is that 15 percent of survey participants say they manage performance continuously. This batch is probably from those companies that use powerful technology and take the process very seriously —more the exception than the rule, according to Rowan.

Unhappy with the status quo
    Technology, however, doesn’t answer all performance management prayers. Of the respondents who already have automated systems in place, 38 percent say they are either somewhat or very dissatisfied with the status quo.

    When asked, 26.5 percent say they are planning on changing their system in the next 12 to 18 months.

    There are areas where the discontent is more pronounced. Nearly 50 percent of respondents say they are somewhat dissatisfied or not at all satisfied with how their organization handles performance management as a tool for succession planning. And 40 percent are either somewhat dissatisfied or not at all satisfied with performance management as an effective employee retention tool.

    But switching systems may not be the solution, according to workforce specialists. “What people have to realize is that technology is not broken,” Knowledge Infusion’s Averbook says. “It is the process that is broken.”

    A more effective approach for getting the most out of performance management is by being more responsive to the data that companies collect in the performance management process. “Information is only as good as what you do with it,” Averbook says.

    Averbook also suggests intertwining performance management with other talent management functions. The survey shows that companies are already doing this to a certain degree. Seventy-nine percent claim strong integration with compensation, but given the lack of automation, this has to be a largely informal integration, Rowan says. Another 72 percent link learning and development with performance management.

    There is much room for improvement. In succession planning, for example, 48 percent of survey respondents say there is no integration at all with performance management.

    It’s not an easy gap to bridge. It’s much easier to draw a correlation between productivity and compensation than it is to do so between productivity and who should receive a promotion.

    Determining whether an employee should move up the ranks requires much more than just their specific job performance. Factors like experience and leadership abilities also come into play, Averbook says.

    The ideal of performance management—clear lines of sight between each employee and the larger organizational goals, frequent feedback and performance evaluations that are tightly integrated with compensation, succession planning and retention, to name but a few—is unlikely to emerge unless companies incorporate automation and drop ineffective processes.

    How companies get there is as individual as the organizations themselves are. Rowan says the Workforce Management survey reveals information that lines up with other work IDC has done in the performance management arena.

    The one variance is that in this survey, the number of companies relying on their ERPs to shoulder the weight of performance management is higher than in other studies conducted by IDC.

    For any companies that are tempted to create an automated performance management system in house, Rowan cautions against it. It might look simple, but there is more to it than just automating a paper trail.

    Vendors are better able to handle the complex interactions involved, she says. And the product developers also have included best practices in their systems, based on the experiences of many other buyers. You might want to benefit from their knowledge.

Workforce Management, June 26, 2006, p. 47-49Subscribe Now!

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