It is not enough to do your best; you must know what to do, and then do your best.

—W. Edwards Deming

WHY YOU SHOULD CARE ABOUT PERFORMANCE MANAGEMENT ANALYTICS

Top performing organizations believe people are their most important asset. Among leadership, there is a strong belief that leaders, managers, and frontline contributors are all critically important to achieving long-term growth and sustainability. However, most companies have not figured out how to best manage the performance of their people, on which growth and sustainability so critically depend.

People are the sole source of innovation. Their passion strengthens organizations and creates competitive advantages. To realize any of this value, organizations need to proactively align the individual goals, strengths, and passions of their workforce with the organization’s short- and long-term objectives. Performance management is the process of continuously aligning people and organizational objectives to realize the value of each individual and team.

Most organizations take a very traditional approach to performance management. This includes individual planning, check-ins, and periodic evaluation of progress, all feeding into compensation and promotion decisions. For most, performance metrics are established in collaboration with a manager and, if well designed, they are actionable and benefit the overall effectiveness of a work group. At most organizations, performance management has evolved through iteration and does a very good job of capturing the strengths and weaknesses of each employee. The challenges are linking this information to the business on an ongoing basis and constantly adapting the overall performance management process to your workforce needs and preferences such as frequent feedback and performance management via an app.

LINKING INDIVIDUAL OBJECTIVES TO COMPANY OBJECTIVES

Individual objectives are typically tracked and subsequently used for evaluation (e.g., complete, partial, incomplete) through the performance review cycle.

Examples of individual objectives include:

• Create a basic disaster recovery plan by July 1, 2016.
• Assume leadership for reconciling e-reports for unit.
• Recruit at least two agencies to participate in a series of classes.

However, very few organizations actually link objectives to meaningful outcomes like growth, sales, or productivity. This is a gap that the best-run companies are beginning to bridge with data and analytical expertise. Organizations are hiring quants with advanced degrees to create new capabilities in human resources (HR). As an example, one of Canada’s largest banks recently hired a team of PhD-level physicists into its workforce planning group to design tools that will help managers be more proactive in providing feedback to employees.

There can be unintended consequences when the future impacts of performance management decisions are not well understood. One consequence is organizational swell. Organizations tend to swell through the natural cycle of promotions and turnover, year over year; this can evolve a nimble, efficient workforce into one that has an expensive middle or is top-heavy. Very much like athletes, it is important for companies to ensure they are in ideal shape to deliver on their objectives. This is a challenge, as the profile of a workforce is constantly in motion. To stay ahead of this, leaders need to understand how these changes impact their ability to deliver on a strategy and the best options available to correct course.

Our approach is twofold: First, assess the workforce required to deliver on future objectives. Then, proactively manage employees to align their development with high-level objectives. Relative to current practice, this will focus employees’ growth where it will have the biggest impact and help to ensure that the workforce evolves in a sustainable way.

Traditional Performance Management

Current practices typically involve an annual review and promotion cycle, with semiannual check-ins to assess performance. Objectives are set annually and measured formally once a year. This practice emerged as more qualitative scorecard-based performance systems developed to consolidate manager ratings into a single score. This approach involved time-intensive interviews, project reviews, and group meetings.

Performance ratings and promotions are typically determined by individual success relative to goals. Success can be very tangible (e.g., sales, cases reviewed, billable hours) or more difficult to measure (e.g., leadership, team contribution, problem solving). In most cases, performance is assessed as a combination of tangible metrics, perception by management, feedback from colleagues, and performance reviews. The labor-intensive and qualitative approach to assessment meant that reviews were performed only once or twice a year (see Figure 9.1).

Leveraging Analytics to Drive Business Performance

An analytical approach that utilizes data enables performance to be assessed at a much more granular level (monthly, or even daily) relative to objectives (see Figure 9.2). The point-in-time data underlying performance provides employees with transparent feedback as to why their performance increased or decreased. Ratings also reflect current conditions rather than a consolidated year of work. This also reduces the impact of the psychological bias that managers have, including the provision of greater credibility to more recent work in their ratings.

Although continuous monitoring of performance does provide the most accurate current assessment of performance, a hybrid approach is typically preferred—one that incorporates greater historical data and structural changes in the business. This has the effect of balancing the long-term and short-term performance measures.

Employee performance is critical to success or failure at an organization. An approach that leverages analytics enables leadership to respond faster to problems and promote success on an ongoing basis.

DEFINING PERFORMANCE MEASURES

The first step in defining performance measures is to define success. Then, assess measurable ways that each employee contributes to that success. The extent of the employee’s contribution is used to assess performance and eventually promotion.

Most organizations have in place enterprise-grade systems that track employee plans, and enable monitoring and evaluation. They have metrics such as “client impact” or “quality” that are underpinned by concrete goals that are proposed by employees and reviewed by management. In current practice, the link between outcomes and the system is presupposed. Implicit in this system is the assumption that quality will actually improve as a result of employees’ achieving their goals for the “quality” metric.

Traditionally, quality of work was far easier to measure than impact. This is particularly true for internal processes at large companies and for those in the public sector. Consider the function of compliance at a bank. Employees in this role review documentation, application processing, regulatory filings, and the like. They play a critical role, and their value is priceless when compared to risk associated with fraud and noncompliance. Traditionally, investigators in this role evaluated based on the number of reviews performed, issues identified, branches inspected, quality of documentation, and similar process-based measures. However, measuring the degree to which an action was performed relative to expectations is not the same as measuring the impact of that action. This approach to assessment assumes that high-quality work reduces compliance risk.

A distinguishing characteristic of our analytical approach is a lack of this assumption. An alternative way to measure performance is to assess actual fraud and noncompliance, and review results ex post relative to the activities performed to mitigate the risk of these outcomes. This approach leverages historical data and assesses performance relative to actual results.

There are three ways that organizations measure performance using analytics: quantitative, qualitative, and passive.

PERFORMANCE INCENTIVES AND PROMOTION

Using data to assess performance enables incentives to be more closely linked to desired behaviors and outstanding performance. Most organizations adjust salaries on an annual basis, and this is an antiquated approach that grew out of annual review cycles and the traditional approach to performance management.

A major benefit of utilizing an outcomes-based analytical approach for assessing performance is that the value of each employee can be evaluated at any point in time. This is a distinguishing feature that provides a significant advantage in terms of flexibility and talent retention. This approach enables organizations to more closely align compensation, level, and value delivered by an employee. An approach where compensation is closely tied to performance will reward employees more on months (or quarters) when they are delivering greater value and less when they deliver less value. Value contributed is measured in terms of performance measures, which highlight the importance of ensuring that these measures are grounded in quantifiable metrics that are linked to business outcomes.

Knowing when an employee is ready for promotion is exceedingly difficult because, in addition to compensation, the role of the employee also changes. With the right data, analytics can add clarity to the selection process by assessing each employee for the characteristics identified in those who are successful at the next level. Promotion into a new role can involve a steep learning curve. The metrics used to identify employees for promotion also provide insights into their strengths and areas where they need to grow. From a mentoring perspective, this information can be used to provide informed and tactical assistance in a proactive way to new managers.

A proactive approach to performance and promotion also tells managers how many employees they will need at each level in the coming years. It helps manager to address questions such as:

• Which employees will be successful if promoted?
• What training would an employee need before getting promoted?
• What team members are required to ensure success of newly promoted employee?
• How long should an employee work for your organization before he or she gets a promotion?

This also helps leading organizations to predict employee promotion paths.

This information can be used to mentor and grow high-potential candidates in ways that will fill identified gaps in the future. Integration and analysis of HR performance measures provide further clarity to the skills needed in the future. Once the gaps have been identified, the next step is incorporating them into the objective-setting process for current employees. The goal is to ensure that the current workforce is grown and mentored to fit into areas of need in the coming years.

Consulting can be a notoriously intense industry, often involving long hours, weekend work, and travel. A well-known predictive analytics firm discovered that it could fight fatigue, increase retention, and boost morale by paying certain employees more during times when they were intensely busy, and less through slower cycles. The approach was simple; compensation increased during long hours and decreased when employees worked less. This also provided the firm with justification at the end of its annual review cycle for avoiding large pay increases, as its employees had technically already received that compensation when the firm was operating at full capacity earlier in the year. The strategy employed was enabled by good data that was available monthly and very transparent performance metrics that linked in a credible way to profitability.

PROVIDE INSIGHT TO SENIOR MANAGEMENT

Senior management defines the objectives for an organization and relies on managers and staff to deliver based on senior managers’ guidance. From their perspective, performance management ties very closely to workforce planning in that organizations need to assess the staff profile required at each level to deliver on a plan. We’ll define the profile of an organization as its distribution of senior leadership, management, and operational resources. This profile is typically measured at multiple levels and varies based on level and function in the organization. Most companies simply let their profiles evolve by inertia through hiring, promotion, and termination. This passive approach can have unintended consequences with regard to organizational shape. More important, it does not in any way seek to maintain the right number of people in the places where they can be most effective.

By leveraging historical data and the right technical expertise, organizations can understand the impact that their shape will have on future performance. This is an exercise that correlates the proportion of employees at each level to key metrics such as revenue, profitability, and growth to identify an optimal profile for each business unit. Once the target state has been defined by senior management, basic ratios can be used to compare subgroups with their associated target state to distinguish optimal and suboptimal profiles. It’s important that this analysis incorporate at least a five-year projection of staff levels adjusted to incorporate retirement, hiring, and termination expectations. Best practice is also to use multiple scenarios (worst, expected, best) to provide recommendations that incorporate uncertainty about the future.

Coupling workforce planning, simulation, and an understanding of target profiles enables management to identify gaps both today and in the future at multiple levels of the organization. Google performed this analysis and found that if it maintained its current hiring practices it would be a middle-heavy organization. Its solution was to reduce new hiring into senior-level positions and instead promote internally, even in the case of management departures.

An understanding of future needs and the implications of HR decisions is invaluable when planning for the long term. Insight into the staff and management profile needed in the coming years enables managers to be more proactive. The number of promotions can be determined by need rather than tenure and relationships. Career growth is determined by anticipated demand for people at different levels in addition to aptitude. This data can be fed back to employees so they are aware of expected gaps in leadership and can plan to grow into positions. Tactically, managers can use this information to plan for the longer term and be more transparent about promotion and performance evaluation.

Employees’ performance is best measured relative to broader organizational objectives. Their performance and related goals should link directly to an outcome. This is a challenge, as each employee has unique performance metrics that are constantly in motion. This can make identifying patterns at the employee level nearly impossible. One way to tackle this problem is to group performance measures in a way that enables them to be tracked as a whole. Performance measurement categories can be mapped across the organization to facilitate a comparison among different employees. The performance categories can be viewed as natural overlays atop concrete measures. Grouping measures assists management in comparing the contributions of employees fairly relative to those of their peers on a similar plane.

BENEFITS OF ANALYTICAL PERFORMANCE MANAGEMENT

To the business: An analytical performance management (APM)-driven approach jointly benefits the business, HR function, and employees (see Table 9.1). The benefits to the business are generated by an improved focus on high-level objectives, including product development, safety, or efficiency. The APM approach ensures that management can actively monitor employees to make sure that they are focused on what counts on an ongoing basis at a granular level.

To employees: Employees become more engaged when goals and accountability are transparent. Utilizing concrete data for performance reviews provides transparency to the review process and enables management to reward employees based on performance when performance is high, rather than 12 months later. Employees benefit from this approach of active reinforcement. Further, transparency in the review process will enable top performers to shine and provide evidence-based feedback to all employees.

To human resources: In most organizations, the HR function relies on feedback and relatively soft metrics to review employees. This results in performance metrics and promotions that, however justified, can be difficult to defend. Another impact of their reliance on softer data is that it can be difficult to quantify the value of HR. An APM approach can resolve both of these challenges. A data-driven approach to promotion and performance management will add transparency to the product and enable HR to clearly articulate the evidence and rationale for promotion. Through a more thorough understanding of employee performance and its impact on the business, HR can also more accurately estimate the employee’s value to the business and justify further investment.

BEST PRACTICES

There are three areas that distinguish organizations that do a fantastic job utilizing their data to increase performance from those who do a very poor job:

1. Link people to the business.
2. Use data and think ahead.
3. Continuously evaluate.

Best practices start by answering the question “Which employee performance measures are meaningful to the business?” Create a list. Then begin to collect data and continuously evaluate and provide feedback to promote an alignment between employees and objectives set by management. Be proactive in managing a workforce to ensure that the profile remains lean.

Do:

• Capture granular data on employee performance.
• Evaluate employees with metrics that can be linked to business outcomes.
• Use data to drive decision making.
• Use an app to manage performance.
• Use predictive analytics to anticipate promotion success.
• Adapt to your workforce demographics.

Do not:

• Remove the guesswork and the human element of people management.
• Define metrics that employees cannot effect.
• Rely on data in isolation from the broader context.
• Use old annual performance reviews.

PREDICTIVE ANALYTICS AND GRAPH THEORY TO OPTIMIZE CAREER PATHWAYS AND EMPLOYEE PROMOTION

Some forward-looking companies we spoke with are already harnessing their talent data using graph theory coupled with predictive analytics to determine whether a given employee will be successful if promoted to a senior-level position. In fact, those companies that are using such predictive models and graph theory analytics recorded 33 percent more success from their newly promoted employees than those who are not leveraging these insights.

So, how does it work? These new workforce promotion and career pathway models use digital mapping of companies’ global resume databases and employee profile data to perform a comprehensive analysis of every candidate or employee. The program also profiles the digital representation of every job and every skill required for those positions. By comparing the data, the models provide insight based on past performance as to whether that particular individual has the skills and track record that will lead to success. The models then assign a final promotion success score to each employee based on current career level, experience, skills, and network graph information.

Similarly, career pathway models are also used to provide advice to employees and even job seekers who would like to transition to other positions—which can be particularly useful to those who are considering a new or an alternative career path. Some companies are using these solutions as orientation tools to provide counsel on what the best next career transition could be for a particular employee.

While still nascent, Big Data graph theory and predictive analytics models will definitely be useful once fully connected to large employment institutions, such as universities or the U.S. Bureau of Labor Statistics, as they will provide actionable insights in regard to training, learning, and development, but, more important, they will also provide even greater data intelligence to those working and competing for global talent.

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