Sunday, June 07, 2009

Performance Evaluations, Business Strategy, and Agile Methodologies

It is performance evaluation time in many companies. This can be stressful, both to the people being evaluated, and the people doing the evaluation.

In companies adopting agile software development methods, the tension can be extraordinary. Individual performance evaluations run counter to agile philosophy, which emphasizes team performance over individual performance.

However, managers and corporate leaders need to take a few steps back, and consider the impact performance evaluations have on the organization as a whole. Especially now, in the midst of a recession, it is important to look at a companies current policies to see if they can be improved, or if they are actually holding the company back.

So, how can a manager evaluate policy? Performance evaluation policies can serve as an excellent example. I'll confine myself to discussing the so-called ‘rank and yank’ methods. These are performance reviews were employees are ranked using a forced ranking system. It usually looks something like this:

20% of employees will be considered top performers.
70% of employees will be considered adequate performers.
10% of employees will be considered inadequate performers.

Depending on the company doing the ranking, the inadequate performers will either get extra coaching and training, or get fired.

There is a quick and simple way to determine whether a policy or strategy like this is likely to do good or harm. It is called the Interaction/Isolation test. The test is based on the nature of business strategy:

Business strategy is a game of interaction and isolation. At its most fundamental level, the job of a manager is to strengthen interactions between the company and its customers, allies, and society (environment). To accomplish this, it is necessary to strengthen interactions between people in the company itself. Conversely, a company can isolate its enemies in order to reduce their power.

This sounds pretty abstract, but we will turn it to practical use in a moment. Here is an Interaction/Isolation matrix:

The matrix has four areas: We-Interaction, We-Isolation, They-Interaction, They-Isolation. You can evaluate a policy or strategy by figuring out in which quadrant it fits. You will find that successful policies and strategies almost always are in the We-Interaction or They-Isolation quadrants. If a policy or strategy fits in the We-Isolation or They-Interaction quadrants, you should at least investigate thoroughly. It is likely that the policy hurts your organization.

A performance evaluation is used to classify employees. It creates an incentive for people to compete against each other. People who compete with each other are less likely to share information. Performance evaluations can also create social cliques. These cliques also tend to isolate themselves from each other.

Performance evaluations also create uncertainty. What does management intend to do with the evaluation? Fire the low performers? Whether this is true or not, the suspicion, breeds distrust, which isolates managers and employees from each other.

Using the Interaction/Isolation test, performance evaluations end up squarely in the We-Isolation quadrant:

We should not rely exclusively on one simple test, but we do have a strong indication that further investigation is warranted. Let's do that.

What do well known management experts say about performance evaluations?

As is usually the case, there are people who are for performance evaluations, and those who are against it. Let's begin with a proponent, Jack Welch, General Electric CEO 1981-2001.

Welch is famous for initiating and consistently supporting a very successful Six Sigma program at GE. He is also famous for firing the lowest performing 10% of his employees each year.

On the other hand... GE also had the Six Sigma program. It is entirely possible that the Six Sigma program was the main cause of GE's success. The performance reviews might have had very little to do with it, or they might even have been detrimental.

Enron had a performance appraisal system, and it may have contributed to the company's downfall. You don't want your company to be the next Enron, do you?

Looking at the reasoning of performance appraisal advocates like Dick Grote, one thing is clear: The reasoning simplistic. Rank everyone, then yank the worst performers. There is little or no consideration of effects other than the desired ones.

For example, if you have good performers to start with, and yank the bottom 10%, the replacements you get will, on average, be worse than the people you fired.

Another problem is keeping the system honest. Welch has emphasized that the system must be honest to work, but how do you do that? For example, a manager can easily downgrade a strong performer in order to eliminate a future competitor. Employees have a strong incentive to sabotage each other.

A third problem, one I have mentioned already, is that information becomes something to withhold, rather than share. You don't want anyone else to get ahead if your continued employment depends on you outperforming them.

Let's see what some other well known experts say about performance appraisals.

Let's begin with one of the world's most successful entrepreneurs, Sir Richard Branson. Here is an excerpt from Business Stripped Bare:
Looking back over the personal notebooks I have kept for more than thirty-five years, I don't think there has ever been a letter from my office which criticises the staff or an individual. Now and again I've disagreed with something and suggested changes in behavior. But the Virgin group has always tried to look for the best in people. That way, you get the best back.
Branson writes a bit about Jack Welch, Alan Sugar, and Donald Trump, then continues:
There's a machismo about the way some managers talk about hiring and firing that I find downright repugnant. A senior person at Apple rather proudly says in his speeches about firing people that ‘I´d rather have a hole than an asshole.’ My philosophy is very different. I think that you should only fire someone as an act of last resort.
Branson's philosophy seems to work. The Virgin Group has about 60,000 employees. It's network structure makes it one of the most (crisis) resilient business organizations in the world.

Examples and counter-examples do not really prove anything, except that

A company that uses rank and yank can be successful. (GE)
A company that does not use rank and yank can be successful. (Virgin Group)
A company that uses rank and yank can fail. (Enron)
A company that does not use rank and yank can fail. (I'll leave it to you to find an example.)

Jeffrey Pfeffer and Robert Sutton are famous. They have written several highly regarded management books. Both are academics, but they also work with large corporations, and have a lot of experience. Here is an excerpt from their book Hard Facts, Dangerous Half-Truths & Total Nonsense:
A couple years ago, one of us gave a speech at a renowned (but declining) high-technology firm that used a forced-ranking system. They called it a stacking system. Managers were required to rank 20 percent of employees as A players, 70 percent as B's, and 10 percent as C's. Just as The War For Talent advises, they gave the lion's share of rewards to A's, modest rewards to B's, and fired the C's. But in an anonymous poll, the firm's top 100 or so executives were asked which company practices made it difficult to turn knowledge into action. The stacking system was voted the worst culprit. This is not just one company's experience. A survey of more than 200 human resource professionals from companies employing more than 2,500 people by the Novations Group found that even though more than half of the companies used forced ranking, the respondents reported that forced ranking resulted in lower productivity, inequity, and skepticism, negative effects on employee engagement, reduced collaboration, and damage to morale and mistrust in leadership.
According to Pfeffer and Sutton there is no evidence at all that rank and yank systems bring any benefits to the companies that use them.

Leslie Bracksick, executive coach and doctor of behavioral science concludes the same thing in her book Unlock Behavior, Unleash Profits:
Sadly, performance evaluations have relatively little influence over the day-to-day activities of employees. They are simply too far removed from where and when things happen.
Finally, let's turn to W. Edwards Deming, perhaps the most influential management expert of the twentieth century. Deming is often credited with being a major influence on the post WWII Japanese economic miracle.

In his book Out Of the Crisis, Deming does not mince words. He lists ‘evaluation of performance, merit rating, or annual review’ as one of the seven Deadly Diseases of Western management:
The idea of merit rating is alluring. The sound of the words captivates the imagination: pay for what you get; get what you pay for; motivate people to do their best, for their own good.

The effect is exactly the opposite of what the words promise. Everyone propels himself forward, or ties to, for his own good, on his own life preserver. The organization is the loser.

Merit rating rewards people who do well in the system. It does not reward attempts to improve the system. Don't rock the boat.
This is exactly why agile coaches and other agile change agents are so much against personnel reviews. Improving the system is exactly what the organization tells them to do, then the organization turns around and stabs the agile change initiative in the back with an outdated, ineffective, counterproductive, personnel appraisal system.

Well, if rank and yank is so bad, why do so many organizations do it?

According to Pfeffer and Sutton there is a very simple reason for why dysfunctional management practices continue to be used for very long periods of time:
When people have strongly held but unexamined beliefs, they act on those beliefs without ever surfacing the underlying assumptions and asking if, indeed their beliefs are logical and empirically sound.
From The Knowing-Doing Gap
Like Pfeffer and Sutton, I believe this is part of the answer. Another part is that many managers do realize that the personnel evaluation systems they use hurt both employees and the company itself.

They also realize that if they rock the boat and do speak out against a detrimental policy, they may very well get a poor performance review themselves.

Deming was right, merit ratings do not award people who try to improve the system.

3 comments:

Mike Giuffrida said...

Interesting read. While I don't use "rank and yank" we do regularly use performance appraisals with our team in an effort to help develop people in areas that they need improvement. That said,, we often try to focus on positive aspects of the process and only reprimand "behavior" to avoid it getting too personal.

Mike Giuffrida
http://www.foresitetech.com/blog/
http://twitter.com/smbceo

Fred Wiersma said...

Interesting indeed!

But what is the alternative to current performance evaluation systems?

I suggest to keep it as simple as possible. Evaluate only on predefined results. That is not so easy and may introduce other negative side effects.

Another alternative is to evaluate not only by the manager, but also by the manager's manager. Or combine it with the evaluation of colleagues.

Henrik said...

Hi Mike and Fred,

A complete answer to what to do would be quite long, so I'll give you an abbreviated version.

First of all, if a practice is really dysfunctional, doing it may be comforting, but abstaining would be better, even if you do not replace it. Smoking is a good example. Rank and yank is also in that category. Rank and coach - we'll, it depends on how you do it.

Second, think about what you want to accomplish. For example, do you want internal competition or collaboration? If you want collaboration, use Crawford Slip to gather information, TLTP to process it, Strategy on the Wall to display it. (This description is of course woefully incomplete. I have written a 400 page book - unfortunately in Swedish - about business strategy and organization. It goes into more detail about how to build collaboration based organizations.)

If you use TLTP, one of the things you get out of it is a strategic Intermediate Objective Map for your company. That map will have measurable intermediate objectives. If you use the strategic IO Map as a starting point, you can create lower level IO Maps for substructures in your organization.

Provided that you display the map prominently (Strategy On the Wall), rather than, say, hide it away in a SharePoint system, and that you have engaged your employees when creating it, rather than just handing it down from above, people will take a personal stake in it. (That is why I recommended Crawford Slip. Best way I know to get people engaged quickly. You need to do a lot of work to keep it up though.)

What do you do with the low level measures in your IO map? Measure at the team level. (Use the one-up measurement principle from Lean.) Focus on means, not results. Management By Means beats Management By Results any day of the week, but it does require that you train your managers appropriately. Lean and TOC training is fine, but my preference is for the IOHAI model, because it allows managers to use not just a particular paradigm, but paradigm shifting, to solve problems.

Putting the team in charge of measuring and figuring out how to improve usually works best. They will need guidance to get the hang of it, but once they have done that, the process is self-sustaining. Watch out for managers getting nervous and discouraging organizational learning though.

Management can and should monitor. Encourage the team, but take care not to interfere with an improvement process that works. (Suggestions are OK. Encourage experiments.)

This is pretty generic advice, so you will find it difficult to apply it. That is actually a good thing, because you can ask your employees to help you figure out what to do. (Crawford Slip, TLTP again.) Once they do that, you are on your way to building organizational unity. People will put more effort into their work than they have ever done before. They will also have more fun than ever before, and a sense of direction.

In general, people do the best they can. There are two things that may limit their accomplishments: innate ability, and the system around them. In the vast majority of cases, the limiting factor is something in the system. It makes sense to look for causes in the system first. Unfortunately, we rarely teach managers how to do that. I had owned a company for ten years before I got into contact with methods that were practically useful.

One of the things I recommend for any company, is to follow the U.S. Marine Corps example of having a reading list and a reading program. Make it very clear that you expect people in your company to read at least everything listed at their level, and the levels below. (The CEO must set an example by reading and being well versed in everything on the list.) Create the strategic IO map first, then put together the list so that it supports the intermediate objectives in the map.