Architecting the resilient enterprise, Part III

So far in this series (Part I, Part II) we have examined four out of the five pillars of engineering the resilient enterprise: the right leadership, the right incentives, the right architecture and the right culture. In the final article we will focus on the most controversial of the building blocks, which is performance management.

Right management approach

Measure, measure, measure

"If you cannot measure it, you cannot manage it"— this is a mantra that is as often heard as it is misunderstood. Misattributed to Drucker and misquoted from Deming, it is a maxim whose misapplication has caused as much harm to businesses as its diametric opposite. The difficulty in measurement lies in two areas: one, not everything that needs attention in organization can be measured, or at least measured meaningfully, and, two, for the right results we need to know what to measure and the right way to measure it.

To address the first point, I will posit that management is the art and science of achieving measurable outcomes in organizations under the normal constraints of business: schedules, budgets, regulation, competition and technology, while leadership is the art of creating the right culture and work environment to enable management to be effective. To put in another way, leadership is the art of influencing the unmeasurable. If we look at it this way, then the above-mentioned quote becomes much less controversial and considerably more useful. We have discussed leadership and culture in a prior article, so here we can focus on performance management. 

Defined as I have done it, management is indeed a discipline driven by measurement and data. The trick is to know what to measure and how to achieve the necessary metrics. There is ample evidence that you tend to get exactly what you measure, so we need to be very careful that we do not create perverse incentives that might be baked into the very metrics we select for scrutiny. Every industry has a well-known set of KPIs, which can be a useful guideline. The trick in adapting the standard KPIs to actionable metrics, as I have mentioned previously, is to war-game the metrics for unintended consequences. The path to finding the right metric and applying the right incentives can oftentimes be anything but a straight line.

Set and evaluate objectives

Although it has of late been trendy to malign management by objectives as a method of performance management, it remains the most effective tool in our kit when properly and thoughtfully applied. Truth be told, there seems to be a cottage industry for debunking well-loved and useful management techniques, but I digress. Objectives can be quantitative, where it makes sense to make them so, or soft when it makes sense otherwise, as long as their fulfillment is not subject to a manager's arbitrary judgment. Once you have determined which KPIs to measure and how their related metrics can be attributed to managers, teams and team members, it becomes possible to establish individual objectives. 

To be effective, objectives must absolutely lie within the realm that the employee can control or directly influence, or else setting such objectives will backfire. They must be sensible — for instance it makes no sense to measure programmers on how many lines of code they produce if this code does not deliver necessary fictionality, or to measure widget makers on their volume when quality is of paramount importance. Furthermore, objectives must encompass outcomes and never methods, in keeping with the Auftragstaktik principle we have expanded on previously, because micromanagement is generally destructive and ultimately ineffective. Their scope should correspond with the scope of responsibly of the employees — for instance, a divisional GM might be tasked with taking her business' market share to the number one or number two position, as Mr. Welch had famously charged his cabinet, while a tech product owner's objective would be much narrower.

Performance against the set objectives should be measured frequently — as frequently as the scope of the objective reasonably allows — and the use of each particular objective should be evaluated often, to make sure that it serves to advance overall long-term shareholder value.

Evaluate continuously 

The inadequacy of the annual performance review as a central tool of management has been recognized for quite some time, and this realization is finally, if tentatively, being translated into action. The fact is that a year as an interval between errors and correctives is far too great to permit effective feedback, thus allowing performance issues far too long to fester. Ideally, instead, we can implement continuous performance management with discrete and frequent measurement of goals and objectives, making underperformance easier to catch and correctives to apply in a more timely manner. If your management by objectives process is well implemented, it will become possible to take steps toward continuous evaluation, at specific MBO level. Under continuous evaluation each objective is evaluated on completion, with more complex activities divided into progress checkpoints by mutual agreement between the manager and team member. Collaborative objective-setting serves to raise morale and increase job satisfaction and objective buy-in by offering team members a sense ownership of their work. Trends in MBO achievements and responsiveness to feedback would be logged and used in determining continuing employee fit and future work assighments.

Once you have ditched the periodic review, you can also get rid of the annual performance-related pay adjustment. The fact of the matter is that most employees are not much motivated by the small adjustment we like to call a merit raise because it soon gets lost in the biweekly paycheck, and the rush, if any, of receiving it is soon forgotten. On the flip side, employees soon learn than a great way to get a raise is to change employers, which serves to distract them from their work and elevate your turnover costs. Instead of feeding this destructive cycle, you might wish to ensure that each competent employee receives market rate pay commensurate with her experience, and that each employee knows that his pay is indeed set to be at market every year — or another interval, depending on how rapidly pay changes in your business. This is hardly a new insight, and a number of well-managed companies have already moved to competitive pay policies, with generally positive results.

Once base pay is set by market metrics, performance excellence can be recognized — depending on what is appropriate to their function — with performance pay schemes, internal or external recognition, thank-you gifts, visible perks and status symbols and — now and then — promotions. That last incentive must be used as carefully as a hand-grenade, however, lest we promote people to the level of their incompetence. Moving individual contributors to management roles in particular can be disastrous unless they are interested in the role, have the aptitude, and receive real training for it. For this reason, well-managed companies have some tome ago began establishing non-management promotion tracks that allow you recognize team-member skills, knowledge and performance without forcing people into roles for which they are not well suited. The flip-side of advancement, is of course managing out those employees whose performance stays below par and shows inadequate improvement — because no matter how careful we are in hiring, none of us are perfect.

In conclusion

The five pillars of the resilient enterprise depend on and reinforce one another. When implemented well, they allow companies to avoid most of the hidden rocks littering the shipping lanes of business, and to recover well and quickly from the ones that could not be avoided. We can bring together all the principles in a short do-list, as it follows:

• Hire the right leaders and empower them to carry out their job
• Architect the organization to minimize destructive conflict and place authority and responsibility closest to the market action
• Shape the culture in accordance with the nature of the business, the market and the surrounding milieu 
• Practice management by objectives, whether you use the OKR method or another way, whether you have management set objectives or have them negotiated between managers and team members
• Separate base pay from performance incentives and pay published market base rates
• Design incentives that are effective for target populations: engineers, for example, should get internal recognition, a chance to work on their own projects and speak or publish to the wider world, while salespeople, who tend to thrive on competition and be motivated by cash rewards, should to be offered those
• Tie incentives to measurable objectives which are set and read frequently, and be sure to expect and to reward initiative
• Ditch the annual performance review cycle — it is a waste of time for both manager and staffer — move instead to continuous performance management at all levels in your organization
• Practice continuous improvement — plan, do, study, act

Cross-posted to LinkedIn Pulse

Architecting the resilient enterprise, Part II

In Part I of this series we discussed the leadership and incentives aspects of enterprise resilience. The timing turned out to be propitious — in fact the latest Nobel in Economics was in part awarded based on the work pointing out the importance and the difficulty of creating the right incentive structure. In this article we will zoom in on the leadership aspects creating a resilient enterprise: the right culture and the right enterprise architecture.

Right architecture

In my experience, the resilience of an enterprise is fundamentally rooted in its architecture, which is in turn closely tied with the concept of the right incentive structure. After all, incentivizing employees to take the right action is not very likely to have the desired effect if they are not empowered to do so. As I see it, the three core principles of right architecture are: alignment of authority with responsibility, delegation of authority to the people closest to front line, and maximizing cooperation.

If basing incentives on metrics that are out of employees' control is demoralizing, then holding them responsible for outcomes they had no power to change is even more so. It often takes only a single incident of disciplining an employee for outcomes determined by someone else in the organization to permanently ruin morale for his or her entire team. It behooves CEOs to make sure that each department and each business unit is designed to align authority with responsibility — and not just for line and middle managers, but also for responsible individual contributors.

No illustration of the delegation principle is more striking than the early successes the German army was able to achieve in WWII despite numerical and frequently material inferiority. Its Auftragstaktik doctrine was arguably its most effective weapon until the army was forced to abandon it under pressure from the top, leading to a series of disasters. Fundamentally, Auftragstaktik (literally "mission-type tactics," or Mission Command in US doctrine) means that subordinates at every level are assigned clear objectives, resources and time tables. Tactical leaders are expected to reach their objectives as they see fit, according to circumstances and their ingenuity. There is a direct application of this principle to enterprise architecture, as well as to the management approach which we will discuss in the next article. It is the managers and responsible contributors closest to the point of execution who are best positioned to see emerging problems before they are are developed fully and to take corrective action in good time. Their superiors' task is less to direct them in doing their jobs and more in clearing the way for them to act and securing the right resources when required, not forgetting of course to balance this support with accountability. Front-line people who feel that they are supported by their managers and top executives tend to be not only far happier, more productive and turn over less frequently, but also come up with more effective solutions more often than their counterparts in closely managed environments.

On the larger organizational scale, careful architecture of departments and business units to maximize cooperation and keep competition for resources from becoming destructive allows the resilient enterprise to better to focus its exec team's competitive spirits on external threats. Some conflicts can be engineered out, such as channel conflicts, but others are fuzzier in their nature. Built-in conflicts and divide-and-conquer tactics beloved of so many CEOs tend to destroy value without building anything more tangible than these CEOs' egos. This is not to say that success shouldn't be rewarded — it should, and executives who deliver the best results should get the resources to further their successes — but rewards should be measured, and methods for achieving these results shared among the exec team with collegiality. When executives are freed from competition with their peers for resources, power and access to the CEO, they become more ready to embrace and promulgate a supportive and collegial culture, as we will discuss next.

Right culture

If the art of management is about ensuring that organizations deliver on objectives, then the art of leadership is fostering a culture that makes the art of management effective. Perhaps the most difficult part of leadership is that there are so few real tools to help effect it, even if there are now emerging ways to take the temperature of the organization. Much has been written about corporate cultures: how they can be toxic or empowering, corrupting or uplifting, drive quality or slacking. A great deal of late has been written about fostering cultures of innovation and of productivity. I will not be addressing this well-trodden ground here, nor will get into the pros and cons of cult-like tribal cultures, such as those enjoyed by the likes of Apple, Palantir, or Zappos. Instead I will focus on guidelines for creating a culture of resilience.

It was probably W.E. Deming who first pointed out how corporate culture affects product quality and is in turn affected by he style of management. I will get into how his ideas are applicable for today's enterprise in the next article, but for now I can say that it the right culture that is the factor most responsible for creating enterprise resilience.

In order for aggressive delegation of authority on the Auftragstaktik principle to be made effective, the culture of taking responsibility for outcomes has to be extant. Such a culture must be fostered from the very top, by CEOs who create an environment of trust and collegiality among their immediate reports and see to it this their executives do likewise. The right corporate architecture plays a large role in making this possible — by eliminating high-stakes competition among top executives, which in turn enables them to see one another as resources rather than as rivals. Collegiality and mutual assistance can and should be incentivized for all employees, regardless of position, while empire-building and budding inter-funciton rivalries in turn severely discouraged.

Of course hiring people who exhibit the right attitude in the first place makes culture-building a great deal easier, but it is in the remit of the CEO to take the lead by avoiding playing favorites, practicing divide-and-conquer, and being as open in commutations to the enterprise as is legally permissible. It is up to the CEOs to reward team members for showing initiative, taking the lead in resolving issues, and championing and taking up new projects. It is up to the CEOs to foster openness and honesty in speaking truth to power, so that information can flow freely in both directions. It is also up to the CEOs to take responsibility for missteps, because no one will trust a leader who throws his followers under the bus.

None of this is to say that a healthy dose of competition is not a good admixture to the culture pie, but like all seasoning it must be used with a light hand. Stakes in internal competition might involve bragging rights, prizes that recipients would value out of proportion to their cost, and most importantly public appreciation from the highest levels for effort and results alike. Rewards would rarely involve promotions — lest contributors are promoted to the level of their incompetence — and almost never large raises or other stakes outside of the defined incentive plans such as might threaten to undermine collegiality.

Finally, it is important in culture-building to be sure to match the culture to the mission of the enterprise. Especially nowadays, when every business wants to be thought of as a tech company, CEOs would do well to guide their cultures in directions that build long-term shareholder value rather than simply promoting creativity or stoking their own egos.

In the next article we will get into the very controversial topic of the right management style and use of metrics and objectives.

Cross-posted to LinkedIn Pulse

Architecting the resilient enterprise, Part I

My last series of articles (Part I, Part II) demonstrated how difficult it is for CEOs, and even more so for boards, to know everything that happens in the trenches and to forestall negative surprises. The only repeatable way to counter the fog inherent in the management of complex enterprises is to bake in the agility to avoid many of the worst surprises and the resilience to recover from the unavoidable.  In this series I will explore how to build this agility and foster resilience.

With apologies to Gautama, the road to enterprise resilience lies in the noble five-fold path: the right leadership, the right incentives, the right architecture, the right culture, and the right management approach.

Right leadership

There is a Russian proverb that says, roughly "A spoiling fish starts rotting at the head." It is not that a great CEO will always ensure ultimate success, but a rotten CEO will oftentimes bring on disaster. As it happens, however, rotten CEOs are rarely replaced in time. Public company boards are notorious for too often backing management regardless of performance, and even many private owners are all too often reluctant to take this step until the business is in extremis.

While this is good news for incumbent CEOs, it is not necessarily so positive for shareholders, customers or employees. One reason that boards are so reliant on CEOs in place is that they have poor visibility into the enterprise, as I have discussed in a previous article. Yet understand they must, if they are to fulfill their duty of providing governance and oversight. For starters, they should trust top management say-so less and seek to understand what they are not being told, whether deliberately or because of CEOs' blinders. Directors would do well to spend time with middle managers, to mingle with employees, to look beyond slides and presentation numbers, to set measurable objectives and hold management to them.

In the occasion that a CEO is in fact replaced, boards would do well to select wisely and set up the new exec team for success from the beginning. In briefing their search agents, they would do well to mark that flashy stars are rarely top performers, that if a CEO looks too good to be true then she probably is, and that great CEOs don't necessarily come from the same space as the company's own sandbox.

What I said about boards and top managers applies as well to CEOs and their cabinets. A rotten head of marketing or engineering may well doom an otherwise well-managed company, while great ones often pull out some impressive rabbits when the circumstances warrant.

Right incentives

Once right management has been achieved, it is time to pay attention to the incentives it receives. There is a great deal of literature that objects to the use of incentives to maximize performance, and much of it is in fact on point; however, I will posit, if controversially, that all work is performed mainly because of the incentives - even if the incentive is the ability to feed one's family, to make a difference or to satisfy ambition. I will argue that while poorly designed incentives can do much harm, the right incentives are crucial to achieving positive results.

Boards in particular often struggle in designing the right incentive structures for their CEOs because of their limited visibility into the company's inner workings. If their and the management's incentives are not aligned then the CEO will have every reason to obfuscate emerging problems for as long as possible, in hopes that they will in time go away or become irrelevant. Only when the management feels like they are on the same side of the table as the board will they treat the board as their strategic resource and seek to work together to air and resolve emerging problems.

It is a truism in economics that the outcome one incentivizes is one received, and indeed incentives demonstrably matter at all levels in organizations. As important is it is to set the right ones, achieving this nirvana is by no means a simple matter. People are remarkably adept at finding unexpected ways to achieve metrics being measured, no matter legal or ethical considerations, often enough causing in the end considerable harm. CEOs would be well-served to give a great deal of thought to unintended consequences of their incentive plans, to adjust plans regularly, and to keep a sharp lookout for sharp practices - superior performers should be scrutinized closely even as they are being held up for emulation. This scrutiny need not come from the place of overt mistrust - after all, if they are to be emulated then their methods demand thorough understanding.

Just as important is setting the types of incentives that have the power to motivate the target employee population. For an extreme example, incentivizing salespeople purely with recognition and engineers solely with cash can both be counterproductive. Most companies use annual reviews and base pay adjustments as cornerstones of their incentive structures for middle managers and the rank and file, even though their effectiveness in producing desired results is as dismal as the effort to produce reviews often enough brings real work to stand-still. My recommendation for CEOs is to separate pay from incentives and to think of incentives in terms other than necessarily financial. I will explore this concept in greater depth in the a future article.

Finally, it is important to tie incentives to metrics that are in the power of the employees to directly influence. There is nothing so demoralizing as knowing that you will miss your bonus because you have had no opportunity to impact the metric that was incentivized. This is not to say that profit-sharing schemes are to be discouraged, to the contrary, they can be a valuable took to build cultural cohesion - but they should not be confused nor conflated with incentives.

In the next article series we will address the art of leadership in creating the right culture and enterprise architecture. 

Cross-posted to LinkedIn Pulse