Setting and monitoring relevant performance goals and resource allocation are the most important processes for executing strategy successfully. We advocate a strategy-based goal setting approach.
Strategy is no longer just the annual executive retreat to consider the big strategic questions but needs broader participation to land effectively. This broader participation happens in goal setting or KPI setting, budgeting and the communication and feedback processes. The upfront executive process is however still key and must at least set overall direction, i.e. as a minimum it should define where the company wants to play (market, product, core competencies) and how it wants to play (culture, structure, operational priorities and constraints). This is normally set out in overarching objectives such as market share, revenue, margins, culture ambitions and external reputation.
Most strategies still fail in implementation. Much of the reason for poor implementation lies in weak processes in either goal setting, budgeting or programme management. These processes determine much of the execution focus and yet it is here that the strategic change initiative is most likely to go wrong. Senior executives can define statements of intent around a bold vision, but changing what gets done daily is what turns the ship.
Good detailed functional planning, where strategy impacts the day to day priorities of work, is therefore key. This is generally referred to as annual goal setting or KPI setting. If done well and involving the entire organisation, this process can be a valuable tool for getting everyone involved in detailed strategic planning and getting immediate feedback on the strategy. Together with budgeting and the change agenda, goal setting should signal to all where the priorities of the organization lie, better than any communication plan.
In this article we focus on what we have observed in performance target setting across a range of organisations and advocate a move away from a broad-based KPI setting processes to a strategy-based goal setting approach.
For better results, advance strategy-based goal setting over organization-based goal setting.
We have observed that annual KPI setting and goal setting is generally done in the spirit of ensuring everyone has a performance goal and the achievement of these are the measure of participation in the bonus pool and salary raises. It is used as a people management tool. We argue though that the goal setting process could be more effective and value adding, if aligned to the achievement of the strategy set out by the Board and Executives. With the strategy as the starting point, the goal-setting exercise:
- Becomes more focused on executing an agreed strategy.
- Creates better integration and linkage between initiatives, tasks and feedback loops across the organisation. It is difficult to get this consistently right but it is vital to inform management’s view of how well the strategy is being executed.
- Focuses resource allocation into the strategic relevant areas and avoids “over stretching” the organisation creating unnecessary cost.
- Develops a tighter set of change initiatives and business metrics. Most businesses are inundated by initiatives and metrics that have been accumulated through time. A strong set of strategically aligned goals requires a top-down prioritisation and an understanding of how these goals collectively work to create value.
- Aligns goal setting (what to achieve) with budget development and talent (resource challenges) conversations. These three processes all impact how strategy is executed and define the constraints and trade-offs to consider.
- Enables a more effective review of progress of execution and business performance. Reviews are largely guided by the goals and metrics set during this process and hence the more relevant to the strategy the goals are, the more meaningful the discussions in business and performance reviews.
A strategy-based goal process serves another vital component of execution success – it provides early and ongoing feedback regarding the viability of the strategy. This feedback opportunity is seldom sufficiently leveraged. Just like the budget process, it tests the underlying assumptions of the strategic direction chosen and the feasibility of the pursuit.
There are 6 key differences between strategy-based goal setting and the more typical people performance management KPI setting process:
1.Strong leadership is needed when establishing these reviews,in defining preparation
requirements and during the sessions.
The KPI setting process tends to be rolled out along organisational hierarchical lines, if deliberately sequence, or not sequenced at all, i.e. different functions do their own goal setting relatively independently from each other. The larger the organisation the sooner the understanding of who does what for what purpose is lost. The outcome is individual goals but not a view of how the strategy will be executed.
In strategy-based goal setting, the capabilities or functions in the value chain that create the most material contribution to achieving the strategy are prioritised. There are two important reasons for this. Firstly, it is critical to think of goal setting as a lever of strategy execution and not as a stand-alone process. Cascading of goals through the organisation is a complex process. If not approached in a disciplined manner it becomes very difficult to set consistently high standards of goals and metrics. By focusing first on the strategy and those parts of the organisation that are key to the execution of that strategy, we prioritise effort and create surety that the strategy is supported properly in the cascade.
The second reason stems from the theory of scarce resource allocation. Many organisations have emphasised ‘stretch goals’ as a universal approach to the goal setting process. This however ignores the reality of scarce resources and assumes that we have the luxury of pursuing all initiatives equally. Stretch should always apply first to those capabilities that are paramount to the strategy and then be cautiously applied to those capabilities that underpin the rest of the value chain.
2.Stretch it or shrink it
Stretch is an important concept in defining goals and typically involves an expectation that we will go beyond current capabilities and performance by finding brand-new paths and approaches. KPI setting processes convert this concept at an individual level to encourage individual growth and at team level to drive capability development.
“Insisting on stretch goals encourages abuse in the budgetary process. This, in turn, creates hostility and suspicion between the various parts of an organization. Even when the numbers are not manipulated, they can mislead. Salespeople on commission, for example, are seldom sensitive to the costs of the sales they produce.” (Extract of the Blue Ocean strategy start up handbook)
In strategy-based goal setting, stretch is employed effectively at a business vision level to inspire step change. However in our recommended approach to goal setting it is applied selectively and with prudence. Prudence is required in setting the right level of stretch in line with the ability to allocate the required resources. Stretch without the means is a dream at a strategic level and a de-motivator at a human level.
Selectivity is required to contain organisational cost and organisational change. Very few strategies call for organisational wide stretch, and where they do we would doubt their effectiveness. If properly defined there should be a balance along a spectrum, with those areas that are vital to the strategy (requiring substantial stretch) balanced by areas where it is actually necessary to take the foot off the accelerator. If not prioritised and selected, every team will strive for stretch. When everyone strives for stretch the demand for business change spend goes up and the company experiences an ever growing cost base.
3.Enabling strategic agility by monitoring what is being done together with the impact that it has
Good goals communicate the gap in terms of the outcome i.e. scale, the capabilities to be developed, and the pace of the required change. KPI setting typically focuses on holding management accountable for developing sustainable capabilities to support the strategy and aligning teams of individuals to these, i.e. inputs.
Strategy-based goal setting articulates the gap in terms of both, outputs (e.g. market share gain) and inputs (e.g. timeous project progress, team behaviour, skill advancement). Combining input and output metrics allows for a much tighter alignment between what is being done and what it is intended to impact. Through this we can detect initiatives that are not achieving the desired impact thereby, early on, enabling a pivot and hence strategic agility. For illustration purposes we use another ScientrixTM example showing the combination and the cascade from highest level strategic outcomes to lowest level input measures.
4.Allocation of resources before finalising goals
In many organisations KPI setting emphasises establishment of accountability before considering the resources required to achieve the goal. Most would agree that no goal is actionable until the decision has been taken to allocate resources. The argument is made that the accountable manager will define the initiatives / projects and resources needed to deliver against the goal. This shortcut assumes that resources are limitless and that the accountable manager will require little assistance from other parts of the business. It also tends to force strategy into structure.
Strategy-based goal setting takes time to consider the goal in all its implementation requirements and makes the link to resource allocation (capital, skills, and management time) aligned to the expected impact, before finalising the goal definition. The focus on a few strategic goals makes this possible. Aligning the goal setting process (what to achieve) with budget development (with what budget) and talent (resource challenges) conversations is vital as these three processes all impact how strategy is executed and define the constraints and trade-offs to consider.
5.Aligning the organisation from top to bottom
Too often individual KPIs and downstream functional targets miss a clear link to the overall objective and strategy of the organisation, pulling the organisation in many different directions. This is true also for conflicting metrics. A sales manager of a wider product portfolio being given market share and profitability targets will make his own trade-off between selling to many customers at small margins or to few at high margins. Clarity of the strategic market pursuit is therefore vital.
Getting higher order goals and lower order goals aligned is a challenge, which is made easier if cascaded from strategy in a disciplined manner through organisational levels. In this way we can also test the viability of the strategy in the organisation. If existing lower order goals cannot be properly defined from higher order goals then it is worth investigating further. An inability to cascade effectively may indicate problems with the logic of your strategy, a misalignment of the organisational architecture to the requirements of the strategy, or the need to set up coordinating entities (e.g. programmes of work) to hold the strategic logic together. These impacts are far more easily identified through strategic goal cascading than through broad KPI setting.
6.Enabling meaningful strategic reviews
The targets set on individual, team, programme, business unit and corporate level form the base of strategic and business performance reviews. Strategy-based goal setting provides this base on various levels (see illustration), whilst typical KPI approaches are unsuitable for this purpose due to the lack of cohesion.
Shifting from a KPI process to a strategy-based process is challenging as one needs to let go of metrics previously pursued. Most organisations have too many metrics and tend to worry about them equally. This can lead to meaningless discussions during review sessions.
The strategy-based goal setting process is only complete when reporting has been aligned. Communicating strategy through what we measure is a critical component of strategy execution. We would propose a good spring clean of metrics annually with a focus on the metrics that concern the execution of the strategy. This will focus management discussions, allow for testing of the strategy’s underlying assumptions, foster teamwork and create a powerful culture change mechanism.
Changing “what management looks at” to make decisions is a visible indicator of priority. Adapting management reports to strategic priorities and getting everyone up to speed with the new ways of reporting may be a difficult and time-consuming activity, but the effort is truly worth the effectiveness in strategy execution.
But is this too much change to handle?
Using a strategy-based goal setting approach may seem daunting from many perspectives – is HR equipped to run this? Will it be too time consuming? Our strategy is agile – how will that influence performance metrics that are derived from here? How will we ever keep track?
Help is however available in the form of technology! Strategy execution management has been greatly enhanced by technology in the last ten years. There are a number of packages that guide goal setting in a manner that creates an integrated set of management tools for managing and reporting on performance after goal setting. These software solutions, such as ScientrixTM mentioned above, allow us to integrate the logic of the strategy and create the links within cascades, as well as links between silos, so that cause and effect relationships can be managed. One of the key benefits of using software to manage strategy oversight is the ability to drill down into both the original hypotheses as well as the detail of how the strategy is being executed during review sessions.
As you move with the new year into a new round of performance target setting, consider doing it differently and use it as a truly value enhancing tool.
At M&D Associates we focus on helping clients solve strategy execution problems. Our experience in cascading goals with meaningful metrics, business review and strategic audits enable us to support clients in developing their own processes, analysing the quality and alignment of goals and measures, as well as facilitating the cascade of goals.
For more information contact Stephen Dippenaar (firstname.lastname@example.org)