Don’t Get Locked into Your Performance Management System

This article highlights the hidden trap of performance management systems. Though the idea behind such systems is usually sound, getting bogged down in those systems can cause an organization to be slow in responding to driving factors from the environment that require it to change. This article draws parallels with concepts and theories from thermodynamics and recent insights from economics and applies them to the organizational setting. Performance management systems that govern the drive toward reliability excellence and organizational leadership must have reflection points built in and require continuous scanning of the external environment that influences organizational requirements.

ENTROPY OF ORGANIZATIONS

Many people are familiar with the first law of thermodynamics: Energy can’t be created, nor can it be destroyed (though there are some, especially those hailing from quantum physics, who contest this). Less familiar is the second law, which doesn’t have a fixed definition, but is characterized through a series of phenomena, such as energy flows automatically from a body with a high temperature to a body with a low temperature, or during the conversion of energy, a portion is always removed in the form of low temperature heat. An important thermodynamic property of materials related to this second law is entropy, which is associated with the notion of disorder and the second law statement that the entropy of a system undergoing a spontaneous process tends to increase. The more processes a system undergoes, the more its entropy increases and the more disorder it has. This entropy has both are reversible and irreversible part, of which the latter ensues that energy exits the system, for instance, heat losses to the environment and friction. The more processes a system undergoes, the greater its entropy and the more energy the system loses. Entropy assessment can be used to indicate the effectiveness of systems by, for example, assessing how much irreversible entropy has been created¹.

Recently, the entropy concept has been applied in economics to explain the unequal spread of wealth across nations. In this article, the concept of entropy will be applied to organizations. More specifically, entropy will be used in the context of performance management systems in organizations that strive though these systems for excellence.

CO-EVOLUTION AND MOMENTUM OF PERFORMANCE MANAGEMENT SYSTEMS AND ORGANIZATIONS

In Schumpeterian economics, the notions of variation, selection and retention are very important in selecting and amassing the right tools to fit within the organizational context. However, as stipulated by the so-called consistency condition, which states that the first prevailing theory supersedes all contradictory theories that follow, ² many organizations make the mistake of not questioning the basics of their performance management system. This coincides with the concept of the multi-level perspective, discussed in earlier articles published in Uptime Magazine^{3, 4}, that the rule set or regime sits on top, while various niches or alternative ideas try to break through to the mainstream.Once a performance management system is conceived, the organization tends to grow the system further by incorporating various critical success factors and key performance indicators in an attempt to cover as much ground as possible and make the entire organization transparent.

With co-evolution, the organization builds the performance management system and consequently changes its behavior in such a way that it serves the system. In the case of momentum, the more the performance management system is expanded and used, and the more the organization adapts to the system, the more difficult it is to change that organization to an extent that reaches outside the parameters permitted by the performance management system.

TURNING THE OIL TANKER

So, what does this all mean? The proliferation of performance management systems in organizations and the ongoing co-evolution between the system and the organization causing further momentum renders the organization to be less flexible. As such, the organization is unable to change or think outside the box. This is where the entropy concept comes into play. Theoretically, an automobile that consists of processes that produce only irreversible entropy won’t get anywhere; any energy that is converted is lost to the environment through heat losses and friction. One could say that organizations that have fully proliferated their performance management systems throughout all aspects of the organization without questioning its components and even its underlying assumptions have rendered themselves fragile in this continuously changing business environment. To draw parallels with the entropy concept, these organizations achieve full, irreversible entropy and don’t get anywhere because they are too vested in their current performance management systems to make swift and sound changes in reaction to the changing environment.

Performance management systems make the organizational dynamics more transparent to higher management and give them more sense of control. It is understandable that these levels within the organization would be unwilling to question the very system that enables them to manage the organization. However, these organizations are hard-pressed to change. Changing them is like changing the course of an oil tanker. Change is the rule now and organizations need to be able to respond to these changing external influences. The 21st century is more about the competitive advantage to change faster than others and to jump on profitable options before your competitors.

RECOMMENDATIONS

Organizations need to accept that the 21st century is all about change.Therefore, they must be willing to question, confront and alter the foundation of their performance management systems. They need to create a culture of continuous change and improvement; whereas the latter frequently refers to improvements in processes, the first is more encompassing and can refer to complete makeovers of companies. To prevent organizations from getting too vested in and dependent on their performance management systems, it is advisable that they adopt these measures as common practices:

• Allow bottom-up feedback/critique regarding the performance management system without perceiving it as an attack on efforts to make the organization more transparent and controllable.
• The performance management system is not set in stone. Be willing to question its underlying assumptions and don’t be afraid of the consequences when it appears that the system requires change, or even a complete overhaul.
• When expanding on the existing performance management system, always do it from a cost bene t point of view. Bottom-up feedback is important for this one!
• Regularly scan the future and get engaged in scenario planning in order to be able to anticipate looming and sudden changes in the environment that might impact the organization⁵.
• By assessing potential futures, design your performance management system in such a way that it is future-proof. Your performance management system will hold up well in each of the different futures, for example, by testing critical success factors and key performance indicators in each future scenario.

These measures will prevent an organization from getting stuck in its own performance management system, thus creating only irreversible entropy, while not being able to respond to changing external influences. The common practice measures will enable the organization to steer its oil tanker in a timely fashion.

References

1. Moran, Michael J. and Shapiro, Howard N. Fundamentals of Engineering Thermodynamics Fifth Edition. Chichester: John Wiley & Sons, Inc., 2006.
2. Feyerabend, Paul K. Against Method. Outline of an anarchistic theory of knowledge. Brooklyn: VersoBooks, 1975.
3. Lachman Daniel A. and Tjoen A Choy, Roy O.F. “Assessing Transitions to Benchmark Performance.”Uptime Magazine June/July 2012: pp. 34-36.
4. Lachman Daniel A. and Tjoen A Choy, Roy O.F. “Benchmarking, Best Practices, Standardization… Development or Envelopment?” Uptime Magazine October/November 2013.
5. van der Heijden Kees. Scenarios: The Art of Strategic Conversation Second Edition. Chichester: JohnWiley & Sons, Inc., 2005.