Target practice

Conventional wisdom would have us believe that effective objectives for managing performance should be specific, measurable, achievable, realistic and timebound (Smart)

But do narrowly drawn objectives have a genuine role to play in today’s rapidly changing business world? Or are Smart targets actually Dumb – defective, unrealistic, misdirected and bureaucratic?

Objective-setting lies at the heart of both management by objectives (MBO) and performance management. The MBO concept, formulated in the 1950s, directed managers’ efforts towards a common goal by ensuring that they understood precisely what results they were expected to achieve. But with unit managers setting – and being accountable for – their individual units’ objectives, this approach often resulted in departments pulling in different directions. Objective-setting also tended to become a formal annual exercise that bore little relationship to managers’ day-to-day decisions.

Organisation-wide performance management was supposed to address these issues. But even before the Internet revolution massively increased the pace of change, the limitations of performance management based on objective setting were becoming clear.

Smart objectives assume that organisations operate within a stable environment. But technology and globalisation have created a world in which winning organisations are those that can lead change, or can at least respond rapidly to market changes. The losers are those that are still driven by year-old objectives.

In the new economy the value of an organisation is often based on the knowledge and skills of its people. Achieving competitive advantage will depend on the totality of this knowledge pool and the organisation’s success in harnessing it. Teamworking and knowledge sharing have become critical. But how effective are Smart objectives in supporting these ways of working?

The essence of performance management is to give everyone in an organisation the answer to two key questions: “What is expected of me?” and “How am I doing?” The first question needs to be addressed in a way that is meaningful for the individual. But a central element of the Smart approach is that targets need to be measurable, and positive results are not always measurable quantitatively.

Smart bombs

Of course, it is important that we know what success looks like, but a quantitative output may not always add value. It would be like trying to “measure” a poem or a statue. Where value is derived from innovation, sharing knowledge and reacting quickly and effectively to a new scenario, then measurability in terms of pre-set objectives can become a constraining rather than an enabling factor.

The pursuit of Smart objectives within an HR-imposed bureaucracy can lead to a “parallel universe” that has little connection to the real world of work. Objectives are written to satisfy the system, rather than to develop people and improve performance. They are only dusted down towards appraisal time, when the parallel universe can clash with the real world.

One solution might be to set objectives more frequently. But a software company in Dublin that adopted this approach found that, even by setting and reviewing objectives every quarter, it could not keep up with the pace of change. Other imperatives kept cropping up that often merited a higher priority than existing objectives. The company also found that the extra administration required for the new system meant that objectives were often not set until halfway through the quarter. It is now changing to a half-yearly system that is constantly revised to ensure that objectives remain meaningful.

Similarly, Barclaycard uses individual objectives but builds in the opportunity to review and adjust them during the year. The company recognises the need to be flexible and to make the objective-setting process an integral part of business management, rather than something that sits alongside it.

Many companies believe that they need to underpin performance-related pay with Smart objectives. This does not need to be the case. For example, Whirlpool Europe has changed its approach to compensation by aligning balanced scorecard, performance management and individual objectives to corporate values. Objectives are agreed relating to performance, personal development and behaviours within the framework set by the values and the scorecard. These are reviewed throughout the year and can change if new priorities arise.

While the “specific” and “measurable” components of Smart objectives prompt organisations to look for very focused outputs, the extent to which targets are met is often a matter of external factors beyond an individual’s control. What, say, would be the right Smart objectives for a surgeon, teacher or training manager?

Recognising that the “how” is often as important as the “what”, a few years ago the Body Shop introduced a new strategy to align its performance management system with its culture. This included a new appraisal system that incorporated objectives, but that took a balanced approach to overall contribution.

It looked not only at how far individuals had met all their objectives, but also at personal commitment – the extent to which they had contributed to the team, taken on extra responsibilities and shown initiative, flexibility and enthusiasm.

A fundamental criticism of performance management systems is that goals are set either too high or too low. A goal that is too low can lead to underachievement relative to potential, while one that is too high will mean underachievement relative to others’ expectations.

Perhaps, instead of setting Smart goals with a given level of achievement, the Japanese model of continuous improvement would be more relevant to today’s economy. This requires organisations to identify key performance indicators and to seek improvement in these areas. ADI, a US integrated circuit manufacturer, used this method rather than setting goals based on past experience. Over five years, it made huge improvements in key areas.

Another company to recognise the inherent limitations of traditional approaches to performance management is DoubleClick, a global Internet advertising solutions company. It is currently developing a programme that does not rely on MBO or Smart objectives.

Although it makes sense to maintain “hard targets” for some parts of the workforce, especially sales teams, DoubleClick has given its sales people the flexibility to target the right potential customers. For the rest of the organisation, the developing system uses measurements that relate to unchanging aspects of the business, such as customer focus, time to market, design and development of new products. In other words, the system asks how the employee’s accomplishments support the direction of the business, rather than if the employee has met the specific goals that were laid out at the beginning of the year.

To help organisations to frame objectives more effectively, perhaps we need a new acronym: Case – condition, action, standard and evaluation.

“Condition” is the environment within which the aims are being achieved. The condition should be explicitly stated or, at least, implicitly recognised. Critically, when the condition changes, the objective should be reviewed and adjusted as appropriate. “Action” describes what the individual is expected to do. “Standard” is the level of achievement or standard of performance expected – a description of what success will look like. “Evaluate” is the process of regularly reviewing and adjusting objectives to keep them current – even within the shortened timeframes of the new economy.