ONUS ARTICLE “ Profits Without Prosperity” The McKinsey Award Winner By William Lazonick The definitive management ideas of the year from Harvard Business Review. 2016 f copyright. Please contact [email protected] or 800-988-0886 for additional copies.HBR’S 10 MUST READS The defi nitive management ideas of the year from Harvard Business Review. 2016HBR’s 10 Must Reads series is the defi nitive collection of ideas and best practices for aspiring and experienced leaders alike. These books off er essential reading selected from the pages of Harvard Business Review on topics critical to the success of every manager. Titles include: HBR’s 10 Must Reads 2015 HBR’s 10 Must Reads on Change Management HBR’s 10 Must Reads on Collaboration HBR’s 10 Must Reads on Communication HBR’s 10 Must Reads on Emotional Intelligence HBR’s 10 Must Reads on Innovation HBR’s 10 Must Reads on Leadership HBR’s 10 Must Reads on Making Smart Decisions HBR’s 10 Must Reads on Managing People HBR’s 10 Must Reads on Managing Yourself HBR’s 10 Must Reads on Strategic Marketing HBR’s 10 Must Reads on Strategy HBR’s 10 Must Reads on Teams HBR’s 10 Must Reads: The EssentialsHBR’S 10 MUST READS The defi nitive management ideas of the year from Harvard Business Review. 2016 HARVARD BUSINESS REVIEW PRESS Boston, MassachusettsHBR Press Quantity Sales Discounts Harvard Business Review Press titles are available at signifi cant quantity discounts when purchased in bulk for client gifts, sales promotions, and premiums. 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The web addresses referenced in this book were live and correct at the time of the book’s publication but may be subject to change. Cataloging-in-Publication data is forthcoming. ISBN: 978-1-63369-080-6 eISBN: 978-1-63369-081-3 Find more digital content or join the discussion on ww w.h b r.o rgContents Editors’ Note vii Reinventing Performance Management by Marcus Buckingham and Ashley Goodall The Transparency Trap by Ethan Bernstein 1 15 Profi ts Without Prosperity by William Lazonick 29 Outsmart Your Own Biases 47 by Jack B. Soll, Katherine L. Milkman, and John W. Payne The 3-D Printing Revolution by Richard D’Aveni 61 Why Strategy Execution Unravels—and What to Do About It by Donald Sull, Rebecca Homkes, and Charles Sull The Authenticity Paradox by Herminia Ibarra 75 89 The Discipline of Business Experimentation by Stefan Thomke and Jim Manzi When Senior Managers Won’t Collaborate by Heidi K. Gardner 103 121 Workspaces That Move People 139 by Ben Waber, Jennifer Magnolfi , and Greg Lindsay Digital Ubiquity: How Connections, Sensors, and Data Are Revolutionizing Business 153 by Marco Iansiti and Karim R. Lakhani About the Contributors Index 171 175 vEditors’ Note As our editorial team read through the past year’s worth of Harvard Business Review to select the articles for this volume, perhaps the most interesting part of the proceeding was seeing how a group of seemingly disparate articles actually overlapped and wove together. Of course some themes were the result of deliberate eff ort; but ac- cidental commonalities and contrasts perhaps even better represent the interests of our authors and our readers. This year we saw orga- nizations focused on their physical spaces, and we’ve included two articles from our issue on workplaces. But one of them, tellingly, also addresses the issue of privacy in the virtual world, which dovetails with questions raised by the growing internet of things and its atten- dant business models. That interplay of digital and physical worlds (not to mention innovative business models) is also embodied in the rise of 3-D printing. Among the other themes that emerged were bet- ter collaboration through the breaking down of physical walls and organizational silos (But how much of this openness is too much?); the balance between intuition and rationality; and the (im)balance between corporate profi t and human prosperity. This volume begins by focusing on the critical (if more prosaic) process of assessing performance. In “Reinventing Performance Management,” Marcus Buckingham and Ashley Goodall describe how Deloitte overhauled its performance management system. In a public survey the company conducted, more than half the execu- tive participants indicated that their current method of evaluating employees’ work neither drove employee engagement nor encour- aged high performance: It depended too much on past results and off ered no practical look into the future. In the new model, rather than asking for their impressions of a particular individual, the performance system asks managers what they would do with the employee to recognize, capture, and fuel performance—bringing agility and constant learning into the center of the organization’s culture. In “The Transparency Trap,” the Harvard Business School pro- fessor Ethan Bernstein takes up the question of performance as well, examining how openness—both in a physical context and through the use of technology and social platforms—can aff ect a viiEDITORS’ NOTE team’s creativity and productivity. Companies are increasingly using open environments to encourage idea sharing and account- ability. But Bernstein’s research shows that too much transparency can stifl e experimental behaviors that might benefi t the enterprise. Privacy, he fi nds, is just as essential as transparency for high per- formance. Bernstein goes on to suggest four types of boundaries to establish zones for private work within transparent organizations. Shifting away from the individual worker, our next piece fo- cuses on the corporation and how its performance aff ects the U.S. economy. In his McKinsey Award–winning call to action, “Profi ts Without Prosperity,” William Lazonick, an economics professor at the University of Massachusetts Lowell and a codirector of its Center for Industrial Competitiveness, studies the reasons behind the increasing underpayment—and unemployment—of American workers, despite a booming stock market. Lazonick corrals remark- able research to suggest that executives are using massive stock buybacks to manipulate share prices and boost their own alloca- tion of corporate profi ts. Rather than contribute further to execu- tive compensation, he argues, companies should reinvest profi ts in their people for future growth. On the level of individual managerial skills, “Outsmart Your Own Biases” describes some of the toughest traps leaders fall into as they make hard choices—tunnel vision about future scenarios, about ob- jectives, and about options—and encourages them to broaden their perspective. A variety of methods, from premortems to joint evalu- ations, can help us overcome the habits that prevent good decision making and move beyond gut instinct to deliberate reasoning. Another prominent theme this year was how technological ad- vances are changing the way businesses compete. One such ad- vance is 3-D printing. Many have already discussed the changes this technology could potentially bring to the manufacturing sector. But as the Dartmouth strategy professor Richard D’Aveni asserts in “The 3-D Printing Revolution,” industrial 3-D printing is no longer just about prototyping or creating trinkets and toys. This transfor- mative technology is gaining momentum, and any companies that sell products will be aff ected—from their internal processes to the viiiEDITORS’ NOTE competitors they face. D’Aveni’s forward-looking piece considers the changing landscape and explains how to adjust your company’s strategy to redesign customer off erings, optimize operations, and evolve your business model to fi t this new context. But even when the strategy is right, who’s to say it will be imple- mented properly? The next piece in our volume views that peren- nial struggle through a practical lens. In “Why Strategy Execution Unravels—and What to Do About It,” Donald Sull, Rebecca Homkes, and Charles Sull bust fi ve myths about strategy execution—includ- ing what it looks like, who drives it, and why it often fails. (Hint: Silos are part of the problem.) By understanding what’s behind suc- cessful execution, leaders can seize opportunities that align with their strategy, pinpoint where eff orts are stalling, and translate their ideas into results. We turn again to individual development with “The Authentic- ity Paradox.” Authenticity is quickly becoming a key leadership trait, says the INSEAD professor Herminia Ibarra. But for many, remaining “authentic” is an excuse for sticking with what’s com- fortable—which means leaders don’t take the risks necessary for growth and development. Instead they should experiment: By try- ing out a new role or temporarily feeling “fake,” they can develop a personal style that feels right to them and suits the organization’s changing needs as well. Experimentation isn’t just for leaders; it’s a core component of the innovation process for organizations. But many companies skip rigorous experimentation in favor of intuition, leading (again) to bad decisions. In “The Discipline of Business Experimenta- tion,” the authors use examples from Kohl’s, Wawa, and Petco to show how companies can eff ectively test-drive innovation eff orts to improve their operations and products. What makes this article important is not the specifi c questions it asks (although those are valuable) but that it draws from the authors’ extensive research and experience to give readers a full understanding of how to try out ideas in the market while minimizing risk. Innovation, experimentation—they often rely on diverse per- spectives and areas of expertise. But what can you do when your ixEDITORS’ NOTE best people from various groups and disciplines won’t collabo- rate? Professional services fi rms often fi nd themselves in just that situation: Partners are so accustomed to competing with one an- other that they don’t work together even for the benefi t of a shared client—or of their company. In “When Senior Managers Won’t Col- laborate,” Heidi K. Gardner, who studies legal organizations and other professional services fi rms, explains how one organization recognized this issue and helped partners with diverse specialties work together to provide a higher-value combined off ering for cli- ents, thus growing revenue for the whole fi rm. Though the piece focuses on professional services, its lessons are applicable to any organization looking to create a more collaborative culture. A culture of collaboration is also the focus of “Workspaces That Move People.” Here the authors urge leaders to create physical workplaces that encourage face-to-face communication and chance encounters among employees. On the surface, this may seem to contradict the zones of privacy suggested in “The Transparency Trap.” But the authors focus less on visibility and more on sponta- neity. They suggest making changes to your physical space that pro- mote informal cross-silo conversation to generate ideas and expand learning. With small tweaks, such as reducing the number of coff ee machines, and larger changes, such as increasing the size of break rooms or establishing easily reconfi gurable spaces, leaders can or- chestrate the unplanned interactions that lead employees to mingle and share knowledge—all for greater creativity and productivity. It’s striking to see how much discussion this year was focused on in-person interaction and collaboration, since so much of work and life is now mediated by digital devices. In “Digital Ubiquity: How Connections, Sensors, and Data Are Revolutionizing Business,” the Harvard Business School professors Marco Iansiti and Karim R. Lakhani discuss the competitive landscape created by the inter- net of things as it connects previously distinct products and ser- vices. Using GE as a central example, they show how companies can proactively evolve their business models to stay ahead—and take advantage—of this digital revolution. xEDITORS’ NOTE From disruptive technological advances to new ways of work- ing together, business is transforming. Some articles we publish in HBR help leaders prepare for the future by describing the here and now—by showing how innovative practices can work in real or- ganizations, for example, or by presenting research that can help them hone their management skills. Others point more explicitly to what’s coming. We hope that this volume, in combining both, helps leaders meet the changing competitive landscape head-on. —The Editors xiHBR’S 10 MUST READS The defi nitive management ideas of the year from Harvard Business Review. 2016Reinventing Performance Management A by Marcus Buckingham and Ashley Goodall AT DELOITTE WE’RE REDESIGNING our performance management system. This may not surprise you. Like many other companies, we realize that our current process for evaluating the work of our people—and then training them, promoting them, and paying them accordingly—is increasingly out of step with our objectives. In a public survey Deloitte conducted recently, more than half the ex- ecutives questioned (58%) believe that their current performance management approach drives neither employee engagement nor high performance. They, and we, are in need of something nimbler, real-time, and more individualized—something squarely focused on fueling performance in the future rather than assessing it in the past. What might surprise you, however, is what we’ll include in Deloitte’s new system and what we won’t. It will have no cascad- ing objectives, no once-a-year reviews, and no 360-degree-feedback tools. We’ve arrived at a very diff erent and much simpler design for managing people’s performance. Its hallmarks are speed, agility, one- size-fi ts-one, and constant learning, and it’s underpinned by a new way of collecting reliable performance data. This system will make much more sense for our talent-dependent business. But we might never have arrived at its design without drawing on three pieces of evi- dence: a simple counting of hours, a review of research in the science of ratings, and a carefully controlled study of our own organization. 1BUCKINGHAM AND GOODALL Counting and the Case for Change More than likely, the performance management system Deloitte has been using has some characteristics in common with yours. Objectives are set for each of our 65,000-plus people at the begin- ning of the year; after a project is fi nished, each person’s manager rates him or her on how well those objectives were met. The man- ager also comments on where the person did or didn’t excel. These evaluations are factored into a single year-end rating, arrived at in lengthy “consensus meetings” at which groups of “counselors” dis- cuss hundreds of people in light of their peers. Internal feedback demonstrates that our people like the predict- ability of this process and the fact that because each person is assigned a counselor, he or she has a representative at the consensus meetings. The vast majority of our people believe the process is fair. We realize, however, that it’s no longer the best design for Deloitte’s emerging needs: Once-a-year goals are too “batched” for a real-time world, and conversations about year-end ratings are generally less valuable than conversations conducted in the moment about actual performance. But the need for change didn’t crystallize until we decided to count things. Specifi cally, we tallied the number of hours the organi- zation was spending on performance management—and found that completing the forms, holding the meetings, and creating the ratings consumed close to 2 million hours a year. As we studied how those hours were spent, we realized that many of them were eaten up by leaders’ discussions behind closed doors about the outcomes of the process. We wondered if we could somehow shift our investment of time from talking to ourselves about ratings to talking to our people about their performance and careers—from a focus on the past to a focus on the future. The Science of Ratings Our next discovery was that assessing someone’s skills produces inconsistent data. Objective as I may try to be in evaluating you on, say, strategic thinking, it turns out that how much strategic think- ing I do, or how valuable I think strategic thinking is, or how tough 2Idea in Brief The Problem Not just employees but their managers and even HR departments are by now questioning the conventional wisdom of performance management, including its common reliance on cascading objectives, backward-looking assessments, once-a-year rankings and reviews, and 360-degree-feedback tools. The Goal Some companies have ditched the rankings and even annual reviews, but they haven’t found better REINVENTING PERFORMANCE MANAGEMENT solutions. Deloitte resolved to design a system that would fairly recognize varying performance, have a clear view into performance anytime, and boost performance in the future. The Solution Deloitte’s new approach separates compensation decisions from day- to-day performance management, produces better insight through quarterly or per-project “performance snapshots,” and relies on weekly check-ins with managers to keep performance on course. a rater I am signifi cantly aff ects my assessment of your strategic thinking. How significantly? The most comprehensive research on what ratings actually measure was conducted by Michael Mount, Steven Scullen, and Maynard Goff and published in the Journal of Applied Psychology in 2000. Their study—in which 4,492 managers were rated on certain performance dimensions by two bosses, two peers, and two subordinates—revealed that 62% of the variance in the ratings could be accounted for by individual raters’ peculiarities of percep- tion. Actual performance accounted for only 21% of the variance. This led the researchers to conclude (in How People Evaluate Others in Organizations, edited by Manuel London): “Although it is implicitly assumed that the ratings measure the performance of the ratee, most of what is being measured by the ratings is the unique rating tenden- cies of the rater. Thus ratings reveal more about the rater than they do about the ratee.” This gave us pause. We wanted to understand perfor- mance at the individual level, and we knew that the person in the best position to judge it was the immediate team leader. But how could we capture a team leader’s view of performance without running afoul of what the researchers termed “idiosyncratic rater eff ects”? 3BUCKINGHAM AND GOODALL Putting Ourselves Under the Microscope We also learned that the defining characteristic of the very best teams at Deloitte is that they are strengths oriented. Their mem- bers feel that they are called upon to do their best work every day. This discovery was not based on intuitive judgment or gleaned from anecdotes and hearsay; rather, it was derived from an empirical study of our own high-performing teams. Our study built on previous research. Starting in the late 1990s, Gallup performed a multiyear examination of high-performing teams that eventually involved more than 1.4 million employees, 50,000 teams, and 192 organizations. Gallup asked both high- and lower-performing teams questions on numerous subjects, from mis- sion and purpose to pay and career opportunities, and isolated the questions on which the high-performing teams strongly agreed and the rest did not. It found at the beginning of the study that almost all the variation between high- and lower-performing teams was explained by a very small group of items. The most powerful one proved to be “At work, I have the opportunity to do what I do best every day.” Business units whose employees chose “strongly agree” for this item were 44% more likely to earn high customer satisfac- tion scores, 50% more likely to have low employee turnover, and 38% more likely to be productive. We set out to see whether those results held at Deloitte. First we identifi ed 60 high-performing teams, which involved 1,287 employ- ees and represented all parts of the organization. For the control group, we chose a representative sample of 1,954 employees. To measure the conditions within a team, we employed a six-item sur- vey. When the results were in and tallied, three items correlated best with high performance for a team: “My coworkers are committed to doing quality work,” “The mission of our company inspires me,” and “I have the chance to use my strengths every day.” Of these, the third was the most powerful across the organization. All this evidence helped bring into focus the problem we were trying to solve with our new design. We wanted to spend more time helping our people use their strengths—in teams characterized by 4REINVENTING PERFORMANCE MANAGEMENT great clarity of purpose and expectations—and we wanted a quick way to collect reliable and diff erentiated performance data. With this in mind, we set to work. Radical Redesign We began by stating as clearly as we could what performance man- agement is actually for, at least as far as Deloitte is concerned. We articulated three objectives for our new system. The fi rst was clear: It would allow us to recognize performance, particularly through variable compensation. Most current systems do this. But to recognize each person’s performance, we had to be able to see it clearly. That became our second objective. Here we faced two issues—the idiosyncratic rater eff ect and the need to streamline our traditional process of evaluation, project rating, consensus meeting, and fi nal rating. The solution to the former requires a subtle shift in our approach. Rather than asking more people for their opinion of a team member (in a 360-degree or an upward-feedback survey, for example), we found that we will need to ask only the immedi- ate team leader—but, critically, to ask a diff erent kind of question. People may rate other people’s skills inconsistently, but they are highly consistent when rating their own feelings and intentions. To see performance at the individual level, then, we will ask team lead- ers not about the skills of each team member but about their own future actions with respect to that person. At the end of every project (or once every quarter for long-term projects) we will ask team leaders to respond to four future- focused statements about each team member. We’ve refi ned the wording of these statements through successive tests, and we know that at Deloitte they clearly highlight diff erences among individuals and reliably measure performance. Here are the four: 1. Given what I know of this person’s performance, and if it were my money, I would award this person the highest possible compensation increase and bonus [ measures overall performance and unique value to the organization on a fi ve- point scale from “strongly agree” to “strongly disagree” ]. 5BUCKINGHAM AND GOODALL 2. Given what I know of this person’s performance, I would always want him or her on my team [ measures ability to work well with others on the same fi ve-point scale ]. 3. This person is at risk for low performance [ identifi es problems that might harm the customer or the team on a yes-or-no basis ]. 4. This person is ready for promotion today [ measures potential on a yes-or-no basis ]. In effect, we are asking our team leaders what they would do with each team member rather than what they think of that indi- vidual. When we aggregate these data points over a year, weight- ing each according to the duration of a given project, we produce a rich stream of information for leaders’ discussions of what they, in turn, will do—whether it’s a question of succession planning, devel- opment paths, or performance-pattern analysis. Once a quarter the organization’s leaders can use the new data to review a targeted subset of employees (those eligible for promotion, for example, or those with critical skills) and can debate what actions Deloitte might take to better develop that particular group. In this aggregation of simple but powerful data points, we see the possibility of shifting our 2- million-hour annual investment from talking about the ratings to talking about our people—from ascertaining the facts of perfor- mance to considering what we should do in response to those facts. In addition to this consistent—and countable—data, when it comes to compensation, we want to factor in some uncountable things, such as the diffi culty of project assignments in a given year and contribu- tions to the organization other than formal projects. So the data will serve as the starting point for compensation, not the ending point. The fi nal determination will be reached either by a leader who knows each individual personally or by a group of leaders looking at an entire segment of our practice and at many data points in parallel. We could call this new evaluation a rating, but it bears no resem- blance, in generation or in use, to the ratings of the past. Because it allows us to quickly capture performance at a single moment in time, we call it a performance snapshot. 6REINVENTING PERFORMANCE MANAGEMENT The Third Objective Two objectives for our new system, then, were clear: We wanted to recognize performance, and we had to be able to see it clearly. But all our research, all our conversations with leaders on the topic of performance management, and all the feedback from our people left us convinced that something was missing. Is performance manage- ment at root more about “management” or about “performance”? Put diff erently, although it may be great to be able to measure and reward the performance you have, wouldn’t it be better still to be able to improve it? Our third objective therefore became to fuel performance. And if the performance snapshot was an organizational tool for measuring it, we needed a tool that team leaders could use to strengthen it. Research into the practices of the best team leaders reveals that they conduct regular check-ins with each team member about near- term work. These brief conversations allow leaders to set expecta- tions for the upcoming week, review priorities, comment on recent work, and provide course correction, coaching, or important new information. The conversations provide clarity regarding what is expected of each team member and why, what great work looks like, and how each can do his or her best work in the upcoming days— in other words, exactly the trinity of purpose, expectations, and strengths that characterizes our best teams. Our design calls for every team leader to check in with each team member once a week. For us, these check-ins are not in addition to the work of a team leader; they are the work of a team leader. If a leader checks in less often than once a week, the team mem- ber’s priorities may become vague and aspirational, and the leader can’t be as helpful—and the conversation will shift from coaching for near-term work to giving feedback about past performance. In other words, the content of these conversations will be a direct outcome of their frequency: If you want people to talk about how to do their best work in the near future, they need to talk often. And so far we have found in our testing a direct and measurable correlation between the frequency of these conversations and the engagement of team 7BUCKINGHAM AND GOODALL Performance intelligence In an early proof of concept of the redesigned system, executives in one large practice area at Deloitte called up data from project managers to consider important talent-related decisions. In the charts below, each dot represents an individual; decision makers could click on a dot to see the person’s name and details from his or her “performance snapshots.” What are team leaders telling us? First the group looked at the whole story. This view plotted all the members of the practice according to how much their various project managers agreed with two statements: “I would always want this person on my team” ( y axis ) and “I would give this person the highest possible compensation” ( x axis ). The axes are the same for the other three screens. 5.0 People: 1,014 4.0 3.0 2.0 1.0 Level 6 Level 5 Level 4 Level 3 Level 2 Level 1 2.0 3.0 4.0 5.0 members. Very frequent check-ins (we might say radically frequent check-ins) are a team leader’s killer app. That said, team leaders have many demands on their time. We’ve learned that the best way to ensure frequency is to have check-ins be initiated by the team member—who more often than not is eager for 8REINVENTING PERFORMANCE MANAGEMENT How would this data help determine pay? Next the data was fi ltered to look only at individuals at a given job level. A fundamental question for performance management systems is whether they can capture enough variation among people to fairly allocate pay. A data distribution like this off ers a starting point for broader discussion. 5.0 People: 343 4.0 3.0 2.0 Level 4 1.0 2.0 3.0 4.0 5.0 (continued) the guidance and attention they provide—rather than by the team leader. To support both people in these conversations, our system will allow individual members to understand and explore their strengths using a self-assessment tool and then to present those strengths to their teammates, their team leader, and the rest of the organization. Our reasoning is twofold. First, as we’ve seen, people’s strengths gen- erate their highest performance today and the greatest improvement in their performance tomorrow, and so deserve to be a central focus. Second, if we want to see frequent (weekly!) use of our system, we have to think of it as a consumer technology—that is, designed to be simple, quick, and above all engaging to use. Many of the successful 9BUCKINGHAM AND GOODALL How would it help guide promotions? This view was fi ltered to show individuals whose team leaders responded “yes” to the statement “This person is ready for promotion today.” The data supports objectivity in annual executive discussions about advancement. 5.0 4.0 People: 153 A candidate for accelerated promotion But may not be eligible this year Tracking toward promotion Confirm eligibility according to time in role, performance history, business requirements, leader support, and other metrics 3.0 Team leaders’ scores vary significantly Investigate performance discrepancies further 2.0 Level 4 1.0 2.0 3.0 4.0 5.0 consumer technologies of the past several years (particularly social media) are sharing technologies, which suggests that most of us are consistently interested in ourselves—our own insights, achieve- ments, and impact. So we want this new system to provide a place for people to explore and share what is best about themselves. Transparency This is where we are today: We’ve defi ned three objectives at the root of performance management—to recognize, see, and fuel per- formance. We have three interlocking rituals to support them— the annual compensation decision, the quarterly or per-project 10REINVENTING PERFORMANCE MANAGEMENT How would it help address low performance? This view was fi ltered to show individuals whose team leaders responded “yes” to the statement “This person is at risk of low performance.” As the upper right of this screen shows, even high performers can slip up—and it’s important that the organization help them recover. 5.0 People: 35 4.0 A blip in otherwise high performance May need clarity on new responsibilities—address through coaching 3.0 2.0 1.0 Not performing to expectations Work style is disruptive to the team—start remediation 2.0 Level 4 3.0 4.0 5.0 performance snapshot, and the weekly check-in. And we’ve shifted from a batched focus on the past to a continual focus on the future, through regular evaluations and frequent check-ins. As we’ve tested each element of this design with ever-larger groups across Deloitte, we’ve seen that the change can be an evolution over time: Diff erent business units can introduce a strengths orientation first, then more- frequent conversations, then new ways of measuring, and fi nally new software for monitoring performance. (See the exhibit “Performance intelligence.”) But one issue has surfaced again and again during this work, and that’s the issue of transparency. When an organization knows 11BUCKINGHAM AND GOODALL How Deloitte Built a Radically Simple Performance Measure ONE OF THE MOST IMPORTANT TOOLS in our redesigned performance management system is the “performance snapshot.” It lets us see perfor- mance quickly and reliably across the organization, freeing us to spend more time engaging with our people. Here’s how we created it. 1. The Criteria We looked for measures that met three criteria. To neutralize the idiosyn- cratic rater eff ect, we wanted raters to rate their own actions, rather than the qualities or behaviors of the ratee. To generate the necessary range, the questions had to be phrased in the extreme. And to avoid confusion, each one had to contain a single, easily understood concept. We chose one about pay, one about teamwork, one about poor performance, and one about pro- motion. Those categories may or may not be right for other organizations, but they work for us. 2. The Rater We were looking for someone with vivid experience of the individual’s per- formance and whose subjective judgment we felt was important. We agreed that team leaders are closest to the performance of ratees and, by virtue of their roles, must exercise subjective judgment. We could have included func- tional managers, or even ratees’ peers, but we wanted to start with clarity and simplicity. 3. Testing We then tested that our questions would produce useful data. Validity testing focuses on their diffi culty (as revealed by mean responses) and the something about us, and that knowledge is captured in a number, we often feel entitled to know it—to know where we stand. We sus- pect that this issue will need its own radical answer. In the fi rst version of our design, we kept the results of perfor- mance snapshots from the team member. We did this because we knew from the past that when an evaluation is to be shared, the responses skew high—that is, they are sugarcoated. Because we 12REINVENTING PERFORMANCE MANAGEMENT range of responses (as revealed by standard deviations). We knew that if they consistently yielded a tight cluster of “strongly agree” responses, we wouldn’t get the diff erentiation we were looking for. Construct validity and criterion-related validity are also important. (That is, the questions should collectively test an underlying theory and make it possible to fi nd correla- tions with outcomes measured in other ways, such as engagement surveys.) 4. Frequency At Deloitte we live and work in a project structure, so it makes sense for us to produce a performance snapshot at the end of each project. For longer-term projects we’ve decided that quarterly is the best frequency. Our goal is to strike the right balance between tying the evaluation as tightly as possible to the experience of the performance and not overburdening our team leaders, lest survey fatigue yield poor data. 5. Transparency We’re experimenting with this now. We want our snapshots to reveal the real- time “truth” of what our team leaders think, yet our experience tells us that if they know that team members will see every data point, they may be tempted to sugarcoat the results to avoid diffi cult conversations. We know that we’ll ag- gregate an individual’s snapshot scores into an annual composite. But what, exactly, should we share at year’s end? We want to err on the side of sharing more, not less—to aggregate snapshot scores not only for client work but also for internal projects, along with performance metrics such as hours and sales, in the context of a group of peers—so that we can give our people the richest pos- sible view of where they stand. Time will tell how close to that ideal we can get. wanted to capture unfi ltered assessments, we made the responses private. We worried that otherwise we might end up destroying the very truth we sought to reveal. But what, in fact, is that truth? What do we see when we try to quantify a person? In the world of sports, we have pages of statistics for each player; in medicine, a three-page report each time we get blood work done; in psychometric evaluations, a battery of tests and 13BUCKINGHAM AND GOODALL percentiles. At work, however, at least when it comes to quantifying performance, we try to express the infi nite variety and nuance of a human being in a single number. Surely, however, a better understanding comes from conversations—with your team leader about how you’re doing, or between leaders as they consider your compensation or your career. And these conversations are best served not by a single data point but by many. If we want to do our best to tell you where you stand, we must capture as much of your diversity as we can and then talk about it. We haven’t resolved this issue yet, but here’s what we’re asking ourselves and testing: What’s the most detailed view of you that we can gather and share? How does that data support a conversa- tion about your performance? How can we equip our leaders to have insightful conversations? Our question now is not What is the simplest view of you? but What is the richest? Over the past few years the debate about performance management has been characterized as a debate about ratings—whether or not they are fair, and whether or not they achieve their stated objectives. But perhaps the issue is diff erent: not so much that ratings fail to convey what the organization knows about each person but that as presented, that knowledge is sadly one-dimensional. In the end, it’s not the particular number we assign to a person that’s the problem; rather, it’s the fact that there is a single number. Ratings are a dis- tillation of the truth—and up until now, one might argue, a neces- sary one. Yet we want our organizations to know us, and we want to know ourselves at work, and that can’t be compressed into a single number. We now have the technology to go from a small data ver- sion of our people to a big data version of them. As we scale up our new approach across Deloitte, that’s the issue we want to solve next. Originally published in April 2015. Reprint R1504B 14The Transparency Trap T by Ethan Bernstein “TRANSPARENCY” is a watchword in management these days, and it’s easy to understand why. After all, if people conduct their work in plain view, won’t they be more open and accountable? Won’t they fl ag and fi x problems more easily, and share information and their good ideas more freely? That’s certainly what I expected to discover a few years ago, when I went in search of empirical evidence that transparency improves performance in organizations. But through rigorous fi eld research and experiments, and observations by embedded researchers, I learned that it’s not that simple. My fi ndings, which complement various studies on open workspaces, suggest that more-transparent environments are not always better. Privacy is just as essential for performance. Here’s the paradox: For all that transparency does to drive out wasteful practices and promote collaboration and shared learning, too much of it can trigger distortions of fact and counterproduc- tive inhibitions. Unrehearsed, experimental behaviors sometimes cease altogether. Wide-open workspaces and copious real-time data on how individuals spend their time can leave employees feeling exposed and vulnerable. Being observed changes their conduct. They start going to great lengths to keep what they’re doing under wraps, even if they have nothing bad to hide. If executives pick up on 15BERNSTEIN signs of covert activity, they instinctively start to monitor employee behavior even more intensely. And that just aggravates the problem. If all this seems vaguely Orwellian, so did some of the activities I saw in leading companies where intense visibility and tracking were making things worse, not better. For instance, at one of the world’s largest mobile phone factories, which is in China and is owned by a global contract manufacturer, the workers on one line were hiding process improvements they had made—not just from managers but from their peers on other lines. Why? Because, as one experienced worker explained, “it’s most effi cient to hide it now and discuss it later. Everyone is happy: They see what they expect to see, and we meet our targets.” This was not an isolated example. In my research, I found that individuals and groups routinely wasted signifi cant resources in an eff ort to conceal benefi cial activities, because they believed that bosses, peers, and external observers who might see them would have “no idea” how to “properly understand” them. Even when everyone involved had only the best of intentions, being observed distorted behavior instead of improving it. Some organizations, however, had found the sweet spot between privacy and transparency, getting the benefi ts of both. They used four types of boundaries to establish certain zones of privacy within open environments: They created boundaries around individual teams—zones of attention—to avoid exposing every little action to the scrutiny of a crowd. They drew boundaries between feedback and evaluation—delineating zones of judgment—to avoid politick- ing and eff orts wasted on managing impressions. They set boundar- ies between decision rights and improvement rights—establishing zones of slack—to avoid driving out tinkering. And they put bound- aries around carefully defi ned periods of experimentation—zones of time—to avoid both too frequent and too infrequent interruptions. Across several studies involving diff erent industries, cultures, and types of work, the companies that had done all this were the ones that consistently got the most innovative, productive, and thought- ful work from their employees. 16THE TRANSPARENCY TRAP Idea in Brief Problem To get people to be more creative and productive, managers increase transparency with open workspaces and access to real-time data. But too much transparency can leave employees feeling exposed. As a result, they may actively conceal what they’re doing—even when making improvements—reducing productivity and, paradoxically, transparency. Solution Employees perform better when they can try out new ideas and approaches within certain zones of privacy. Organizations allow them to do that by drawing four types of boundaries: around teams of people (zones of attention), between feedback and evaluation (zones of judgment), between decision rights and improvement rights (zones of slack), and for set periods of experimentation (zones of time). Benefi t Less-transparent work environments can yield more- transparent employees. And by balancing transparency and privacy, organizations can encourage just the right amount of “deviance” to foster innovative behavior and boost productivity. Type 1: Boundaries Around Teams As social media platforms, wearable devices, and other tools for transparency become more advanced, our sense of being “onstage” is growing. And so, in keeping with the sociologist Erving Goff man’s insights about interpersonal behavior, we spend more time acting, trying to control others’ impressions and avoid embarrassment— particularly at work. We cater to our audience, doing what’s expected. That was the case at the Chinese mobile phone factory, which had 14,000 workers. When I began studying that work environment, it seemed like the epitome of transparency: Each fl oor—roughly the size of a football field, with no walls or other divisions—held as many as 2,000 workers across shifts. By embedding into the lines fi ve Chinese-born Harvard under- graduate researchers—who worked, ate, and lived alongside the employees, who knew them only as coworkers—I quickly learned 17BERNSTEIN that the production teams hid a great deal from observers, despite the open environment. For example, to speed up assembly, work- ers scanned multiple bar codes into the system at once instead of scanning each one individually after applying it to a metal shield in a phone, as standard operating procedure required. And team mem- bers cross-trained on tasks during downtime—it looked like fooling around from the outside—so they could cover for one another when an operator fell behind. There was no ill intent—only a rational cal- culation about how to be most productive without having to waste time on explanations. Such subterfuge is problematic for a host of reasons, though, ranging from increased risk of compliance-related defects to a lack of shared learning. To test some basic interventions that might address it, I set up a few fi eld experiments. On one fl oor, where 32 produc- tion lines made similar mobile data cards, I randomly selected four lines on which to experiment, leaving 28 “controls” to work as they always had. Because one of the experimental lines was very close to a con- trol line, engineering put up a curtain between the two. When it was raised, one of the embedded students overheard a worker say, “Wouldn’t it be nice if they hung up curtains all around the line, so we could be completely closed off ? We could be so much more pro- ductive if they did that.” Curious to see if that would be true, I asked engineering to fully encircle each experimental line with the equiva- lent of a hospital bed curtain. Over the next fi ve months, to my sur- prise, the lines with curtains were 10% to 15% more productive than the rest, even when I controlled for other infl uences (such as the Hawthorne eff ect, whereby subjects improve simply in response to being studied). By shielding employees from observation, the curtains supported local problem solving, experimentation, and focus. But within the curtains work became much more transparent. Partly for that rea- son, defects remained extremely low, even as throughput rose. And over time the camaraderie within boundaries made the workers more likely to share—as a group—their privately worked-out solu- tions with other lines. 18THE TRANSPARENCY TRAP Traditionally, people in organizations expect full transparency within teams but not necessarily beyond them. Team boundaries can allow for productive, selective opacities within starkly transparent environments—as was clear at Valve Software, a top PC game devel- oper I studied with Francesca Gino and Bradley Staats. Valve’s 400- plus employees are allowed to allocate 100% of their time to projects they feel are valuable to customers. When they collaborate on new products or features, they form teams called cabals and move their desks (which are set on wheels) together into clusters. The offi ce lay- out is so fl uid, with some individuals rolling their desks to diff erent cabals multiple times a week, that Valve even has an internal appli- cation to track desk location. Valve’s cabals choose their own workspaces, creating privacy by positioning themselves at a distance from others. Though transpar- ency is high within them, it’s moderate at best across the company because of the physical separation and Valve’s distaste for manage- rial oversight. (No one has the role of keeping tabs on the cabals or shuttling information back and forth.) This gives the cabals more freedom to investigate ideas. When one employee started a cabal to explore how Valve could get into hardware, the team was initially tiny. Had it immediately tried to rally the support of the entire organization of software engi- neers, the hardware concept might have been dead on arrival—it’s hard to persuade lots of people at once to embrace anything new, even at Valve. But acquiring a few followers with whom to experi- ment and create prototypes was doable. Gradually, the hardware cabal accreted people and resources, gaining scale and momentum. To recruit more people to join it, early members eventually had to tell others what they were up to. In other words, they increased their transparency outside the group—but in their own way and when they were ready. Is Valve providing an innovative, productive work environment? Its success suggests that it is. In its 18-year existence, Valve has pro- duced a large share of top PC games. According to its founder, Valve has grown sales by more than 50% every year and brought in more revenue per employee than Apple or Microsoft. Its game platform 19BERNSTEIN consumes more bandwidth than most countries do. The cabals help the company compete in a market where creativity and rapid proto- type and launch capabilities are critical. Though Valve is an extreme case (and its success is a product of many factors), other firms are similarly fostering innovation and productivity by allowing privacy within team boundaries. For instance, Google doesn’t track when and where its engineers spend the 20% of their time that they devote to projects that interest them personally—but they feel transparently accountable to others within the self-organized teams in which the work gets done. And that protected 20% time has been credited with the incubation of more than half of Google’s current product portfolio, including Gmail, AdSense, Google Talk, Google News, Google Transit, Google Now, and the Google Transparency Report. Team boundaries have a big impact on performance for service providers as well. In a recent Harvard Business School study, Melissa Valentine and Amy Edmondson show how such boundaries (in their case, counters delimiting small and very fl uid groupings of nurses and physicians) improved teamwork and effi ciency in a hospital’s emergency department. Transparency and accountability among people working within the boundaries increased. As a result, aver- age patient time in the department fell by more than 40%, with no decrease in quality. Remarkably, the department sustained that improvement for over a year (the length of the study) even though its daily patient volume rose by more than 25%. Although tools for observation (see the sidebar “Tracking Every Move”) and collaboration have become more powerful, making it easier for individuals to do much of their work without formal teams to support them, teams are actually proliferating rather than dying off . Longitudinal surveys show that today nearly all Fortune 1000 fi rms have formal team structures, compared with fewer than 20% in 1980. Though a number of factors are driving that trend, my research suggests it has something to do with the value of bound- aries. Workers today can tackle problems in cooperation with large networks—and even crowds—of people, but as teams scholar Richard Hackman demonstrated, they frequently do it better on 20THE TRANSPARENCY TRAP Tracking Every Move MANY OF THE SAME COMPANIES that led the digital transformation of in- dustries are also leading the digital transformation of work—allowing manag- ers to observe from a distance far more than they could before. Even knowledge work can be digitally monitored now. VoloMetrix—a Seattle- based start-up that extracts and analyzes data from company e-mails, calen- dars, social platforms, and line-of-business operations—provides employees with “people analytics” productivity dashboards based on their own collabo- ration and activity data or the data of the people they manage. Of course, all this can feel intrusive—creepy, even—unless employers say what’s in it for those being watched. That’s how companies persuade con- sumers to give up personal information—by off ering a quid pro quo. Yet for all the rhetoric about the value of utter transparency, there is scant empiri- cal research to support it. So, what value can managers give in exchange for digitally tracking employees? Can they make the work easier or increase its impact? Can they use the data for recognition rather than coercion? Ambition, a Y Combinator start-up, is trying to make transparency more en- gaging and less intrusive by reporting performance data as if employees were players on fantasy football teams (the user interface mimics fantasy football). Meanwhile, more individuals are monitoring their own activity through such de- vices as the Jawbone UP, the Fitbit, and the Nike+ FuelBand, to improve their be- havior. Perhaps that will make them more receptive to digital tracking at work, which can yield equally benefi cial self-awareness, even if the boss is watching. Some Examples: Amazon warehouse employees carry handheld computers that track and optimize every move. Tesco warehouse workers wear armbands that do the same. UPS trucks now have sensors that record nearly every action by their drivers. Harrah’s uses RFID technology to track how long it takes the waitstaff to serve drinks to customers. clearly bounded teams. Boundaries create a focus on “us” and “our work together,” liberated from external noise, whether it’s unpro- ductive interference or chaotic workfl ow. No matter what the work is, some observers will increase productivity, but others will under- mine it. Whether boundaries are spatial or psychological, they can 21BERNSTEIN limit observation to a zone of people. It happens with curtains, cabals, counters—even nominal team boundaries mitigate the pres- sures of being onstage by keeping the audience small. Type 2: Boundaries Between Feedback and Evaluation Organizations are incorporating more and more real-time data—all those electronic bread crumbs we leave behind as we do our work— into performance assessments. In response, employees waste a lot of valuable energy managing impressions. But tools that separate data-informed feedback from the evaluation process help lower people’s defenses and put the focus squarely on productivity and problem solving, where you want it. In general, any information that goes into a formal performance review tends to put people on edge. Nevertheless, most employ- ees are keenly interested in improving their skills. Just look at the popularity of Rypple, a social media platform created to allow members of organizations to give and gather anonymous feedback. (Salesforce.com purchased Rypple within three years of its launch for $60 million. It’s now called Work.com.) “You simply had to ask, ‘How am I doing at X?’” explains Rypple cofounder Daniel Debow, “and the answers were purely for you.” Because only the recipients had access to their feedback, fear of repercussions was removed from the equation. Further, Debow notes, those giving the feedback submitted honest, useful appraisals—with assurance of privacy, they didn’t have to worry that candid criticism might damage col- leagues’ reputations. Another way of allowing employees to learn from their day-to- day actions without having every little mistake exposed to manage- ment is to deliver feedback within a protective bubble. A large U.S. trucking company did this when it installed a DriveCam at the top of each tractor cab’s windshield to improve driver safety and per- formance. The small video camera points both outside and at the driver, gathering and wirelessly transmitting data that analysts can use to fl ag risky behaviors and prevent accidents. A green light tells the driver that all is well. But during a “G-force event” (any erratic 22THE TRANSPARENCY TRAP driving incident that causes gravitational force, such as excessive speeding, slamming of brakes, or sudden swerving), the light blinks red and green. If the force is strong enough, the light turns red and the camera stores footage from eight seconds before and four sec- onds after the event. (On average, each vehicle’s DriveCam stores about fi ve minutes’ worth of video a month.) The DriveCam also records key metrics, like the truck’s speed and location. A small group of coaches who oversee fl eet safety review any events deemed preventable. Only in a situation involving damage or a willful breaking of the law—for instance, failing to use a seat belt or text ing while driving—would the coaches share footage with management. And the supervisors who evaluate the truckers aren’t privy to the coaching. When the DriveCams were installed, drivers initially dreaded “being watched by Big Brother.” Some got distracted when the red light came on, which made safety worse. But drivers have since warmed to the cams, because they now trust that management won’t use the videos to evaluate or reprimand them. As one coach explains, the collaboration is helping drivers “turn bad habits into good habits” and improving their safety record. When coaches look at the footage with drivers, “it really does help,” another says. “It changes people’s perspectives.” Sometimes it’s just a simple realiza- tion: “Wow, you know, I was following a little too closely.” Type 3: Boundaries Between Decision Rights and Improvement Rights Managers work hard to clarify decision rights, and for good reason. Spelling out who gets to make which calls helps organizations run more smoothly. It prevents duplicated eff ort, for example, and deci- sion gridlock. But the empowerment of a select few can leave the other people in the organization feeling voiceless, especially if they aren’t explicitly invited to improve systems, processes, roles, and tasks. Employees may withhold their ideas or implement them on the sly. When organizations don’t grant improvement rights to those without decision rights, innovation by those who see solutions 23BERNSTEIN where others don’t—known as productive, or positive, deviance—is eff ectively squashed in favor of conformity and compliance. It’s important to draw a line between the two kinds of rights, because the people exercising them have diff erent needs. Holders of decision rights benefi t from a transparent environment, where “every small fact becomes the subject of careful, scientifi c investiga- tion,” as Frederick Winslow Taylor put it more than a century ago. But while holders of decision rights want perfect visibility, which requires transparency from everyone, that kind of visibility gets in the way of employees’ striving to make things better, because it cur- tails the experimentation necessary for improvements, as seen in the mobile phone factory and other settings. In fact, a long stream of research tells us that in the presence of others, people do better on repetitive, practiced tasks—what psy- chologists call dominant responses—but worse on learning tasks that call for creative thinking. The visibility created by transparency conjures up self-consciousness and inhibitions. That’s why musi- cians perform in front of an audience but practice without one—they need privacy to noodle and make discoveries. So, the right level of transparency—and thus oversight—depends on the activity and the observer. While musicians may practice in front of a teacher, that teacher is an invited coach, not a consumer of their work. Technology is making close scrutiny by large audiences of consumers possible to a degree that Taylor could never have imagined, and clear deci- sion rights amplify its eff ects. If you’re under the spotlight in front of such an audience, the last thing you want to do is to make unprac- ticed improvements while being held to a performance standard. All that transparency can create yearning for a closed door with a sign that says, “I’m in rehearsal!” Organizations that understand all this are giving employ- ees a reprieve from total transparency in order to make “slack” (excess resources) more productive rather than more scarce. Take Flextronics, a company that Willy Shih, Nina Bilimoria Angelo, and I have studied. By setting up a “moonshine shop,” Flextronics has turned its factory fl oor in Guadalajara into a veritable Legoland for workers. The shop gives employees a place to develop tools and 24THE TRANSPARENCY TRAP fi xtures for their lines in periods of downtime—creative work that imparts a sense of ownership. (Manufacturing companies often facilitate improvement rights in this way.) Made of simple pipes, connectors, and recycled materials, the designs produced in the shop can cost a tenth of what it takes to produce the more complex, specially sourced fi xtures provided by vendors. The quality makes IKEA look high-end, but the designs do the job effi ciently, safely, and eff ectively. More important, the shop encourages continual innova- tion by the operators, creating effi ciencies that would otherwise remain in the imagination of workers. Manufacturers aren’t the only organizations that have made slack more productive by protecting improvement rights. Saravanan Kesavan, Bradley Staats, and I saw this happen at the U.S. retailer Belk when it upgraded a mostly manual labor-scheduling system for its 24,000 employees and 300-plus department stores. Belk could have followed the lead of large retailers that have automated nearly all the scheduling tasks, increasing the effi ciency of labor with com- plex algorithms based on minute-by-minute sales fi gures, real-time weather predictions, activity-based time studies, and other data. But Belk wanted to give its store managers and schedulers the fl ex- ibility to account for staffi ng variations and other local factors, since retail labor is a key driver of customer experience—and, therefore, sales. So its managers chose the simplest form of the technology and allowed local store managers and schedulers to exercise judgment, revising the schedules proposed by the system without having to seek corporate-level approval. In the early days they revised more than 70% of the scheduling. Now that rate is below 50%—a more efficient, productive range. And while at least one of Belk’s competitors recently suff ered well- publicized challenges in getting a return on its new fully automated scheduling system, Belk’s pilot stores showed a 2% lift in gross profi t by the end of 2013, several months after implementing the version that allowed for overrides. Which employees should be given improvement rights in order to create productive zones of slack? That depends on the organi- zation and its leadership. In a lean environment everyone may be 25BERNSTEIN responsible for improvement. But other companies might treat it as an opportunity, not a mandate, perhaps vesting improvement rights in an R&D unit, a heavyweight team of senior managers, or front- line workers. Or an organization might outsource improvements to suppliers, contractors, or consultants. In any case, the assignment of improvement rights both refl ects and infl uences strategy, so leaders must protect them by putting skunkworks activities inside zones of privacy. Type 4: Boundaries Around Time Another way to strike the right balance between transparency and privacy is to experiment within limited blocks of time. With this approach, execu