What your employees may not be telling you, While most people would agree that a company's goal sould be optimization, not its component parts, opinions differ markedly as to what methods, practices and policies management should employ in its efforts to align system objectives with the goals and behavior of employees. Clearly one of the prevailing management approaches to such alignment, even among firms claiming to have adopted many quality management initiatives, is management by objectives (MBO) or management by results (MBR)
Hile most people would agree that a company's goal should be optimization of the entire organization, not its component parts, opinions differ markedly as to what methods, practices and policies management should employ in its efforts to align system objectives with the goals and behavior of employees.
Clearly one of the prevailing management approaches to such alignment, even among firms claiming to have adopted many quality management initiatives, is management by objectives (MBO) or management by results (MBR). This practice persists in spite, of warnings by quality experts such as W. Edwards Deming that MBO often results in internal competition, selfishness and a lack of cooperation-the very behaviors that must be avoided if system optimization is to be achieved.
Certainly every organization wants better results. The question is, by what methods? Is MBO/MBR as practiced by most organizations,
even those committed to quality management, the best method for achieving better results?
Deming certainly did not think so. He believed that MBO/MBR put the focus on outcomes, usually expressed as some arbitrary numerical goal or target. He saw the way to better results as a focus on the system that was causing the results.' More important, he believed that a goal beyond the capability of a system would lead to frustration, discouragement, and a loss of pride and joy in work as employees were held accountable for what was clearly beyond their control.
The story in the sidebar "MBO/MBR: One Story" on p. 42 was told by a student we'll call Caroline, who was enrolled in one of our master's degree level Strategic Cost Management classes. The story, edited for the purposes of this article, was part of her response to a case question about the efficacy of numerical targets in controlling people and processes and influencing behavior. It is an example of the very thing Deming warned about.
We have shared Caroline's experience with other MBA classes to get their reactions and views. In this article, we will share additional student experiences to support our view that these practices not only undermine legitimate quality initiatives but also have dysfunctional effects on employees.
What has surprised us is that so many other students shared with us similar stories about their own experiences with these popular management practices. Even more alarming, many of the firms involved were engaged in quality management initiatives. In spite of their professed commitment to quality management, these organizations continued to pursue MBO and MBR practices that were deeply rooted in the use of accounting targets and other numerical goals. (For the purposes of this article we will be using MBO, MBR, numerical goals, targets and quotas in the same context as accounting based targets).
The case for accounting targets
In his book Relevance Regained, H. Thomas Johnson makes a compelling case against the use of accounting targets to control people and processes. However, Johnson notes that the focus on achieving accounting goals has been the driving force of American management for the last 40 years. He indicates that the use of accounting information has been the cornerstone of top-down control of operations.'
In addition to being used to control people and processes, this accounting information is also used to make process adjustments through its comparison with actual data.
Advocates for the use of accounting targets usually begin by noting the importance of aligning employee behavior with the goals and objectives of the firm. MBO and MBR usually become the primary means for assuring this alignment.
Few would argue that management information affects business performance by'helping to shape a firm's goals. These goals, in turn, influence the behavior aimed at achieving them.
The stage is thus set. NM targets are agreed upon by individuals, profit centers, divisions and so forth. Management keeps score through reporting systems that compare actual results to targeted amounts. The results of this process are used to motivate and influence behavior aimed at achieving the agreed upon goals.
In addition, corrective action can be initiated to bring future results in line with the agreed upon goals. At the end of the period managers rank, reward or punish employees based upon performance. This approach is deemed to be objective, fair, quantifiable and effective in aligning and motivating the behavior of those who are seen as responsible for the results. What could possibly be wrong with such practices?
MBO/MBR: the TQM disconnect
There is widespread agreement that becoming more flexible and responsive in meeting customer needs is critical to survival in our current competitive environment. A visit to your local bookstore or quality Web site will introduce you to a variety of suggestions and strategies aimed at improving or reengineering business processes, creating a customer focused culture, showing how to build effective teams, and revealing the secrets to happy and empowered employees strategies crucial to becoming more flexible and responsive to customers.
Yet in spite of the impact of the total quality management (TQM) revolution, the literature advocating the suggestions and strategies just mentioned contains little evidence challenging the continued use of MBO/MBR to control people and processes.
Equally disturbing is that management may not even be aware of the dysfunctional consequences that continued use of these practices can have on the very initiatives designed to create an organizational culture that is customer focused, team oriented and committed to process improvement.
We believe the failure to recognize this MBO/MBR quality management disconnect may help explain why quality initiatives often fail. To make our case, we will use the following basic tenets that we believe form the cornerstone of most quality management initiatives:
• Focus on the customer.
• The need to view the business as a system and to aim for optimization of that system.
• A commitment to continuous improvement.
• Creating an empowered work force.
Customer focus
Johnson sees the global competitive imperative for flexibility and responsiveness in meeting customer needs' Deming often referred to the need to delight, not just satisfy, customers.
Creating a customer focused culture is not easy. Responsiveness and flexibility in meeting customer needs require that everyone in the organization clearly understands his or her role. They also require recognition that the path to pleasing external customers begins with meeting the needs of internal customers.
In a customer focused organization, each employee recognizes his or her unique role as both supplier and customer. Each person responsible for a task is both supplier to the next internal customer and customer to the previous process. Cooperation between these processes is crucial if the external customer-the ultimate consumer of the product or service-is to be delighted.
Firms striving to achieve this orientation often fail to recognize that when they pursue numerical targets, their own focus shifts away from the needs of the real external customer to the demands of an artificially imposed internal customer.
One of our students worked for a sales organization where quotas were the most important and rewarded goal. The company believed that these targets had to be set high enough to motivate the sales force. Sales goals were usually set at some percentage above the previous year's results.
Often quotas were set for specific product lines. As a result, customers were sometimes lobbied to buy products they didn't need just so the salesperson could meet targets. Special discounts or payment terms were sometimes offered as an incentive. The results were often angry customers and a waste of a salesperson's time. The quota became the imposed customer.
Another student told of working for a cookie company during the Christmas holidays. Business was brisk, and the company was very committed to getting all orders out on time. Clearly it had the needs of the customer in mind.
Two shifts of workers were employed. Management decided to pay an extra weekly bonus to each worker on the shift that packed and shipped the most cookies. Our student was on the day shift. He complained that he never won the bonus since the night shift hid boxes and packing material and left a mess for the day shift to clean up. The competition and bonus became the imposed customer. Management meant well-it was doing its best to get more cookies packed and shipped-but had inadvertently diverted employee attention from the real goal: the external customer.
Earlier we mentioned how important it is for each employee to understand his or her job relative to the firm's goal of being responsive and flexible in meeting customer needs. One of our students had worked as a computer support programmer and told of a company policy that clearly demonstrates how the imposed customer can confuse and frustrate employees, who must decide which customer to serve.
This student was responsible for answering a tollfree number for software customers having problems. The student would dial into the system and fix the customer's problem. Management set a numerical target of answering 85% of the calls within 60 seconds. The goal was measured by the minute, hour, day, month and year.
Our student indicated that the target was only met a handful of days the two years she was with the company. Meeting this service level target accounted for half of each support center employee's yearly performance review. But not to worry-even though the goal was only really met a handful of times, no one was penalized since numbers were fudged.
Even worse, the student raised this telling question: Which goal do I meet? Do I provide good customer service and solve problems right the first time? Or, do I answer calls and find a fix for customers that will get them off the phone faster so I can answer the next call?
In each of these cases the use of numerical goals and targets undermined the ability of organizations to meet customer expectations. In many cases they were not even aware of the damage being done to the external customers by the demands of the imposed customer.
The organization viewed as a system
Proponents of quality management recognize the need to view an organization as a system of interdependent processes that must work together to accomplish the overall aim. As seen in this context, the goal of the organization is optimization of the system.
Quality management initiatives supportive of systemwide optimization recognize the importance of a clearly defined aim, employee understanding of their jobs relative to the organization's aim and cooperation among the interdependent components in the system.
What is often overlooked, however, is the danger of policies that encourage optimization of the components of the system instead of the entire system. Once again, the use of numerical 'goals and targets (MBO/MBR) is often the chief culprit in the destruction of the system view of a business. In the most extreme cases, such policies may result not only in distortion of figures, but also in distortion of the system.
Numerous examples of the failure of management to understand a system and its given capability were evident from our students' comments. One, who was employed by a consulting firm, told of the emphasis placed on billable hours. An award to the consultant of the month was based solely on this criterion.
The award often proved frustrating to consultants because they recognized that if the marketing / sales people had not acquired clients, there was little or nothing they could do to bill more hours. Consequently, the award had nothing to do with how well consultants served customers but was really about what project the consultants had been assigned.
Another of our students, who worked for a software service center, told how the company ranked customer consultants on the basis of how many calls they took from customers. As a result, employees were being rewarded for getting customers off the phone as quickly as possible. Those who took extra time to focus on customer service were penalized, so fewer and fewer employees were willing to stay on a call any longer than absolutely necessary.
Perhaps the most serious violations of system optimization occur when individuals or departments are pitted against each other in the zero sum game known as the annual merit review.
One of our students reported that in his current job employees were told of the importance of working as a team. But raises and bonuses were doled out on an individual basis. So it benefited individuals to hoard information and knowledge and push down peers to secure for themselves the limited reward money.
Process vs. Management By Objective (MBO) Thinking
Process improvement
A commitment to continuous improvement of processes is a central feature of any quality management initiative. Managerial practices that focus on MBO/MBR-what we characterize as results oriented thinking (see Table 1 for a comparison of process vs. MBO thinking)-often undermine a commitment to process improvement.
Obviously, the way to get better results is to work on improving processes that are capable of giving the desired outcome. A results oriented focus tends to value effort only if it can produce immediate shortterm results. When the organization's focus is directed at cost reduction, the logical consequence is to manage these costs downstream. The results are usually focused on an imposed customer, as discussed earlier.
Caroline's story is a perfect example of the difference between results oriented and process oriented thinking. Caroline was given a target dollar amount of accounts receivable to collect. Her evaluation and performance rating were based upon how good her actual results were relative to this numerical goal.
Recall from Caroline's story how she had no idea why her 'performance was so high one month or so low the next. The numerical goals given to Caroline and her co-workers were not based upon any capability analysis. Control charts were not being used to monitor the collection process. The results oriented approach was classical MBO/MBR - give someone a target based upon past performance, measure the results, and reward or punish based upon the results.
Even Caroline, who had not been with the company very long, realized she had little or no control over when customers paid their bills. A process oriented culture would have noted that customer complaints about improperly installed equipment, or worse, products being shipped to customers that had not been ordered, were affecting the downstream accounts receivable collection process.
Process thinking and a commitment to continuous improvement would have exposed the sheer folly of giving Caroline collection targets and expecting her to be able to influence and control when customers paid. Even more damaging, this results oriented focus was diverting attention from the real customer issues the company should have been addressing.
In another example, a student told of preparing for her annual evaluation. She knew that she had only achieved her numbers once during the year. Being concerned, she tried to express to management that the goals she was given were unattainable unless the process was changed (she had studied statistical process control in a prior master's level class).
The student's boss said that since she met the goal once, she could do it on a continual basis. She was told that she was the problem because she would not take ownership of the process. Of course the fact that she did not design the process and could not change it herself seemed to elude her boss.
After the meeting the student decided to create a control chart of the data. Just as she had suspected, the process was in control except for the one data point when she met her target. She highlighted the special cause as the only time her target was met. She took the data to her boss and presented information about what could be done to improve the process so that she could achieve the desired results.
Her boss seemed responsive until she asked him what might have happened to produce the one-time special cause. He replied that this was the time she finally was doing her job correctly. She left with a bad evaluation and an attitude to match it.
An empowered work force
Current business publications have chronicled a heightened interest in employee empowerment. While operational definitions are important but elusive, the clear focus of this new management initiative is on engendering a spirit of excitement, innovation, commitment and accountability in an organization's employees.
The managerial rationale for focusing on empowerment is very straightforward. An empowered work force will be more highly motivated to align its behavior with the established goals of the firm, work fervently and faithfully to provide quality goods and services for customers, and assume responsibility and accountability for the goals and expectations defined by top management.
While the current quality management literature contains a great deal of discussion about why employee empowerment is important and how to cultivate it, there is little evidence that those firms willing to embrace this concept are willing to abandon or even call into question their continued use of MBO/MBR management practices that we believe are totally inconsistent with a genuine commitment to employee empowerment.
The necessary conditions to promote a climate for empowering employees involves a management commitment to driving out fear, removing barriers between work groups, promoting cooperation instead of internal competition, and creating a culture that instills pride and joy in employees.
Each of these efforts will be undermined if an organization attempts to use numerical goals and targets to control people and processes and to motivate behavior. Similar concerns were expressed by Deming and addressed by many of his Fourteen Points.
Consider the following account of one of our students and then decide whether all the slogans, programs and pronouncements about employee empowerment will be effective. This particular student used to work for a bank that believed the only way to get results was to set quotas and numerical goals-a system that caused rampant cheating and tension among branches.
Branches were required to open a specified number of accounts each day, week and month regardless of the weather, day of the week and number of people coming in. Employees began to lose focus on why customers had actually come to the branch and began pushing products that had no benefit to the customer-doing whatever it took to meet the goal. Do you really think this bank had any hope for creating the kind of empowered work force it wanted?
Another student related a typical account of how the demand for results often leads to distortion of the system or figures just as Deming warned. The student told of a previous job where management reprimanded budget analysts for overspending the budget. Management usually focused on only a single or a few data points and wanted immediate action.
This management response is very typical in a results oriented culture. Management sees its job as looking at the last data point and then saying, "Don't just sit there; do something." But if management understood variation and analyzed a distribution of data, it would know when to say, "Don't just do something. Sit there until we have analyzed the process."
Our student went on to relate how budget analysts lacked the power and authority to change the system. As a result they hid numbers and gave bogus reports to stay out of trouble.
Our final example involves a retail footwear outlet. Our student reported that it had a numerical goal called the purchase ratio that was to be achieved each day. The ratio was calculated by the number of people who came into the store and actually made a purchase. At some point top management noticed that purchase ratios were stagnating or declining.
Store managers were told that purchase ratios were now going to be a top priority on which a significant portion of each manager's bonus would be based. Our student recognized that a stagnating or declining purchase ratio can mean different things. Yes, it can mean poor customer service or poor selling techniques. It can also mean inappropriate shoe sizes, low inventory or lack of stock of hot items. But no analysis was done on the stagnating ratios.
No amount of sloganeering, cajoling, bribing or training will foster employee empowerment when an organization clings to management practices rooted in MBO/MBR and ranking. The use of quotas and numerical goals and targets, which are often outside the capability of the processes being asked to produce the results, will rob a work force of its pride and joy. Fear, barriers between departments and individuals, and internal competition-often the inevitable result of such practices-will sap creative energies.
The proper role for measurements
You may have concluded that we are against all forms of measurement. This is not the case; we are only opposed to the use of MBO/MBR that is rooted in accounting based goals or any other numerical goal or target to control people and processes and to motivate behavior. We believe such practices defeat most of the initiatives that are fundamental to any organization's quality management efforts.
In his book The Economics of Trust, John O. Whitney captures the essence of the problem and offers some cogent advice: "We establish tracking and monitoring devices like standards and report variances in part because we don't trust people to do their best. We want to know where to fix blame. But because these evaluation tools are patently wrong-and our people know it-workers don't trust managers.
In Whitney's view, the next result is that, "We have thousands of drones busily producing reports `full of sound and fury-signifying nothing.' Concomitantly, we have thousands of employees hunkering down, spending time and wasting their energy defending themselves. This nonsense has to stop!
We agree. If you are using MBO/MBR to control people or processes or to motivate behavior, stop doing it if you are serious about your commitment to customers and employees.
But what do we do once we stop these destructive practices? Yes, we need measurements. But for what purpose? If the aim of your measurements is control, the focus must change. Anyone can establish an arbitrary goal or target. But ask yourself: By what method was this target determined? In most cases these figures are purely arbitrary and have been determined with no understanding of the capability of the underlying process.
An additional problem with this approach is that you have no way to separate noise from signals without the use of control charts.' But you might argue that we have to make predictions. Again Deming offers us some sound advice. He said, "If you have a stable system, then there is no use in specifying a numerical goal or target. You will get whatever the system will deliver. A goal beyond the capability of the system will not be reached. If you do not have a stable system, then there is again no point in setting a numerical goal. There is no way to predict what the system will produce; it has no capability.
In a nutshell, Deming was telling us that we need to know if the process producing the data is stable or unstable. If it is stable, you can expect the next data point (the result you are measuring) to fall between the upper and lower control limits. That is the best you can predict. Forget about calling for a specific number and certainly one beyond the current capability of that process.
On the other hand, if you have a process that is unstable (you have special causes), forget it. This process does not even permit predicting a range for the next data point. It has zero predictive capability.
So, management should do the following:
1. Recognize that its real job is not to control but to lead the organization in improving the system. This means managing the business as a system and focusing on optimization of the whole, not the component parts as MBO/MBR encourages.
2. Begin using control charts so it can interpret what the voice of the process is saying. Are signals or just noise present in the data? Being aware of the difference is crucial to knowing what decisions to make to improve processes.
3. Change its perspective about the purpose of measurements. Management shouldn't see measurements as a way to control, rank employees and motivate behavior but rather as information that can be used to help formulate theories to improve processes. It should use control charts to look more deeply into what accounting data are trying to communicate and then use this information to improve processes.
4. Remember that in some cases management information systems may be feeding back information about the effects caused by random variations (the noise in the system) but that management may be reacting as if the effects are coming from special causes (signals). By taking the focus and blame off employees and studying the system with the proper measurements, management will avoid errors caused by its confusing of noise with signals.
The real consequences and questions
The stories told by our students provide compelling evidence that if you use MBO/MBR to control people or processes or to motivate behavior you risk the following:
• Manipulation of processes.
• Suboptimization of the system.
• Failure to satisfy customers.
• Creation of fear and barriers to cooperation among employees.
• Diverting of management's attention from improvement of the system.
All of these consequences diminish an organization's chances to be more flexible and responsive in meeting customer needs-what Johnson calls the “global competitive imperative.”
The stories we have related also speak to a much deeper question that all organizations will have to face as the demands of global competition require even more employee innovation, motivation and commitment: What is the real cost to an organization of MBO/MBR practices that are holding employees accountable for results that are clearly beyond their control? This could turn out to be one of the most significant questions facing management in the decades ahead.
Nice points on MBO - Management by Objectives.
ReplyDelete