Why targets are needed
Organizations have goals to achieve. Overarching goals such as profits and ROI are cascaded into goals around sales, costs and capital employed in business. Towards achieving these, companies make an annual budget or plan at the beginning of the year. In this, the company lays out the targeted revenue for the year, and the limits for its expenditure and capital to be employed to run the business. For sales goals that are set out to be achieved, the company has to achieve numbers across product categories and geographic areas. Similarly, for the company to make profits, the different cost heads such as direct labour, marketing expenses, salaries, etc. have to be kept under control. To control the capital employed, inventory and receivables should be within defined limits.
Naturally, in a large organization, all these variables cannot be managed by a single individual. And lack of clarity about who is responsible for what, will very likely lead to a chaotic environment without direction or accountability. Therefore, in order to align individuals to organizational outcomes, it makes sense to break up the organizational goals into departmental and finally individual targets. This is a popular option to try to bring control in the system, because targets at an individual level enable clear post facto traceability of who can be held accountable. For instance, the responsibility for achieving sales in different territories can be vested with area managers; total manufacturing costs can be divided up into its various sub cost heads, and different managers put in charge to control it. This way, each individual in the company has a small part to play on their own for the organization to collectively achieve its goals.
The problem with targets
On the face of it, this seems apt. However, in practice, a complex interplay of “individual factors” and “systemic factors” is required to achieve any outcome sustainably by organizations. Individual factors are variables within the locus of control of a manager, such as the right capabilities and attitude. On the other hand, systemic factors are the uncertainties or the variability of any business/environment which are beyond a single individual’s control, but can impact results. For an individual to achieve her goal, there may be other individuals in the system whose co-operation may be needed. This dependency is another kind of systemic factor. The problem for managers who periodically try to evaluate their team’s performance, is that it is difficult to separate out the contribution of systemic and individual factors in hindsight, and pinpoint the real cause for the failure or success of an individual. Managing using individual targets generally also implies that the supervisor is not closely involved in the day to day operations of the subordinate. This makes it even more difficult for the supervisor to judge the extent of impact of these factors.
To clarify the problem, let us take a single assigned target such as the sales target for a territory, and examine it closely. For a territory-in-charge to achieve her sales target, there are many factors that have to fall in place. For example, the quality of the product has to be acceptable, supply of materials has to be on time, the product she is selling should have good after sales service, etc. For all these, she needs the support and co-operation of production, logistics, quality control, after sales service, etc. of her company. Even if all these are manged without a hitch, external uncertainties such as the weather, economic factors, competitor actions can play spoil sport and derail her ability to achieve her targets. An individual cannot be held accountable for these systemic factors that are beyond her control.
However, in addition to these systemic factors, individual factors such as skill, knowledge, intent, motivation, etc. also affect the achievement of a set target. For example, the salesperson can choose to go the extra mile to complete her target, or take a lackadaisical attitude towards it. The main objective of any performance review is to understand if an individual did all she could under the given circumstances. But because of the tangled nature of individual and systemic factors that affect outcomes, it is very difficult for a supervisor to differentiate these in hindsight. For instance, when salespersons fail to achieve their targets and say “Our supplies were delayed”, as the reason for their failure, it is tough for the boss to tell if this is a genuinely systemic issue or a cover up of individual lacuna.
This ambiguity over the contribution of systemic and individual factors in goal achievement sets the stage for a whole series of issues:
Only the individual himself or herself who experienced a situation has any real inkling about the real cause of success or failure. In the face of this confusion or conflicting information about a subordinate’s performance, more often than not, managers tend to give a higher weightage to individual factors – initiative, attitude, etc., especially in the event of failure to meet expectations. This happens because it is usually easy for a boss to conclude that something could have been done if she (the boss) had known earlier. For instance, she could have responded to the reason proffered (above) by saying “If you had an issue with delivery, you should have discussed with me. We could have tried to sort it out”! Further, human beings are often subject to bias. So, when the target has been achieved, individuals tend to believe that it was due to their own efforts, and when it is not, it is attributed to lack of support received or external uncertainties. This perception that she was not to blame, would make a subordinate question the boss’s conclusion. Moreover, it is also possible that she genuinely made an effort to achieve her target. In either case, this kind of reprimand may be perceived as unjustified by a subordinate and can create friction between them.
Further, in this situation, where there is no objective data around what really happened, peers too can judge an individual who achieved a target as ‘lucky’ and themselves (who did not achieve targets) as ‘unlucky’, creating a sense of injustice within their minds when the ‘lucky’ teammate is rewarded or promoted. This can lead to friction between teammates.
• Fear of Failure
All individuals are aware that the impact of vagaries and uncertainty on their ability to achieve targets cannot be wished away. Yet, by accepting a target, they have become accountable for it. Individuals construe their accountability to mean “If things go wrong, I will have to pay for the consequences”. Therefore, in such an environment, people will tend to operate from a place of fear, the fear of failure. This makes them extremely short term oriented. Even if there are actions that can be taken today to help the company flourish in the long term, managers with targets will shy away from these for fear that their numbers will take a ‘hit’ in the short term.
Moreover, whenever individual goals are being set, they would be extremely conservative. Later, even if there was potential to do more than the assigned target, this will be artificially capped-from fear of an even higher target for the next period. For example, if a salesperson receives a customer’s order when he has already achieved his target for the period, he will try very hard to push it to the next period. He does so, for two reasons. Firstly, if he secures the order for the next period, it can ease his next month’s burden. Secondly, and more importantly, with an over achievement in the current month, he runs the risk of being assigned higher targets for the next period. Most people are smart enough to nip this risk in the bud – what if he is not as lucky in the next period! On the other hand, if he has indeed been unlucky, and he is fairly sure that he is going to miss the target, he is very likely to give up quickly, and miss the target by a good margin. This action helps him secure a lower target for the next period. In either case, the company loses on potential sales.
• Loss of Agility
Fear of failure clearly makes individuals wary of over committing. So, they will negotiate hard for lower targets for themselves and their teams. At the same time, top management will try to push these numbers higher to meet the goals of the company as a whole. Both sets will present data and arguments in support of their own points of view. This back and forth between groups, at many levels of hierarchy, can make the company systems slow down! For instance, in a consumer products company, production planning for the month usually gets delayed because the quantities to be manufactured can only be finalized after a long drawn out set of negotiations by individuals, branches or regions of a company, over what is a ‘realistic’ target that each can achieve.
Even annual business plans take enormous management bandwidth, three to four months of meetings, buy-in discussions and negotiations to finalize numbers that are agreed as being fair. The fact that the company can afford to do this laborious exercise of making a budget only once a year, also makes it difficult for the company to alter its capex plans or take up any new initiative in the middle of a year. This makes a company slow to react to emerging opportunities.
• System Tampering Behaviour
Another major issue with individual targets is that it fosters system tampering behaviour. It is not unusual to have a supervisor who is only interested in whether the assigned target was achieved on not, and not in how it was achieved. Moreover, even if the supervisor tried to find out, as mentioned earlier, isolation of causative factors of an outcome is a challenge in hindsight. So in an inherently interdependent organizational system, the temptation to take a short cut by gaming the system is almost irresistible. For example, if you ask a person to increase sales, she can do it as long as you are not asking about receivables. The manufacturing team can achieve production numbers by cherry picking orders and making large batches for production. It will help achieve productivity numbers but may delay orders. Similarly, in project environments, people can meet their task durations by doing incomplete handovers to the next team.
• Interdepartmental Conflicts
When individuals, thus, work fastidiously at protecting their targets, they very often create damage for others – unintentionally or intentionally. For instance, the logistics department, in a bid to reduce costs, can engage larger trucks; but this can cause intermittent unavailability in the market, and loss of sales, a target for the sales head.
In an attempt to ensure that they escape from blame, managers will also do everything possible to identify why something could not be achieved. One common manipulation by the sales team – when they realize that there is significant threat to their target – is to ask the production team to supply a quantity that they already know cannot be supplied by that team. So, later, when the sales team is asked about unachieved targets, the blame can promptly be passed on to production! A few rounds of ‘pass the blame’ by multiple departments in a firm precipitates as chronic inter-departmental conflicts!
As evident from the above discussion, fear of blame, continuous negotiations over targets, stress over how to achieve committed targets, a persistent sense of injustice in how rewards and promotions are doled out in the organization, and chronic inter-departmental conflicts break down the culture of collaboration in the company.
The Core Conflict
The problem that is at the heart of these issues is that, while on the one hand, the organization wants to ensure effective control through clear individual accountability (i.e. the firm would like to hold employees to account after the event and evaluate whether they did everything possible in their individual capacity to further organisation goals), on the other hand, the company also wants individuals to do their best within the given circumstances by collaborating with their colleagues to deal with dependencies or uncertainties.
Unfortunately, the act of seeking individual accountability through targets creates a culture of “fear of failure”. This disrupts teamwork and collaboration, crucial for a culture of “greed for stupendous success” to thrive. Further, it is clearly difficult to exercise any control in a company fraught with problems of team friction, blame games, poor agility and rampant system tampering behaviour. Any sense of control ostensibly brought in by assigning individual accountability is a mere mirage. So, paradoxically, the very purpose of establishing targets is defeated!
What is the Alternative – Multiple Targets?
As discussed earlier, organizational variables and their measures have strong dependencies on each other. For example, when sales go up, inventory or receivables may go up as well. This means multiple interacting measures can give us the full picture of progress. And, if all these are at optimum levels, then an individual/team/company is successful.
Does this mean that we can have a solution to ensure both individual accountability and a culture of collaboration by having many targets on many parameters for a period? This sounds credible in theory. Let us see what will happen if we identify a bunch of related variables and solicit commitment of optimum numbers on these measures from the managers.
– Juggling of variables with inherent conflicts is stressful: Very likely, the managers in such a situation will protest vehemently. Afterall, there are likely to be many situations wherein there are inherent conflicts between the variables of interest. And in most of these situations, there is usually no effective solution to address these conflicts and ensure that all variables meet the defined commitment without compromise. For example, in engineering, procurement and construction (EPC) projects, it is very complex for managers to derive the optimum from the three variables of utmost interest – project cost, lead time and quality. How much more time can one afford to spend on negotiating a cheaper deal with the vendor, without compromising on project delivery? The extra time spent in negotiation may be recovered later, or it might not be. In taking decisions at runtime on variables of interest, managers will be forced to choose between what is visibly getting compromised at that point in time or wherever there is maximum pressure for control. As a result, many managers will find themselves focusing too much on one variable at one time and then focusing on another later. In a distribution environment, there will be emphasis on sales at one point in time, and inventory or receivables at another. Similarly, in a software environment, you can find many scope compromises close to an important release date. In the earlier EPC example, costs may be controlled very strictly during the initial part of the project, while time slips away, and towards the end of the project, the company will be forced spend a lot of money if they want to get the project back on track. In effect, it will be similar to someone trying to keep a bunch of ping pong balls under water in a swimming pool. You keep one down, the other pops up – managers will not be able to take this stress. So, at some point, they will either refuse these targets, muddle through them somehow or completely ignore them.
– Aggravation of collaboration issues: Even if there are multiple targets, if review is only periodic, there is no visibility for supervisors into systemic issues that may derail their subordinates’ targets. This means that all the problems associated with targets (fear of failure, loss of agility, system tampering, inter-departmental conflict) leading to poor collaboration will not only continue, it will increase many fold. Imagine the amount of time it will take for negotiation around multiple variables! Moreover, while static measures such as sales are difficult to manipulate, many leading indicators, such as, for instance, order book is much easier – it can be filled with a pile of irrelevant orders.
Targets, whether single or multiple, have serious lacunae. This means that the concept of targets itself will have to be abandoned. If at all targets are used, these should only be global ones. The whole group shoulders the responsibility for the outcome, and not individuals. Collective responsibility implies that there is no one person to blame (‘Collective’ is an abstract entity without free-will – hence cannot take any blame).
Direction of Solution – Management by Tactics
Based on the above discussion, we can conclude that any viable alternative that we use to align people to the organizational goals has to meet the following criteria:
- It has to ensure that no parameter would show deterioration. In fact all parameters should show improvement
- It has to foster a culture of collaboration in an environment of dependencies (rather than conflicts)
- It has to enable people to do their best, given the circumstances of the day
- There has to be clarity about the contribution of systemic and individual factors to realized outcomes
The only way these criteria can be achieved is by focussing on
1) identifying the right tactics – tactics that solve inherent conflicts between measures;
2) having many related measures (refer to Table 1 for the difference between a target and a measure), and
3) collating these at very high frequency (daily) to get full transparency of the process
The way to make sure that the right tactic is being followed is to build a process by which well thought out tactics are identified, agreed upon (after validation of assumptions behind the tactical steps). A set of measures to monitor the effectiveness of these tactics can be defined upfront. A consensual approach to agreement on these tactical steps will help the company prevent the implementation of short-cut steps/tampering behaviour to achieve these, and enable implementation of sustainable steps. Once the tactical steps are agreed upon, the focus of management should shift to speed of implementation. This implies that instead of being accountable for targets, managers are accountable for rapid implementation of agreed tactical projects. To have a clear visibility of systematic and individual factors in play requires dedicated capacity and frequent review of the steps. This high frequency review mechanism can also provide clear and early signals for proactive problem solving. Consequently, the outcomes or the results are then just bi-products of implementing the tactical steps successfully.
This style of functioning is a radical new approach called ‘Management by Tactics’ (MBT).
Management By Tactics, Yes … but
Management by Tactics is an effective tool for companies of all sizes. However, while embracing Management by Tactics, companies need to avoid the following pitfalls:
- Deploying too many tactics
- Deploying the wrong tactics
– Preventing too Many Tactics
In a conventional organization, without flow systems, there is a possibility of too many tactics being launched in a quest to initiate company wide improvements. This will not only overwhelm management bandwidth; it will bring little or no returns. (Watch this video for a full explanation ). However, when core systems are run on Theory Of Constraints flow fundamentals, the constraints in the system are clearly visible, and hence, tactics needed are few, and are focused on improving the major obstruction to flow.
– Preventing Wrong Tactics
Often, the CEO or someone from top management may dictate the tactics to be used. This is not a good idea. There is a risk of bias creeping into such a list of tactics. To eliminate bias from this process, companies must engage groups trained in using the principles of scientific critiquing for decision making. A culture that is supportive of good ideas, wherever they come from, and is not driven by “boss is always right” is necessary to enable this.
Choosing the Right Tactics
Before the assigned group embarks upon identifying tactical measures to be implemented, they have to first answer the following questions:
- What is the problem we are trying to solve?
- What is the objective outcome we want to achieve by solving the problem?
- What are the tactical steps required to achieve the objective outcome?
- Why do we believe that the tactical steps will help achieve the outcome?
Moreover, it is important to challenge assumptions both in solution design phase and during implementation. Anytime wrong assumptions are established, it is necessary to go back to the drawing board and rectify the tactics. When, in spite of following robust thinking process tools, find out how to use thinking process tools for decision making, the group is unable to decide between alternative courses of action, the best idea would be to use pilots to try out the plausible solutions on a small scale to identify the right actions to scale up.
A Final Word
The main obstacle in the way for companies who adopt Management by Tactics will not be related to the above-described technicalities of adopting Management by Tactics; it will be the difficulty of letting go of the traditional “target” culture. Massive change will be needed in the collective mindset of the firm. Further, entrenched organizational paradigms related to hierarchy, how appraisals are done, how promotions are decided, etc. will have to be revisited with the view of checking whether these, as practiced in the firm, are obstacles to the success of Management by Tactics.
A tall task; but totally worth it!