Turning Performance Reviews Into A Vehicle For Radical Innovation

3 April, 2017 / Articles
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Annual performance reviews are becoming irrelevant. In fact, they’re a hindrance to success because they interfere with the rapid learning cycle that organizations need to survive in the era of volatility, uncertainty, complexity and ambiguity (VUCA). One of the most important skills for leaders in the VUCA age is providing effective performance feedback that facilitates an iterative learning cycle. But most performance reviews are conducted sub-optimally.

Here are why some companies are changing traditional performance reviews and how your own company can transform them from a dreaded task to an ignition for radical innovation.

Is It The Death Of Annual Reviews?

The business environment has changed dramatically over the last decade but companies are still using tools and frameworks from the last era. These tools work well in a more predictable, linear business environment, but are not useful in dealing with the dynamic VUCA environment businesses encounter today. Things are changing too rapidly and the timing of feedback is too far removed from real-time action. It robs companies of opportunities for vital feedback.

Aside from the anxiety that we are all familiar with when it comes to annual performance reviews, they’re also costing companies a significant amount in tangible terms. Deloitte identified that its annual reviews cost 2 million hours a year. That translates to over $1 billion in revenues, using the average daily associate rate of $5,000 (probably double that amount for partners). Most of that time is spent completing forms, holding meetings, creating ratings, and discussing outcomes among the partners. These numbers don’t even include the hidden costs of not taking action on rapidly emerging situations on the ground.

Recognizing these inherent limitations, some companies are beginning to implement a real-time solution. Adobe, Gap, Goldman Sachs, GE, Microsoft, IBM and Accenture have all changed or abolished their annual performance ratings in favor of providing ongoing feedback.

The Benefits Of Frequent Performance Reviews

Deloitte changed from issuing performance ratings to focusing on performance improvement by implementing weekly check-ins, quarterly or end-of-project feedback, and annual compensation decisions. The annual meeting merely formalizes what has been discussed all year, and hence can be completed much more quickly. Team leaders “set expectations for the upcoming week, review priorities, comment on recent work, and provide course correction, coaching, or important new information.”

Similarly, in 2016, IBM ditched its 10-year-old annual review system based on the survey results of its 380,000 employees. The program was replaced with one that gives more opportunity to shift employee goals throughout the year and includes more frequent feedback. IBM employees now set shorter-term goals, and managers provide feedback on their progress at least every quarter.

So why is this more effective?

In this rapidly changing VUCA era, learning and adapting to the environment produces a much more accurate and relevant result than finetuning the same thing to the nth degree, during which time what you are fine tuning might become irrelevant. This is why Google’s product launch philosophy is “ship and iterate” through soft launches, instead of the traditional approach of “iterate, iterate, iterate and ship.” The constant interplay between feedback from the market and adaptation of features, products and marketing provides a much greater impact during the same period than refining close to perfection.

To facilitate this iterative experimentation, your organization must create a culture of accepting failure as a necessary input for radical innovation. This is what empowers agents to self-organize and unleashes their innate creativity.

In this VUCA era, effectiveness trumps efficiency: doing the right thing is more important than doing things right. For instance, what good is it to spend years trying to eliminate variances in your manufacturing process to produce defect-free products 99.96% of the time if a competitor in someone’s garage totally changes the rules of the game overnight, rendering your product obsolete?

Embracing Failure, Speed And Flexibility

Establishing an operating rhythm of frequent, regular feedback and iterative adaptation — informal or formal — can kickstart radical innovation much better than providing feedback in annual reviews, which leads to a loss of salience and relevance of what is happening on the ground right now.

Performance reviews should be about creating a platform for trial and error — feedback and adaptation — not evaluation. Radical innovation is a serendipitous result of many self-organizing agents experimenting through trial and error.

To get the most out of feedback in this VUCA era, leaders can do the following:

  • Embrace speed and flexibility. As a leader, your effective self-management creates a sense of safety for others, allowing them to freely explore and try new ideas without the fear of disappointing you. These trial-and-error efforts can result in a radical innovation that leads to revolutionizing the industry. Build tolerance for ambiguity and favor speed over accuracy. Avoid black-and-white thinking and be open to all possibilities.
  • Institute a culture where failures turn into actionable intelligence. Remember, failure is necessary for radical innovation because it’s a serendipitous result of iterative learning: It never happens in one genius stroke but in countless small improvements. To execute on this concept, set the cultural expectation that it is absolutely OK to try something and have it fail. Share the findings in regular meetings.
  • Facilitate fast and safe failure using web analytics tools. Use A/B testing, lead source tracking and conversion funnel tracking to reveal what works best, what doesn’t work, and why. These findings can be used to speed up execution, maximize revenues or minimize costs.

The science man and innovator, Fernando Fischmann, founder of Crystal Lagoons, recommends this article.

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