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Create a performance culture in 21st-century businesses

By Peter Spence, Associate Technical Director — MA, Association of International Certified Professional Accountants

In the modern business world, pervasive volatility and unpredictability continuously test business resilience. In this environment, businesses not only need to respond to rapid-fire changes to survive but, perhaps most importantly, they need to take advantage of these forces to thrive.

Most recently, businesses have had to contend with the implications of the COVID-19 pandemic. But there are many other challenges that we know about, including emerging environmental sustainability regulations and changing investor sentiment, rising geopolitical rivalry and conflict, and growing consumer awareness and influence. There are also the inevitable shocks we don’t and can’t know about — anything can happen.

Against this backdrop, businesses need to be more agile, responsive and innovative. Yet, in this business ecosystem full of surprises, many businesses still manage their performance in rigidly structured silos of command-and-control power hierarchies designed to avoid surprises. Fundamentally, there is a tension between navigating the 21st-century business ecosystem and using 20th-century management philosophies based on command-and-control.

People closest to the coalface are usually best placed to respond to these volatile and unpredictable forces. The challenge for business leaders striving for innovative, responsive organisations is to create an environment in which people feel engaged in driving business strategies. In other words, a culture of employees who are empowered, motivated, passionate and invested in their work that is driving strategy and creating value — or what we call a performance culture.

Our research with the World Business Council for Sustainable Development (WBCSD) identified five key factors that contribute to creating a performance culture.

  1. Improving accountability
    Business leaders want employees to be accountable for their results. However, our research shows that many businesses still struggle to hold employees accountable. Why is that? In certain corporate environments, coercive controls fetter entrepreneurial instincts and stifle creativity. When the consequences of failure risk outweighing the rewards for success, employees avoid taking responsibility for risky challenges by negotiating activities and targets into their comfort zones. To reach challenging strategic goals, business leaders should develop enabling controls that encourage employees to confidently take on ambitious challenges

  2. Creating a clear line of sight
    One of the main obstacles to increasing accountability is that employees beyond a certain management level lose sight of the connectivity between their personal objectives and the business strategy. Businesses often rely on a formal process of cascading strategic objectives down the chain of command. However, this process has several flaws:

    •  Managers are taking a safety-first approach and choosing tactics that play to their strengths.
    •  Strategic ambitions get misinterpreted, especially further down in power hierarchies, leading to misguided choices of actions required for success.
    •  Activities are being based on decision-maker biases rather than what might be best for the business.
    •  Managers deliberately select activities most likely to reward them or position them for advancement.
    •  The structure gets in the way of strategic focus with employees prioritising functional excellence over strategy execution.
    •  The complexity of the process can impede efficiency, visibility and responsiveness.

  3.  Enhancing cooperation between silos
    Business strategies typically require a coordinated mix of expertise for successful execution. Since businesses tend to be structured in functional silos, cooperation is key to effectively coordinate the execution of strategy. But we found that businesses struggle to make this happen. To solve this issue, some businesses have implemented matrix responsibilities, meaning that managers are accountable for both strategic goals and functional excellence. Yet, we found three key challenges:

    •  Managers have a primary allegiance to their functional silo rather than the overall business strategy.
    •  There is poor coordination between silos, with each trying to solve the same problem in isolation rather than together.
    •  There is complexity around resource allocation in matrixed organisations.

  4. Using incentives to better connect people and business performance
    It is sensible and logical to question how incentives connect employee performance with business performance. In our research, we found that there is strong connectivity between incentives for business leaders and senior executives, and strategic goals. When looking further down the business structure, these connections tended to be weaker. Without clear connectivity between personal objectives and business objectives, incentives do not work to motivate employees to excel in their roles or encourage them to engage with the business strategy.

  5. Ensuring collaboration between HR and finance teams
    Finance teams perform a critical role in coordinating the development, execution and refinement of business strategies.  Given that business value creation and strategic success are dependent on employees who are motivated, passionate and invested in their work, we expected HR and finance teams to work closely together to ensure that the performance of people is aligned with business performance. Unfortunately, we found that, for the most part, finance and HR teams continue to work in separate silos. The finance team is largely responsible for enterprise performance management and the HR team is responsible for people performance. Many of the finance and HR leaders who engaged with us in this project admitted that better cooperation would be better for business, but that barriers remain to prevent this from happening.

In the next phase of our project, we will build on the good practices identified in the first phase of the research and focus on developing and testing their practical application to real-life business challenges and developing and testing applications of theory relevant to the challenges highlighted in this phase.

To find out more about the research, read our Reimagining Performance Management report.