Why is everyone abandoning performance reviews?
Posted by Ivan Osmak
on November 7, 2017

In 2012, Adobe announced it would abandon annual performance reviews. Since then, many organizations followed suit: Microsoft, Dell, Deloitte… among others.

When announcing such plans, organizations often say that annual performance reviews are a “waste of time”, “cause stress” and in general are “obsolete”.

Now what?

With performance reviews being abandoned, we are left in a vacuum – now what? Organizations, consultants, and vendors are offering numerous marginal improvements. Check-ins, 360 feedback, continuous performance – just to name a few.

Walking faster in a wrong direction is rarely a good idea.

Before rushing into “solutions”, we should perform a root cause analysis. Get back to first principles: why were we doing performance reviews? What changed?

Structural changes in an organization

Marc Andreessen famously said that “software is eating the world”.

We can extrapolate from this and claim that, fundamentally, every company is a tech company today. From January 2018, banks in the UK will be required to open their APIs. In Berlin, one orders a taxi through the Uber app; car sharing is available anywhere through your mobile phone.

What we are witnessing is a silent, yet powerful, change in the organizational structure across the board, where performance management is not about the individual anymore.

There are three key forces driving this change:

  • Increasing pace of innovation
  • Move from hierarchies towards networks
  • A new imperative is to drive performance, not just measure it

Increasing pace of innovation

A common way to illustrate just how fast are things moving these days is to list things that did not exist 10 years ago.

In 2006 we did not have:

  • iPhones
  • 4G
  • Android
  • Airbnb
  • Bitcoin
  • Spotify

Innosight research reveals that in 1965, the tenure of the typical S&P 500 company was 33 years. By 1990, it was 20 years. The forecast is that by 2026, it will be only 14 years.

All this brings us to the following conclusion. Companies have an ever narrower window to capture value. Agility is becoming a survival skill and setting up rigid structures optimized for long-term value extraction is not an option anymore.

Whereas in the past, we would compare great companies to a well-oiled machine, today the best companies are more like living, ever-changing organisms.

Ultimately, this change means that the performance of today’s organization is much more driven by its collective ability to communicate, learn and adapt – than an individual’s ability to perform a well defined set of tasks.

Networks over hierarchies

When making a trade-off between predictability and agility, companies are increasingly optimizing for agility.

The subtle, yet profound, effect of this change is the structure of the organization. While most organizations are still nominally hierarchical, the hierarchy is getting shallower and ever larger pockets of the organizations are shaping themselves as networks. Networks, by their structure, are much more dynamic and agile. The organizational ability to learn, create, innovate and change is dramatically amplified through Metcalfe’s law – where the fundamental drivers of value are the connections between different nodes of the network.

In the same vein of thought, a network is much more stable during the periods of rapid change, as the system itself does not depend on any given node. Opposed to this is a hierarchy, where significant parts of the organization depend on one single person.

This phenomenon plays a significant role in the demise of performance reviews. The focus is suddenly switched from ensuring that every cog performs well, to the need for the network as a whole to perform well.

The old hierarchical playbooks do not apply anymore. The distributed nature of networks creates new challenges, such as alignment, focus, and transparency.

Driving performance, not measuring it

Finally, the competitive pressures are forcing organizations today to be proactive about performance. Acknowledging poor performance after a year is folklore.

Ability to track performance in the real-time and correct course as needed is paramount.

Summary

Numerous organizations are abandoning annual performance reviews for a myriad of quick solutions.

While much research has been done, the findings are mostly focused on the fact that current practice of performance reviews is universally hated.

Understanding the contextual changes is critical to understand why performance reviews have suddenly become obsolete.

In short, organizations are undergoing structural changes, where the collective performance is taking the place of individual performance.

This phenomenon is driven by three important forces:

  • Increasing pace of innovation
  • Move from hierarchies towards networks
  • The new imperative is to drive performance, not measure it

Going forward, the performance of an organization will be only marginally influenced by the increases to an individual performance. The true levers will be organization’s ability to drive alignment, focus, and transparency – as those will have multiplier effects.

In one sentence: Performance used to be an HR issue; today its an operations issue.

 

 

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