What were these companies going to do instead? Are they addressing a symptom or the root cause?

The elimination of performance review is a reaction to the “measure it and control it” attitude that has proliferated in the past twenty years.

Many organizations understand that we need a new way — but by eliminating the performance review companies are plunging themselves into a period of uncertainty and chaos.

Complexity & Control

Over the last twenty years, the business world has seen an unprecedented increase in information and a simultaneous increase in complexity and confusion. In reaction, many well trained MBA’s and other business types (count me as one!) have taught ourselves many different methods for planning, controlling and optimizing. This has driven an unprecedented rise in complexity.

BCG has done research to show how dramatic this shift has been:

The performance review has similarly become more and more complicated over the years. How many categories were you assessed on last year? I would bet most of you can not name the exhaustive list of criteria you were evaluated on. Nor could your manager — that’s why your performance still comes down to a few simple things:

• do people like working with you?
• does the person evaluating you have a favorable impression of your work?
• do you have a strong reputation for what you are expected to do?

Almost everything in the business world has been reduced to a performance metric than can be measured and controlled. Yet, assessing talent remains largely an elusive mystery. Even identifying performance of a CEO is close to impossible. Only 21% — at most — of a companies performance can be directly linked to a CEO. Even then, some researchers believe it is luck still — because a CEO’s job is predicting the future and deciding whether to pursue strategy A or B. If assessing even the performance of the CEO is hard — how can a company truly assess performance at all levels?

Some of you may stop me here and say “my company is the exception — we have the best people!” You may be right — but this is almost impossible to test. There is no alternative scenario to test your organization with different people. This leads to a well-documented phenomenon called the halo effect — which in the business world — ascribes positive traits to people who happen to be in successful organizations.

Ditching the Performance Review

By re-thinking the performance review, companies are rebelling against the analyzing, controlling and measuring tendencies of the last twenty years — and a long-term trend since Taylor. These companies have taken the bold step to acknowledge that the business world has changed and they had to adapt. Whether they know it or not, these companies have taken the plunge into figuring out what the future looks like.

These companies may not fully know what that end state looks like, but I believe it will be harder than they realize. Take GE’s CHRO Susan Peters who said: “The world isn’t really on an annual cycle any more for anything.”[2] This seems to indicate that the reason for removing the performance review has more to do with the increased pace and exchange of information than trying to move towards a healthier and more successful reality. GE’s solution is to implement an app-based model where you can constantly get feedback from your co-workers. As Pascal-Emmanuel Gobry, a writer and fellow at the Ethics & Public Policy remarks, “Constant feedback also means constant pressure.” [3] How companies manage the unintended consequences of these decisions remains to be seen.

Google’s former Chief People Office Laszlo Bock offers a different perspective:

Performance management as practiced by most organizations has become a rule-based, bureaucratic process, existing as an end in itself rather than actually shaping performance. Employees hate it. Managers hate it. Even HR departments hate it. [2]

Eliminating the performance review may be a leading indicator of the exhaustion from more rules, more analysis, more spreadsheets, more data and the illusion of control. However, the move to eliminate the performance review is a net positive for the business world and not for the reason you expect.

I don’t believe companies will figure out a magic formula for assessing talent in a better way (at least not in the near term future). However, the real benefit for these companies is the fact that they are accepting that the working world has changed and they need to figure out how to operate in that new world.

What Could the Future Look Like?

As complexity continues to increase, controlling and measuring will no longer suffice. The companies that succeed will be the ones that master the core principle that will be the driver for 21st-century governance:

TRUST.

Warren Buffet is one of the few Fortune 500 CEO’s that have fully embraced this. Compared to most companies, some would say his system is radical. His right-hand man Charlie Munger puts it best:

A lot of people think if you just had more process and more compliance — checks and double- checks and so forth — you could create a better result in the world. Well, Berkshire has had practically no process. We had hardly any internal auditing until they forced it on us. We just try to operate in a seamless web of deserved trust and be careful whom we trust

Consider the following:

• Over 50+ CEO’s report to Buffett and they only have to submit monthly financial statements and the free cash flow generated by operations
• The CEO’s of individual businesses do NOT have to meet with anyone from HQ, ever. They don’t need to submit strategic plans.
• The global HQ does not have HR, a general counsel, PR, Investor Relations or corporate strategy

He prides himself on his bare bones operations. Here is his modest corporate staff in 2016:

Change is Hard.

Unfortunately, you cannot appoint Warren Buffett and Charlie Munger to be co-CEOs of your organization. Nor can you manufacture trust and magically transform your culture by eliminating performance reviews. Building a strong culture around a set of values that reinforces behavior is hard work — and may even be harder if people have become accustomed to yearly cycles and clear expectations of how they are assessed.

The language many companies are using around eliminating performance reviews signals that leaders are still re-imagining a future state based on the current system. Most of today’s business leaders were promoted through this system — one that was built on structures, processes, and hierarchies — and are assuming that changing a few of the policies will position the company for long-term success. They are likely not anticipating the state of increased uncertainty and confusion

CEB has done some analysis on the companies that have eliminated rating and found less than positive results:

• Less than 5% of managers are able to effectively manage employees without ratings
• Managers have more time, but time spent on informal conversations decreases by 10 hours
• Employee engagement drops by 6%

This has not stopped companies. Eliminating the performance review has shifted from a bold move to conventional mainstream practice. The increasing popularity of eliminating performance reviews with the proliferation of low-cost HR technology ensure that this trend will not slow. Not to mention the ability to placate an increasingly restless millennial workforce.

What does the future look like?

Companies are being forced to give up more control to employees, whether they want to or not. The performance review is the start of a broader trend. To cope with increased complexity, companies that succeed will need to be self-governing, focused on trust, values, and behavior.

The inevitable failure of the elimination of performance reviews will force companies to re-think the types of people they hire, re-define how they approach culture and even re-think the way people are organized and deployed to solve problems across their organizations. These are big questions that some organizations are likely dealing with, but have not fully tackled.

I expect three kinds of companies to emerge over the next several years:

Many companies shifting to “Company 2.0” are eliminating performance reviews but they are layering new systems and behaviors on a foundation that prioritizes policies, processes, and controls.

The companies that react quickly and continue to make bold moves — beyond eliminating the performance review — will create the future. The journey will be hard — but it will be one that ultimately determines which companies survive in today’s economy.

As Warren Buffett says about his business strategy, “find good people and trust them.” Trust is going to be the competitive advantage of the 21st century and if leaders are not willing to find good people and trust them, they will struggle to build a scalable, sustainable modern organization. Getting rid of the performance review is a necessary first step, but companies have a long way to go.

[1] “In a big move, Accenture will get rid of annual performance reviews and rankings” Washington Post, 21 July 2015

[2] “Why The Annual Performance Review Is Going Extinct” Fast Company, 20 October 2015

[3] “Why eliminating annual performance reviews will make your job worse” The Week, 20 August 2015

41k+ Sold! (Top 1% Book) The Pathless Path is Paul's book about walking away from a "perfect" job with a promising future and starting over again. Through painstaking experiments, living in different countries, and a deep dive into the history of our work beliefs, Paul pieces together a set of ideas and principles that guide him from unfulfilled and burned out to what he calls "the pathless path" - a new story for thinking about work in our lives. Learn More & Buy The Book Here

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I was talking with fellow alumni from my grad school program and the conversation turned to performance management and feedback. These were people working at great companies. I was startled by how many questions they started asking me and it dawn on me that people are rarely trained on how to give feedback. Instead, people are usually guided by conventional wisdom or gut instinct.

Giving feedback without knowing what you are doing is like driving blind.

Before we get into what good feedback looks like, lets talked about the famed feedback sandwich:

Everyone knows the feedback sandwich. In theory it is great — most feedback tends to downplay what you are good at. However, it may offer a false sense of accomplishment that the content of your message is in fact valuable. At worst, the feedback sandwich protects someone from constructive feedback that would help them improve, not to mention someone at risk of losing their job.

Before I show you how to give world class feedback, lets talk about annual performance reviews.

The Drive to Eliminate the Annual Performance Review

This has not been a good year for the annual performance review. What do the following companies have in common?

You guessed it. Within the past three years, all of them have eliminated annual performance reviews. Why? Research from CEB (a best practice insight company) shows why this is happening:

“CEB found that 95 percent of managers are dissatisfied with the way their companies conduct performance reviews, and nearly 90 percent of HR leaders say the process doesn’t even yield accurate information” Source: Washington Post

However, lets not jump to conclusions. Many leading thinkers are railing against the annual performance review, but I think it may be getting a raw deal. It is likely a symptom of broader failed performance management systems and processes and likely not the root cause of the problems.

That doesn’t mean these companies are making the wrong move. This type of bold action is likely necessary to signal to their organization that they want to move in a new direction.

At the core of any effective organization there is a shared alignment around helping each other improve. Unfortunately, many organizations unconsciously support a culture of playing nice or passive aggressiveness that fails to enable self-improvement.

No one has broke this down better than Kim Scott, a former Googler who has championed a concept called “radical candor.” In a presentation to First Round Capital in 2015 (see video at end) she presented an intuitive framework:

Many people can quickly identify experiences where they have received feedback that falls in the yellow or green zone. This is what we want to avoid. Scott goes on in the video:

Radical candor is humble, it’s helpful, it’s immediate, it’s in person — in private if it’s criticism and in public if it’s praise — and it doesn’t personalize.” That last P makes a key distinction: “My boss didn’t say, ‘You’re stupid.’ She said, ‘You sounded stupid when you said um.’ There’s a big difference between the two.”

Now that may seem a little tough, but this type of approach can be effective — if it is grounded in a culture of respect and follows the principles I call out below:

The Five Elements of Great Feedback

1. Self-Reflection: “Know Thyself” is a great idea in theory, but hard to do in practice. Anyone who aspired to be great at coaching and feedback needs to start to separate what bothers them personally versus what will help another employee improve. Too many times, I have seen managers default to focusing on their own neurotic pet peeves. This leads to a lack of appreciation of other working styles and can lead to teams becoming more homogeneous and less creative. So ask yourself — Is this feedback I am about to give about me or will it really help this person improve? Everyone has two or three things that drive them crazy. It may be helpful to share these with the people you work with, but become aware of what percentage of your overall feedback and coaching focuses on these things.

2. Cultivate a Foundation of Respect: All feedback is built on a foundation of respect. The big mistake here is focusing on being well-liked versus building a strong relationship and embracing the concept of radical candor. The easiest way to develop a strong rapport with colleagues is to get to know them. Crazy! I know — but many people do not take this step. Take the effort to ask what others are working on, what they think they are good at and what you can do to help them generally or on a specific project. When it comes time to offer timely feedback (see next step) you will already have a strong relationship to build on. One thing I do with people when I first start working them is ask “How do you like to get feedback?” and “What are you trying to improve on?” I also share my personal preferences which shows that I am open and looking forward to them helping me improve as well.

3. Timely: Most feedback fails on this point. If you are receiving feedback in December about a phone call you made in September, this will just make you resent the person for not telling you at the time. This person really was afraid to be honest and you’ll lose faith that the person wants to see you improve. If it’s not a cultural norm, you need to be proactive to seek out timely feedback. For example, anytime I give a public presentation I always ask one audience member to give me feedback. I always specify two or three specific things I am working on so that they know what to look for. Without someone proactively asking for feedback, I typically ask them, Would you like feedback on X? immediately after the observed action. Most people happily say yes.

4. Specific: Giving someone the feedback that “sometimes you do X” is not helpful. Be specific and use examples when giving someone feedback, especially if it refers to an event in the past. Specific feedback should sound something like this: “I noticed you spoke in a quiet voice when speaking on Tuesday. It could help you appear more confident if you worked on communicating with more energy.”

5. Next Steps / An Offer to Help: While working at McKinsey, we were trained on giving feedback. One of the impressive things was that people I worked with always made an offer to help with next steps. Building on the last example, you will notice that the person offered an observation about someone’s energy level but offered no plan for how to actually change and improve. A better offer could be: “I noticed you spoke in a quiet voice when speaking on Tuesday. It could help you appear more confident if you worked on communicating with more energy. I’m happy to observe your next talk and provide feedback on your progress. I’d also suggest watching Eric speak and asking him for advice, he is very good at this”

So next time you are giving feedback to someone ask yourself:

• Do I really care about this person’s improvement?
• Is this feedback on something that they can control?
• Is the feedback timely and specific?
• Have I made an offer to help them act on the feedback?

Watch Kim Scott’s Radical Candor video here:

41k+ Sold! (Top 1% Book) The Pathless Path is Paul's book about walking away from a "perfect" job with a promising future and starting over again. Through painstaking experiments, living in different countries, and a deep dive into the history of our work beliefs, Paul pieces together a set of ideas and principles that guide him from unfulfilled and burned out to what he calls "the pathless path" - a new story for thinking about work in our lives. Learn More & Buy The Book Here

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I have studied organizations, people and motivation and am fascinated by the changes that have unfolded in my relatively short career. I’ll defer to Neils Bohr to qualify this entire piece:

Prediction is very difficult, especially if it’s about the future — Neils Bohr

Since I can’t predict the future, I promise this will contain ideas that are not fully baked. I hope you can help me improve them.

Accelerated Transformation

Most people agree that that change is happening and that the pace of change is accelerating. However, if you look around, our modern organizations are not much different than they were 20 years ago. When I talk to people and HR leaders about their organizations they share with me the feeling that something is not right and that organizations need to evolve.

I’ll get to my vision of that future, but first wanted to call out three trends that I believe are driving this uncertainty. These are trends that are equal parts powerful and also hard to notice on a day-to-day basis:

1. Increased competitiveness — In the 1920’s, the average lifespan of a company on the S&P 500 was 67 years. Now? 1 company is dropping off the S&P 500 every two weeks!
2. Open Talent Networks: Individuals are increasingly becoming aware of their own market value thanks to resources like Glassdoor and LinkedIn. This information is not perfect, but it’s getting better. As more talented people realize they are worth more, they will seek to maximize their value either by switching to a new job, or as technology continues to facilitate a freelance path — go it on their own.
3. Dis-aggregation — Paul Graham had an excellent essay on what he called “the refragmentation” (see here). A key insight was that organizations are setup to minimize transaction costs (coase theory). Technology has dramatically reduced the cost of doing business across many industries. While still substantial, scale advantages will continue to diminish.

But Wait!

Your counter argument is that we have some of the biggest companies ever, right? Yes, this is true in a monetary sense. But in terms of number of employees — not even close. in 1979, GM had 853,000 employees. Now? 215,000. The historical GM is now a complex supply chain consisting of hundreds of companies across the globe.

Your second counter point may be the observation that the biggest firms seem to be getting bigger or merging with other big companies. On this, you are also correct. Between 1997 and 2012 the share of the top four firms’ revenues has risen from 26% to 32% of total industry revenues.

The employment trends also tell the same story:

So where is all this freelancing and disruption that everyone in Silicon Valley promised us?

A lot of it has yet to be realized, but we are seeing evidence of it across industry (with the tech sector leading the way).

I believe that “aggregation” and “dis-aggregation” can both exist within the same industry. In fact, it may signal a more stable strategy for our economy. Nassim Taleb offered the image of a “barbell” in his book Antifragile to talk about a two-sided investment strategy. I think this image of a barbell also offers a compelling vision for firm and industry dynamics more broadly:

I initially used the image of the barbell to describe a dual attitude of playing it safe in some areas…and taking a lot of small risks in others…hence achieving antifragility. That is extreme risk aversion on one side and extreme risk loving on the other, rather than just the “medium” or the beastly “moderate” risk attitude that in fact is a sucker game (because medium risks can be subjected to huge measurement errors). But the barbell also results, because of its construction, in the reduction of downside risk — the elimination of the risk of ruin.

In the book, he discusses how systems become more stable through a healthy amount of fragility — meaning that continual shocks (companies going out of business in this case) make the overall system stronger.

So in a hypothetical industry, there will be a small number of firms that have disproportionate power, but also a very large number of small firms that will be more volatile. These small firms will be ready to pounce or merge when the larger firms stumble.

This could also be a winning strategy at a firm level. Google moved in this direction with its newly re-organized Alphabet. It has a central large operation, but a separate arm to incubate its early stage investments such as Nest, Fiber and Calico. Many firms are taking the route often espoused by Clayton Christensen — of setting up completely separate business units that may or may not cannibalize its central operations — as a path for long term survival.

Setting up this barbell approach internally will not be enough for success for big firms to stay on top.

So what will?

Four Factors of Thriving 2025 Firms

From the successful companies I have observed, studied, or worked at, I believe there are four elements that will drive successful firms in 2025. These firms will be a roadmap for large firms to maintain power and for smaller firms to take to disrupt the big players:

1. Process Excellence — According to BCG, firms are becoming 6.7% more “complicated” every year — a measure of the number of layers, procedures and decisions within an organization. Technology has no mercy for the organizations that continue to complicate. Sub-par processes cannot hide (think cab companies) and firms will decreasingly find protection from existing structures and regulation. Healthcare is a perfect example. A hospital resisting a new process to save lives could still succeed in the 90’s but will have a tough time in 2025. With increased transparency of outcomes, entrepreneurial physicians will spot an opportunity to take a different approach and move to a more innovative practice or start their own. Across all industries, firms will have a tough time retaining high-performers if they are not continually evolving on processes and operational excellence.
2. Purpose-Driven Cultures — Apple is the world’s most valuable company. It’s no surprise that they are synonymous with “think different” and “making the world’s best products.” Some of the smartest people I know now work for Apple — I don’t think that’s a coincidence. John Kotter did a famous study that found purpose-driven companies returned 10 times more than non purpose driven companies over a period of 10 years. Millennials are driving a lot of this change — they make up more than half of the workforce already. Deloitte found that 87% of Millennials believe that “the success of a business should be measured in terms of more than just its financial performance.” In 2025, organizations will need to answer the question: Why are we here?
3. Adaptive Technology: Legacy IT systems don’t cut it anymore — they are too costly to maintain and don’t align with a fast moving processes. In 2025, technology will have to both simplify processes (save time) and enable continuous improvement. Having the wrong system will be costly. Upstart competitors will do the same thing in half the time and half the cost and put you out of business (Compass is a good example of this in the real estate industry). Companies will have to rely on custom and proprietary solutions that can evolve fast and help generate revenue itself. This is Amazon.com’s strategy. It systems are the backbone and driver of continuous improvement on its its e-commerce strategy, while also being a generator of revenue (its Web Services business generated $7.8 billion in 2015!)
4. Agile Teams: In writing about his experiences with transforming the modern military organizations, General Stanley McChrystal’s wrote a book and introduced the concept of “Team of Teams” (here is a great podcast on it). During the Iraq war, the traditional command and control organization did not cut it. This shift was necessary to deal with the information-rich environment in which they operated. They needed to have flexible and autonomous teams that could make decisions quickly but be able to extract the information from other teams and the central office. As the working world continues to become more complex, being able to deploy the right team in the right situation will become more important than ever. It is also imperative not only to attract the best people, but to have the best people working on transformative new ventures that will drive growth. For example, MasterCard tapped into the power of FinTech startups by launching an internal startup accelerator. Google is going one step further and letting employees craft their own roles (in my mind, this helps overcome some of the obstacles of top-down org design). Not being limited by traditional roles and hierarchy and creating more agile teams will be an imperative for high-performance teams in 2025.

These four factors are not the only factors that will determine success in 2025, but a failure to succeed on any one of these four will put you at risk for being disrupted well before 2025.

The best way to predict the future is to create it 

Peter Drucker

41k+ Sold! (Top 1% Book) The Pathless Path is Paul's book about walking away from a "perfect" job with a promising future and starting over again. Through painstaking experiments, living in different countries, and a deep dive into the history of our work beliefs, Paul pieces together a set of ideas and principles that guide him from unfulfilled and burned out to what he calls "the pathless path" - a new story for thinking about work in our lives. Learn More & Buy The Book Here

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