Challenges in target setting and performance management

Target setting in business is an essential part of motivating and rewarding employees, as well as a roadmap for how the company will execute on its vision. Too often, organizations fail to effectively link targets and actionable metrics to desired business outcomes. As a result, those challenges lead to organizations not only failing to add value during this process but potentially driving undesired, value diminishing behavior. Below, we dive into some of the most common challenges organizations face.

• Level of detail - Business targets set at granular levels within organizations require expansive effort and can drive siloed behavior. As targets become sub-divided and/or shared across functions, leaders lack the autonomy to quickly react to changing business environments.
  
• Forecast transparency - Organizations that lack transparency into forecast accuracy, drivers, and assumptions are prone to sandbagging and bias within forecasts.
• Accountability - Matrixed organizational models that lack clear accountability drive significant ineffectiveness in the business targeting setting and performance management process.
• Strategic linkage - Organizations often fall short of hitting their goals by failing to properly link targets and metrics to their strategic priorities. This is generally driven by the lack of understanding of key business drivers and how they impact various financial statements.
• Target churn - Iterations of targets with negotiations between executive and middle management slow the planning process and consume valuable resources. A lack of accountability, forecast transparency, level of detail and linkage of metrics to strategic objectives would lead to target churn and inefficiencies in delivering against assigned targets.

Business target setting process overview

When determining the performance management and target setting process, organizations should consider the full end-to-end planning lifecycle. Organizations should strive to create a connected ecosystem of processes and capabilities that drive integration and alignment across the business, maximizing organizational involvement and strategically linking inputs, outputs, and assumptions across planning, budgeting, and forecasting activities.

Business target setting is the connective tissue that drives linkages from strategic planning through to business strategy and performance measurements. A thoughtful approach should drive the timing and integration of target setting and performance management processes. Consider the linkages to strategic, operational, and financial planning cadences.

A top-down approach to performance management and target setting

A leading-practice target setting framework is executed in a top-down manner to drive alignment to overall business strategy and reduce the number of iterations required to develop financial plans.