Microsoft and dumb decisions

I was stunned to read recently in Vanity Fair, that Apple's iPhone generates more revenue than all of Microsoft's wares combined. Microsoft was once held up as the icon of efficiency and effectiveness in the industry - what's led to this disparity?

Based on detailed interviews and internal corporate reports, author Kurt Eichenwald in his latest book "Microsoft's Lost Decade" suggests it may have something to do with the "astonishingly foolish management decisions" taken in Microsoft over the last decade.

While presumably a whole Harvard Business School case study could, and possibly will, be developed on the topic, the one issue that stood out for me was the performance management system Microsoft used.

As a management consultant, my colleagues and I do a lot of work with organisations of all sizes around getting their performance management systems working well. Our aim is to help them deliver what everyone thinks they should deliver but in real life, rarely do. But the Microsoft version is amazing.

If you were an employee at Microsoft, you would participate in their performance management system called Stack Ranking. Under this system, instead of being judged on your ability and the outcomes you achieve, you knew that all you had to do was be better than the rest of the team. If there were 10 in your team, you knew before any conversation started that two of you were going to get a great review, seven were going to get mediocre reviews and one was up for a shellacking!

So how to survive in such an environment?

Easy: all you had to do was be better than your team members. Forget customers, forget the quality of your work, or innovation or helping anyone else in the organisation. All you had to ensure was that your boss thought you were better than at least eight others in the team.

What sort of behaviour would result?

According to Eichenwald, this system effectively crippled Microsoft's ability to innovate. "Every current and former Microsoft employee I interviewed — every one — cited stack ranking as the most destructive process inside of Microsoft, something that drove out untold numbers of employees," Eichenwald writes

I am constantly stunned that so many organisations forget that we are social, relationship forming, co-operative beings. We perform best in situations where we trust the people we work with and where relationships are positive and supportive. It's not rocket science. So why do organisations find this so hard to get their heads around?

This Microsoft system is somewhat similar to the GE one of Forced Ranking, a process that eliminated the bottom 10% of employees each year. Many other organisations jumped on this system (which according to GE, seemed to work well for them).

Now, I'm unable to find any recent statistics, but in 2003, management development consultancy, DDI, contended that one third of organisations in the US were using similar systems. Would this figure hold up today?

There are a number of ideas why organisations support such approaches.

Firstly, they contend that, when assessing performance, the normal bell-shaped distribution will occur. So, whatever happens, you will have a natural distribution of poor to excellent performance. Why not pre-empt that result – be proactive and assume the worst!

Secondly, managers are known to be averse to doing performance reviews and in particular, giving poor reviews when they are deserved. With this system, the judgment is taken away – the manager must rank some of his/her people below others and in fact meet a specific target for this poor performing group.

Finally, overall organisational performance will be improved if the organisation continually retains and rewards its better performing employees.

But what leads an organisation to consider such approaches in the first place?

Obviously business goals are not being met. So employee performance is seen as a cause. Yet performance reviews generally reflect good performance for the majority. Something is wrong. So a decision is made to raise the bar by introducing true performance management.

The views on the pros and cons of performance management, despite the myriad of research, are subjective. The main problem for researchers is the challenge of filtering the attributable factors. So, like many other writers, I draw on my personal experience of over 30 years working in, and consulting to, organisations on their performance management issues.

Firstly, let's start with the bell-shaped curve. Assuming that there is a normal distribution of performance around the mid-point (satisfactory performance) instead of dumping on the poor performers, why not try to move the entire curve to the right by improving the level of satisfactory performance? Surely much cheaper than recruiting for the loss of supposed deadwood.

Secondly, we know that managers are averse to doing performance reviews (well). Why not provide a better system?

I've recently been introduced to a new performance review system – I call it the Positive Performance Management Process (PPMP). Guess what? It was invented by a practising manager!

Here's how the PPMP works.

The manager takes a blank sheet of paper and draws four boxes. They are headed "Could have been better", "OK for now", "Really Good" and "Peak performance – me at my best".

The manager then asks the employee to allocate 100 points across the four boxes to rate his/her performance over the last three months.

Then, starting from the far right, the manager asks questions such as:

• What are you doing that is outstanding/really good?
• What tells you that? How are you managing to do that?
• What else is going well? What else? What else? What else? (keeps asking "What else?" until all examples are discussed)

The discussion continues in a similar vein as the employee moves from box to box. Finally, the manager asks:

• Suppose next time we meet some of the scores have shifted more to the right, what will you be doing then that you're not doing now?
• How will others know?
• What will I be noticing?

I've now been using this with clients for the last 18 months. The reports I get from both managers and employees is that it's the best performance discussion they've ever had (many use the PPMP process as a precursor to completing their own organisation's process, which then becomes merely a formality).

And the third reason for using such a process - to retain good employees – no argument. It's just the way that it's done that's important.

In Microsoft's case, I can only guess at how much real value, not to mention money, Microsoft has lost through their insane process. Still, at least the rest of us can learn from it.