In this guide to organizational performance, we will cover everything there is to know about organizational performance.
Below, we will explore topics and concepts such as:
- The basics of organizational performance, including key ideas and definitions
- Organizational performance management
- How to measure organizational performance
- Frequently asked questions
- How to improve organizational performance with change management
And much more.
Let’s start by answering the most essential question:
What Is Organizational Performance?
Organizational performance often refers to how efficiently and effectively an organization achieves its stated aims and objectives.
This definition is closely linked to organizational effectiveness – and for many, the definitions are interchangeable.
Some assert that organizational performance should focus on three key areas:
- Financial performance
- Market performance
- Shareholder value performance
These are certainly valuable areas to focus on, but not all experts follow this model.
Others view organizational perspective from contexts such as:
- Workforce, operations, and financial performance
- Financial and marketing performance
- An organization’s ability to meet shareholder expectations and goals
- Employee performance and productivity, in light of the expectations placed upon them
As we will discover later, there are quite a few models of organizational effectiveness. And each model has its own unique perspective on organizational performance.
However, despite the proliferation of these models, the oldest and most widely accepted measure of performance is the first one mentioned above – a goal-based approach.
That is, organizational performance is measured by how well an organization meets its objectives.
Clearly, this topic is deep and there are multiple perspectives on the issue … which is why professionals should research the topic carefully before applying this information in their own organizations.
Here are a few related concepts that can help lay the groundwork for understanding organizational performance:
- High Performance Organization (HPO) – The high performance organization (HPO) framework is aimed at sustained organizational improvement. Although there is no universal, clear definition of what an HPO is, there is a common set of characteristics that they share, such as customer-centricity, agility, and adaptability.
- Human And Organizational Performance (HOP) – HOP has a different focus from organizational effectiveness and performance. It aims to improve safety performance in an organization by reducing human errors, building better management systems, improvements in worker-to-worker relationships, and a variety of other mechanisms. Though this field is distinct from organizational performance, there is a bit of overlap in the concepts and results, as well as the terminology.
- Employee Performance – Employee performance refers to how well employees perform in the workplace. Their performance often contributes directly to the performance of teams, business units, and the organization itself. For this reason, improving employee productivity and performance is a key area of focus for many specialists who focus on improving organizational performance.
- Organizational Effectiveness – Organizational effectiveness, as mentioned, overlaps considerably with organizational performance. How an organization defines and models effectiveness directly affects the methods used when improving business performance.
Naturally, this brief list of concepts does not cover the field completely or to any real degree of depth.
However, these concepts can help set the stage before we dive into them more deeply.
Organizational Performance FAQ
Let’s explore organizational performance by examining some of the most frequently asked questions about the topic.
We have already covered the most basic question, “What is organizational performance?”
So we will start with the next question on most professionals minds, which is…
Why should I care about organizational performance?
There are plenty of reasons why businesses should invest in and care about organizational performance.
After all, performance improvements can offer a number of benefits, including:
- Boosts to business efficiency, productivity, profits, and organizational outcomes. Perhaps the best argument for organizational performance management is boosted outcomes. These outcomes can span every dimension of a business, depending on the area being improved upon. A business that wants to improve employee productivity, for instance, can see greater output levels, increased engagement, higher skill levels, and so forth.
- Enhanced competitiveness. Another benefit of organizational improvement is gains within the marketplace. For example, a business that wants to improve the customer experience may aim at increasing its delivery pipeline – which, in turn, can positively affect customer satisfaction, loyalty, and value.
- Better growth potential. Boosted organizational effectiveness can also open up new growth opportunities or enhance existing ones. A company that improves its efficiency financially will have more funds to work with and grow its business. A business that improves its customer-facing services will experience more customer growth.
There is really no limit to the potential upsides of performance improvements.
One important concept to understand, though, is that these benefits are not guaranteed.
The results of any organizational improvement program will depend greatly on other factors, such as the aims of the program and the methods employed.
Who manages organizational performance?
Organizational performance management is the responsibility of a variety of professionals, such as:
- Executives and senior managers. The senior managers and the C-suite often direct performance improvement projects, especially organizational changes. Or, if another individual within the company is directing improvement projects, business leaders will often sponsor it.
- Change managers and organizational development specialists. Change managers lead organizational change projects, which are often required to make significant headway in performance. These professionals often coordinate the project, team members, and stay in touch with business leadership regarding these improvements.
- Human resources professionals. HR professionals work with anything having to do with employees and employment. When it comes to performance improvements that affect employees, HR will often handle certain aspects of these projects, such as training and development.
- IT professionals. In today’s digitally-driven economy, IT departments involve themselves directly with digital change projects. Digital transformation, for instance, is complex and involves many other processes, such as digital adoption, software implementation, product training, and so forth.
- Managers and employees. Employees and managers are the ones who actually implement improvement projects. They are instrumental in actually executing the project and making change happen, which is why their support is so necessary. As we will see later, change managers make it a point to enlist employees and earn that support.
In short, virtually every level can involve itself in a change management program.
Of course, the level of involvement will depend on the nature of the process improvement in question.
Large-scale performance improvements may involve the entire organization.
Smaller ones, however, may be restricted to specific business units or teams.
What are the top challenges to improving organizational performance?
The bigger the performance improvement, the bigger the organizational change. And every change project faces a number of common obstacles.
- Employees often resist organizational change. Resistance can hinder projects or, in worst case scenarios, derail them completely. There is no magic solution for preventing resistance, though change management professionals do employ systematic methods for reducing that change.
- Budget constraints, resource constraints, and technology constraints. These constraints are common in every facet of a business, and organizational performance improvements are no exception. For this reason, efficient project management is critical.
- Lack of buy-in. Executive sponsorship – or lack thereof – can break a performance improvement project. As with any other business endeavor, it is important to obtain buy-in, sponsorship, and ideally leadership. This will dramatically improve the chances of success, not to mention access to resources.
These are just a few examples of challenges commonly associated with organizational change projects.
However, there are other pitfalls that can ruin performance improvements – such as not applying change management principles or not understanding the concepts behind organizational improvement.
Below, we will discuss these pitfalls in more detail.
Organizational effectiveness vs. performance vs. efficiency … what’s the difference?
The distinctions are sometimes subtle, but here is a bit of clarification:
- Organizational effectiveness refers to how efficiently and effectively a business completes its stated goals. As we will explore in more detail later, organizational effectiveness often refers to how well an organization accomplishes its objectives.
- Organizational efficiency refers to the efficiency of business processes, resource use, and workflows. Organizational efficiency often refers to the efficient use of resources, focusing on maximizing output and minimizing effort.
- Organizational performance can refer to both an organization’s effectiveness and its efficiency. Finally, organizational performance is often used synonymously with organizational effectiveness, though certain organizational performance researchers use models unique to their field.
Ultimately, all of these concepts are closely interrelated – and they are all important.
What is the impact of organizational structure on organizational performance?
Many view organizational structure as being a major influence on organizational performance.
Although this is certainly true to an extent, certain organizational effectiveness models look beyond organizational structure.
McKinsey’s 7-S model, for example, focuses less on organizational structure and more on the coordination between business functions and systems.
Below, we will explore this model in some detail.
How does organizational culture affect organizational performance?
Organizational culture is the set of beliefs, values, and assumptions held by those within an organization.
Culture affects employees, who, in turn, affect the organization’s productivity.
For instance, culture impacts employee metrics such as:
- The workplace atmosphere and environment
All of which can have a significant effect on an organization’s overall efficiency and performance.
How does employee motivation and engagement impact organizational performance?
Culture is one variable that can impact employee metrics, but it is certainly not the only one.
The workplace, the work environment, and many other factors can also affect important employee metrics, such as motivation and engagement.
Motivation and engagement, in turn, impact employees’ overall contributions and performance in the workplace.
Improving these two key metrics can raise areas such as:
- Employee productivity and performance
- Employees’ proficiency and willingness to learn new things
- People’s openness to change
For reasons such as these, many organizational performance specialists – as well as change managers – emphasize the importance of employee engagement and motivation.
Organizational Performance Management 101
Organizational performance management – also known as enterprise performance management or corporate performance management – focus on managing and improving organizational performance.
Approaches to organizational performance vary, but they often follow project-based approaches similar to organizational change management.
The United States Office of Personnel Management, for instance, follows a 3-stage performance management process:
- Anchor – During this phase, organizational performance consultants lay the groundwork for future improvements. They refine and define the organization’s core purpose, its strategic priorities, key performance indicators, and environmental factors, among other things.
- Determine – Consultants analyze the organization’s current performance, examine the workforce’s use of time, determine how aligned this usage is with the organization’s strategic aims, and evaluate the gap between the current state of the workforce and where it needs to be.
- Transform – Finally, consultants make the necessary organizational changes. They do this by identifying the right tools, processes, and training, then offer consulting and support services to assist with improvements.
These endeavors can result in many widespread changes, including a range of new strategies and even a new organizational structure.
While this example serves to illustrate how organizational performance management works, it is only one example.
Some specialists follow a different model, focusing on specific business domains, such as:
- Strategy formulation
- Business planning and forecasting
- Financial management
- Supply chain effectiveness
Yet other specialists engage in the same types of performance improvements, without using these terms at all.
Change management consultancies, for instance, deal directly with projects designed to improve organizational performance – but their terminology and areas of interest may differ.
When researching organizational performance management, therefore, it pays to examine related disciplines, such as:
- Change Management
- Organization Development
- Organizational Effectiveness
Fields such as these, after all, are often tasked with improving organizational performance … even if they don’t use the same terms.
How to Improve Organizational Performance with Change Management
Organizational improvements are only possible with organizational change.
There are many possible ways to improve a business, and each improvement project will depend entirely on the organization and its circumstances.
Here are a few examples of ways to enhance organizational effectiveness:
- Business Process Improvement – Business processes can be made more efficient, results can be improved, processes can be redesigned, resources can be reallocated to other processes, and so forth. There are many ways to enhance specific business functions, and each one can contribute to the organization’s overall performance.
- Employee Performance Improvement – Increasing the workforce’s productivity is another way to enhance the organization’s overall effectiveness. Organizations can increase employee performance through, for example, employee training, cultural adjustments, corporate well-being programs, and any other tactic that raises workforce productivity.
- Digital Adoption and Transformation – The digital revolution is well underway. Those that don’t adapt will get left behind. Digital transformation and adoption can help organizations become more innovative, more agile, more customer-centered, and more relevant, all of which benefit the organization’s effectiveness.
The potential avenues for organizational improvement are endless.
However, as with any investment, businesses should focus only on improvement projects that offer the greatest potentials for return.
To do that, it is useful to follow a structured approach to change management. This begins by analyzing the organization’s needs and potentials, then follows up with planning and practical implementation.
Here is an example of a step-by-step process that organizations can follow to implement and manage such change projects:
- Assess. Assessments will differ depending on the project. A digital transformation program, for instance, would likely include assessments of digital maturity, workers’ digital literacy, and change readiness.
- Strategize. Change projects will involve several interrelated strategies. For instance, organizations must choose improvements that mesh with the organization’s overall mission and strategy. They must also design change management strategies that improve the success of change management projects.
- Plan. Planning puts the strategy into a concrete form, with schedules, deadlines, goals, expectations, and so forth.
- Test. It is often advisable to perform pilot tests with large-scale organizational changes. A software rollout, for example, could be tested with a small group of users prior to the organization-wide implementation.
- Implement. Full-scale implementations should be monitored closely. Coordinators should track data and be willing to shift strategies if necessary.
- Optimize. Over the life cycle of the project, coordinators should track data and use it to increase efficiency and improve results.
Structured change management can dramatically enhance the results of any improvement project. And the larger the project, the more necessary change management becomes.
How to Evaluate and Measure Organizational Performance
Organizational performance metrics and KPIs will depend on how your organization views organizational effectiveness.
As mentioned, organizational effectiveness models take a variety of perspectives and approaches.
Since these models will be used to derive metrics and KPIs, organizations must decide on their model, strategy, and plan before even developing a set of metrics.
Deciding on an Organizational Effectiveness Model
Models come in several flavors.
A few of the most common are:
- Goal-based. These models gauge effectiveness based on how well organizations meet its goals and objectives.
- System-based. Another perspective analyzes the organization as a system, such as a social system, and determines effectiveness from how well that system operates.
- Constituency-based. With constituency-based models, organizations are evaluated based on how well they meet the expectations of their constituents.
These are not the only models of organizational effectiveness, however.
The McKinsey 7-S model analyzes a business in terms of how well certain business dimensions are coordinated.
Its seven components include:
- Shared Values
These components are then analyzed in order to determine how well an organization performs.
Measuring Organizational Performance
Measurements and metrics can be derived from the model, focusing on:
- Intended goals and targets
- Actual achievements and outcomes
- Business process efficiency
- Workforce performance metrics
- Talent management and employment metrics
- An organization’s delivery systems
Choosing and using the right metrics serves several purposes.
Not only do they help business leaders monitor organizational changes, they also act as feedback and control mechanisms.
That is, they allow business leaders to make course corrections, maintain accountability, gain insight into communication strategies, and adjust change projects when needed.
Organizational Performance Dos, Don’ts, and Best Practices
Below are some best practices that can help organizations get better results from their organizational improvement projects.
Start with assessments and evaluations.
As covered in the section on change management, it is important to begin any business project with assessments and analyses.
These can include assessments of:
- Change readiness. Change readiness refers to how ready a business is for organizational change. This assessment can and should include multiple dimensions. It should focus not only on the workforce’s ability to change – such as their skills, knowledge, and the organization’s tools – but on their willingness and motivation.
- Digital maturity. Digital maturity is a concept that measures the digital capabilities of an organization. At the lower end of the scale, organizations have little or no digital capabilities. Digital workflows are fragmented, software utilization is low, the workforce lacks skills, and so forth. At the other end, organizations utilize software fully, train employees consistently, have integrated digital workflows, and so on.
- Risk. Every change comes with risk … but not changing can also be risky. A risk assessment should explore the potential risk inherent in both scenarios. This assessment will play a large role in strategy development and planning.
- Costs and benefits. A business improvement project is an investment. Naturally, any business engaged in change should estimate the costs and returns of each proposal.
In addition to these, organizations should also assess and evaluate factors specific to each project.
An organization that wants to increase the efficiency of its sales pipeline, for example, would want to evaluate the current health of its program, potential vendors, and so forth.
Prioritize employee performance.
Many organizational improvement professionals emphasize the importance of employee performance and productivity.
The reason is clear – workforce performance improvements translate directly into improvements to organizational performance.
There are several approaches that businesses can take to achieve this goal:
- Manage and enhance the employee experience. The employee experience covers the life cycle of the worker. It begins with the first contact a company has with prospective new hires. And it continues through the end of the employee journey, to post-exit communications. Improving each stage of this life cycle can increase key employee metrics, such as productivity, engagement, satisfaction, and performance.
- Provide employees with modern tools and technology. Employees’ tools – such as the software they use – affects performance and productivity. Without the right tools, employee performance will fall short of its potential.
- Train employees effectively. Employee training is a critical business function, especially in the digital workplace. Digital adoption and digital transformation are continual in the modern work environment, which means employees must continually learn new software. Training quality, therefore, directly affects workers’ proficiency and productivity.
- Implement a structured approach to change management. As mentioned above, structured change management significantly streamlines organizational changes. But it is also an excellent way to improve worker productivity. Change management deliberately focuses on streamlining the employee experience, which, in turn, positively affects the performance of the workforce.
Naturally, the more actions that an organization engages in, the greater the impact on the workforce.
However, organizations’ budgets and resources are of course limited.
For that reason, companies should evaluate potential actions and choose the ones that are best-suited to the business’s circumstances.
Improve talent acquisition and management.
Talent management, an HR function, also plays a large role in the efficiency and effectiveness of the workforce.
It is certainly not the only factor that affects workforce performance, but it is a large one.
There are a number of benefits to improving talent acquisition and management, such as:
- Decreased employee turnover
- Candidates who are better fits for the workplace culture
- Lower costs associated with recruitment, hiring, and onboarding
- Greater workforce productivity and performance
To name just a few.
One of the best ways to increase the quality of the talent pool is to improve the earliest stages of the employee life cycle.
- Improve the quality of candidate selection
- Enhance the employee onboarding process
- Personalize employee training programs
- Implement modern employee onboarding tools, such as digital adoption platforms
Better talent recruitment and management will ultimately improve the efficiency and productivity of the workforce.
The result: improved organizational output and performance.
Modernize IT and streamline the digital workplace.
Digital transformation is the process of leveraging new technology to transform businesses and business processes.
There are many ways that digital transformation can improve organizational performance:
- New tools can increase the efficiency of business processes
- Automation can add significant productivity gains and decrease human errors
- Data-driven technology can offer many benefits across a wide range of business activities
- Better digital tools increase worker productivity
- Digital technology enables new methods of working, such as remote working and online collaboration
Many businesses hesitate with the adoption of new digital technology. Change, after all, can be daunting and risky.
However, digital technology offers many opportunities for growth.
The right digital transformation strategy – along with the right digital technology – can result in significant performance improvements.
Enhance the workplace culture.
Organizational culture, as we saw earlier, can affect the performance of the workforce and the organization as a whole.
There is no single “right” organizational culture, of course.
Every business is unique and each company’s culture will also be unique.
However, there are certain characteristics that can positively affect workforce performance.
- Digital cultures and data-driven cultures will be more productive and efficient. “Digital” cultures value digital skills, adopt technology early, and use technology more effectively. Therefore, they are more suited to survival in the digital age. And they will be better at implementing digital transformation initiatives.
- Cultures that value continual learning will be more adaptable and productive. On the other hand, employees who resist learning will contribute less to the digital workplace. Employee training is certainly beneficial – but that training will be even more effective in a workplace that is built around learning and development.
- Companies that are open to change will be more flexible and agile. Employee resistance is a common roadblock to change. It can be overcome, though … especially when employees are open to change and new ideas.
- Innovative cultures will be more creative and more willing to try new things. The best way to create a culture of innovation is to build mechanisms that foster innovation. Google, for instance, once allowed its employees to spend 20% of their time working on their own independent projects. This resulted in many new ideas and solutions, including Gmail.
Cultural change is like any other organizational change. It takes time, effort, and resources.
However, with the right approach, it can deliver significant performance gains.
Improve leadership throughout the organization.
The influence of leadership should not be understated.
Successful leaders, after all, positively affect nearly every aspect of the business, from the organization’s strategy to employee performance.
There are many thoughts on what makes a leader great.
But perhaps the best way to improve leadership is to understand it at one’s own organization.
Here are a few steps that businesses can take to begin improving leadership at the organization:
- Assess and evaluate leadership at one’s own organization
- Invest in a leadership development program
- Regularly assess and improve that program
Ineffective leadership can be detrimental to the performance of the workforce and the organization, which makes this a very valuable program for any organization.
Many factors influence an organization’s performance.
Employees, the leadership, digital tools, organizational strategy – all of these affect how an organization performs in the market.
Because there are so many variables at play, there are also many ways to improve organizational performance.
As we saw, businesses can see performance gains by improving many of the areas covered.
From digital adoption to leadership development, business professionals have many tools at their disposal.
However, regardless of which approaches a business takes, organizational improvement is only possible through organizational change.
Every business, therefore, should invest not only in the organizational improvement process, but also in formal, structured change management.