Date: November 2018 | Autho(s): Dorette Lochner & Birgit Preuß-Scheuerle, FLAG Consulting & Training | Published in: managerSeminare, Heft 248

Rethinking goal agreements

AN AGILE APPROACH TO SETTING GOALS

The process of setting goals in organisations is becoming increasingly controversial. Some people argue it should be scrapped because it no longer reflects the modern world of work, while others argue that it can still be useful and continues to be a widespread and popular tool. For anyone still interested in taking advantage of SMART-based goal setting, innovation holds the key to success!

Everybody knows that the times are changing – but not everybody is willing to accept the consequences. Companies worldwide are seeing their business environments becoming increasingly unpredictable as the world shifts ever further into the VUCA paradigm of volatility, uncertainty, complexity and ambiguity. Yet when it comes to internal processes – and especially goal setting – few companies seem willing to adapt to the new reality. Instead, they are stubbornly sticking to the traditional SMART method of setting and achieving goals.

This should come as little surprise, because it is no easy matter to move away from the established discourse on goal setting. At the end of the day, management by objectives has been the dominant principle of business leadership for decades. Setting individual goals is a core component of annual performance appraisals and, in many cases, forms the basis for calculating the variable component of an individual’s remuneration – and it continues to offer a number of benefits.

The first of these benefits lies in the top-down principle: in traditional goal setting systems, managers translate their own goals into packages of goals for their individual staff members and delegate these during annual performance appraisals. As well as the benefits a company can accrue from a coherent, vertical system of goal cascading, this method also offers a number of other advantages. For example, employees have a clear idea of what is expected of them. If the principle is applied correctly, it makes it much easier for each employee to understand how their manager will assess their performance. The appraisal is based on objective, transparent criteria – and there is no doubt that this continues to be a positive aspect.

Goal agreements are rooted in outdated assumptions

The problem is that this approach is based on three Tayloristic assumptions that have essentially become obsolete in many areas of business. These three outdated assumptions can be summed up as follows:

  • An employee’s work can be assessed over a 12-month period, at least for the manager concerned
  • An employee’s performance can be precisely planned and allocated on an individual basis
  • Employees are primarily extrinsically motivated

The reality is rather different. Rapidly evolving business requirements require goals to be planned on a more short-term basis and constantly adjusted. This fast-changing environment also necessitates intrinsically motivated employees who are willing to be flexible and adapt to changes in their work and projects at any time. What’s more, a business situation characterised by features such as ambiguity and complexity makes it impossible for a manager to set the right goals for employees without their input. The whole top-down approach ignores the fact that the factors that influence business have become so varied that knowledge transfer and business incentives are increasingly having to travel bottom-up and in a horizontal direction.

So what if a company is not ready to switch completely to an agile, self-organised, new form of working in all areas of its business? What if – and this is true of many big companies – they are keen to introduce agile methods of leadership, yet still want to hold on to goal agreements and maintain the practice of management by objectives? The solution in this case is to keep the traditional SMART method but to take an innovative approach to its more outdated aspects while simultaneously adding additional features that take collaboration and intrinsic motivation into account. Ideally, a modern goal agreement process should take into consideration five elements of goal orientation and four principles or behaviours for the goal setting process.

It’s time to rethink the SMART model 

1. S = “specific goals”
Based on the executive management’s strategic objectives, departments and teams derive specific deliverables that they can contribute to achieve the overall objectives. In the past, goals and performance indicators were often cascaded from top to bottom. Nowadays, however, departments develop many of their own objectives themselves and take a decentralised approach to specifying how they can best contribute to the company’s overall success.

2. M = “measurable milestones” instead of “measurable goals”
Even in past decades, goal agreements based on the traditional SMART model have often been difficult to execute in their entirety. The “M stands for measurable” part of the SMART model is a particularly tricky point that arguably requires a rethink. If something is genuinely measurable, then it is, of course, possible to make an objective comparison between the goal and the outcome. But it is questionable whether this really makes performance more objectively measurable, since factors that cannot be influenced by the employee might also have an impact on the final result. In practice, tackling this point often ends up being something of a grey area: if an employee fails to meet the goal, managers tend to react in different ways. Some will take external reasons into account in the appraisal, while others won’t. Whatever the case, there is one option available that can help to minimise this problem: instead of focusing on the final result, which is subject to so many external unknowns, it can help to set milestones at short intervals and then use these to measure performance.

3. A = “as if now” instead of an alignment that is not really collaborative
Many people take the “A” as standing for alignment – yet this is also problematic and requires a rethink. Alignment refers to the self-imposed task of coordinating set goals with other projects within the company. This is a laudable aim, but it is difficult to achieve in traditional structures and using traditional tools. The problem is that goal agreement tools do not offer any assistance in this process. Consequently, employees who are striving to meet their goals all too often find their goals conflicting with those of other employees or teams, assuming that they have no new collaborative means at their disposal. Some companies have therefore switched the “A” part of the SMART model to “as if now”. Essentially, the idea is to word goals as if they had already been achieved. The goal is formulated as a result that meets certain criteria, and not as a task
or measure to be taken. For example, the objective “to develop a strategy for entering the European market” could be phrased as follows: “In October, we will present a strategy for entering the European market that meets the following criteria: firstly, it incorporates the results of the dealer survey and, secondly, it has been coordinated with the sales department.” Why is it worth making this extra effort? Because the clearer and more tangibly we can visualise the goals as a finished product, the higher the probability of actually achieving them.

Goals with a high probability of failure motivate us more

4. R = “relevant added value” instead of “realistic goals”
Perhaps the most controversial and hotly debated aspect of the SMART model in the context of traditional goal agreements is the question of whether a goal is “realistic”. The difficulty lies in the fact that employees understandably try to agree goals that are easy to achieve. Managers, on the other hand, try to set the bar high in order to boost the results of their own assessment and potentially gain a bonus for achieving more challenging goals. Essentially, then, employees tend to take a conservative approach while managers are likely to be ambitious.

This conflict of interest extends along the entire goal cascade through all hierarchical levels that work on the basis of management by objectives. How it is solved depends on the leadership culture in each case. In practice, the top-down principle generally wins the day: the concept of a mutually agreed goal is transformed into a goal stipulated by the manager. Sometimes the goal still ends up being something of a compromise, but it is rarely the product of genuine negotiation between the two sides.

There is another reason why the “realistic” criterion is so problematic: as shown by a plethora of research into the concept of “aspiration levels”, peoples motivation to perform tends to be highest when a goal has a probability of success of just over 50 percent, meaning that it also has a fair probability of failure – and thus a higher level of risk than managers generally set for their employees. This was confirmed decades ago based on many years of in-depth research by American psychologist John William Atkinson and German psychologist Heinz Heckhausen – yet these findings clearly attract far too little attention in today’s business world. The fact that tasks become more appealing as the probability of success decreases leaves employees facing an impossible dilemma. They are essentially stuck between motivation and excitement on the one hand, and risk avoidance, a good performance appraisal and perhaps a bonus on the other.

The realities of goal agreements in the modern world therefore requires us to leave the concept of a “realistic” goal firmly behind us. To keep the “R” in SMART, one option is to make it the first letter of “relevant added value”. The idea here is that when you are setting goals in a business environment plagued by uncertainty, it is best if they are short-term and include a step-by-step process, with each step adding value.

5. T = “timed action plan”
The argument that you can’t have a clear goal without a deadline still applies. In rapidly changing business environments, however, it is becoming increasingly difficult for each individual employee to define goals with timeframes measured in months or years. From a practical point of view, it therefore makes sense to have an action plan with shorter deadlines, which all the members of the team can sign up to until the next coordination meeting. 
 

A new culture of goal setting based on four key principles

Applied in the manner described above, the SMART model offers a basic tool for specifying the results we expect and performing an objective assessment of whether they have been attained. To be truly effective, however, the SMART model needs to be supplemented by additional aspects. For the first time, some companies have begun to realise that goal agreements no longer have to be seen simply as a top-down deal made between two parties with different interests about what performance should be delivered – in other words as a rational, extrinsically motivated transaction. They understand that goal agreements can only achieve an optimum effect if they are up to the challenges of the VUCA world and the realities of agile working – and that means combining them with four key principles. These principles form the acronym CODE. This transforms SMART into the agile SMART CODE, which is ultimately both a tool and a new form of goal setting culture.

 

First principle: C = collaborative
Employees, teams and their managers form practical coalitions in the goal setting process. They are no longer “adversaries” faced with the daunting task of negotiating goals while protecting their own interests and maintaining buffer zones to cushion the effects of any agreement. Instead, they collaborate on how goals are formulated and set goals together. This involves both top-down collaboration and horizontal networking, with goals also emerging from the middle layers of the organisation.

These kinds of goal setting coalitions offer two benefits: firstly, they avoid frustrating conflicts of interest between departments and, secondly, they encourage shared objectives that have binding force for a team. In fact, having a common goal could even be said to be the decisive factor that turns a group of employees into a real team. That’s why some pioneering companies have already scrapped the bulk of their individual bonus programmes in favour of defining goals on a team level. Goals are formulated and integrated on a collective basis.

In his highly regarded work Reinventing Organizations, Frédéric Laloux explains this process as follows: 

In modern organizations performance and outcomes are discussed foremost at the team level: „Are we collectively doing a good job contributing to the organizations purpose?“ Modern organizations measure indicators like team results, productivity, and profit, just like other organizations – except that they mostly tend to do so at the level of teams ...

So how does this work in practice? Essentially, top management defines, communicates and explains its strategic objectives and parameters for success at the level of the organisation as a whole. Teams at all other levels then use these strategic objectives as a basis for defining their working goals. The fact is that today’s managers need team members’ knowledge and experience to derive sensible sub-goals, metrics and milestones from the organisation’s strategic objectives. Prerequisites for successful employee involvement include a shared understanding of the nature of the organisation (mission, purpose) and an overarching aim (vision, strategy). Equally important is the ability of all employees to access relevant data and information (key financial figures, market data, customer feedback, etc.) that are required to intelligently tailor goals to the reality on the ground.

 

Second principle: O = open to adapt
As the evolution of market conditions, customer requirements and technologies continues to accelerate, many companies are realising that goals need to be conceived in more manageable – i.e. shorter – timeframes. This means defining working goals as milestone goals, enabling them to be periodically reviewed and adapted appropriately to new requirements. Modifications to goals can even be put forward by individual employees, though goals should only be modified if external conditions have changed or new insights have been gained in the meantime. Team meetings are held to generate a shared understanding of this issue.

Setting short-term goals or relative goals

Many companies automatically review their goals on a monthly or quarterly basis. For example, Google, LinkedIn, Twitter and Zynga all define team goals and review and adjust them several times over the course of a year. Here too, however, modifications are only made if the team considers this necessary after jointly reviewing the underlying conditions. An alternative approach taken by some teams is to work with relative goals from the outset. These are defined in relation to other metrics such as market developments, competitors’ offerings or exchange rates, for example. This means relative goals automatically adapt to known variations in the broader environment. One often quoted example of a relative goal would be “to grow faster than the market”.

 

Third principle: D = daring
As mentioned above, conservative goals – the negotiated kind that leave optimum solutions by the wayside – do not inspire maximum performance. Goals that yield groundbreaking achievements tend to be bold and courageous. It therefore makes sense for teams to change the way they set goals, taking a bold approach that motivates them to maximise their performance rather than a conservative approach that incorporates buffer zones to cushion the possibility of non-achievement.

This requires a new paradigm in which employees do not perceive as a risk the fact that the probability of completing a goal in its entirety is only a little over 50 percent. Even if they only achieve 70 percent of a goal, that should also be regarded as a success. Missed goals constitute a learning loop, not a failure . In modern mindsets, the non-achievement of a goal is no longer associated with a financial penalty – and certainly not interpreted and regarded as a failure. In today’s world, non-achievement of goals and learning loops have become the norm. The act of not achieving a highly ambitious goal almost always represents a major, value-added development. The team learns from the experience and continues to work on surpassing its own performance. People no longer have a bonus in the back of their minds, so they can dare to embark on blue sky thinking and strive to achieve real breakthroughs.

American consultant Dick Grote, who criticises the inherent weaknesses of traditional goal setting systems, argues that: 

The SMART technique encourages people to set low goals. No one is going to set goals that don’t seem attainable or realistic ... It‘s a justification for setting goals at a shooting-fish-in-a-barrel level of challenge. It‘s the setting of high goals – tough, demanding, stretching – that generates the greatest level of effort and performance.

 

Fourth principle: E = eco-checked:
In the past, it was not uncommon for goal agreements to contain ten or more goals, which is far too many! Employee surveys offer sobering feedback on this approach, revealing that many of the goals agreed so enthusiastically in the previous year ultimately end up running aground or simply sliding off the agenda. The reasons given generally include too many unexpected obstacles, too little time, over-stretched schedules, no support within the organisation, and negative side effects caused by other projects. In short, the fact that nobody checked carefully enough whether the goals were compatible with the type and quantity of all the other projects and requirements within the organisation.

Another way to express it is that they failed to check whether the goals actually fitted into the “ecosystem” of the organisation and team. Meaningful goals should be able to pass a compatibility test. A good way to define this is with a term used in systemic organisational consulting and NLP: “eco-check”. The concept of an eco-check includes a number of questions. For example, do we have enough capacity to meet this goal? What can we break down? What can we prioritise? What can we replace on the agenda? What support do we need? How confident can we be of getting that support? So, instead of being viewed in isolation, the goals are viewed in the context of an overall system. Teams and managers focus on five (plus or minus two) key goals. These goals form a meaningful portfolio of KPI targets, strategic objectives and skills development goals.

A bridge into the VUCA world: SMART goals with the agile CODE

By taking all these steps and principles into account, it is possible to benefit from the positive aspects of SMART goal setting while sidestepping the potential downsides. The key is for goal agreements to no longer just be SMART, but also collaborative, daring and developed jointly on an equal footing. These kinds of goals encourage an intrinsic form of motivation and can be pursued independently and adjusted in an agile manner as required. This enables employees to
experience their own effectiveness and ongoing development and often results in them surpassing their own expectations in bringing the goals to fruition, especially when working as a team.