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A critical evaluation of performance management and development processes within Otis PLC

The purpose of this assignment is to critically evaluate the Human Resource Development (HRD) aspects of my employer, Otis PLC’s, performance management and development process and to suggest ways in which they could be improved.

This review will be in the light of the organisation’s business strategy, key commercial challenges and culture and will compare Otis PLC’s practice to a model of best practice. In reviewing best practice I will suggest that performance management is a system of interlinking processes which are carried out by both line managers and Human Resource Management (HRM) / HRD professionals. I will also suggest that in order for the system to be fully effective its components must work in a coherent and integrated fashion. However, the purpose of this assignment is to consider issues of performance management specifically from an HRD perspective and so I will not review in detail those aspects of performance management which fall outside the HRD function.

In the light of this review I will propose appropriate actions to bring the organisation’s current practice closer to best practice standards

Otis PLC: Organisation, Culture and Key business drivers.

Otis PLC is the UK subsidiary of Otis Elevator Company which is itself a subsidiary of United Technologies Corporation (UTC). Other significant subsidiaries of UTC include Pratt and Whitney, manufacturers of aircraft engines, and Sikorsky, manufactures of helicopters. Both Otis Elevator and UTC are U.S. multinationals with their headquarters in Connecticut. An organisation chart is attached in Appendix 1.

Otis Elevator is a global organisation and its principal business is the manufacture, installation, maintenance and modernisation of lifts, escalators and moving walkways. Globally Otis Elevator is market leader in its industry and employs 40,000 people. The financial performance of the business has been a source of concern for UTC recently. Although Otis Elevator returns significant profits, its Return on Sales is felt, by U.S. stock analysts to be below what could be achieved. Improving this performance is seen as critical to the future stock rating of UTC as the following extract from Lehman Brothers (1999) makes clear, “More importantly, the company (UTC) will host an investor conference focused on growth prospects at Otis on December 2nd. This meeting will be very important in the minds of investors as earnings growth at Otis is critical to the UTC story going forwards”

As a consequence the business has been undergoing significant restructuring and the business context for Otis is one where costs are tightly controlled and efficiency of operations is closely monitored. As a result, in the UK the company’s approach to performance management is changing.

In Britain Otis PLC employees approximately 3000 people. As elsewhere, the Otis business model depends on achieving a significant market share of newly installed lifts and escalators, this in turn allows the organisation to achieve economies of scale in the maintenance of customers’ equipment. Maintenance is the primary generator of profits, with a target of 50% gross margin, that is direct costs of service, excluding Selling and General Administration expense, should be no more than 50% of the cost of the contract. Currently the organisation is achieving 40%.

Traditionally, purchasers of new equipment would choose to have it maintained by the manufacturer. Increasingly, however, purchasers are using a tendering process to select a maintenance supplier and this is placing downward pressure on maintenance prices. This trend, together with the global requirement to increase profitability has led the organisation in the UK to review its maintenance business with a view to increasing efficiency and profits. A significant restructuring process was announced in July 1999 under the title “ Seizing the Offensive”. This restructuring is focused on increasing workforce efficiency while improving customer service levels. It includes a declared intention to take a more active stance on the management of performance coupled with increased investment in training and development. The restructuring included a reassessment of all line managers and sales staff within the maintenance division. The selection process, by means of an assessment centre, was based on a competence model that was developed with support from an external consultant. More details of the competence model are shown in Appendix 2.

Armstrong and Baron identify the importance of ensuring that an organisation’s performance management system fits its culture. To provide some context to my review I will give a short description of the culture of Otis PLC. Schein (1992) cited by Mabey et al (1998) suggests that culture can be considered on three levels; artifacts and creations; values; basic assumptions. I will use this structure to describe the culture of Otis PLC, beginning at the level of basic assumptions. The core belief is that the elevator industry is in some way different from other industries and there is an unquestioning belief, that Otis is the “best” organisation in the industry. This leads to an unwillingness to learn from competitors or to recruit managers from different backgrounds

The values of the organisation are typical of a small engineering company but with a strong orientation to problem solving which is, perhaps, a product of the highly reactive nature of its business. Long term planning takes second place to the ability to respond well in a crisis. Many of the organisation’s espoused initiatives are long term in focus but there is a tendency not to persist with them to completion. Almost all senior management appointments are made from within and a background in the industry, together with considerable length of service, is considered essential for promotion. Loyalty and hard work have been valued more than actual achievement and, historically, few concerted attempts have been made to manage performance.

Finally, at the level of artifacts, the organisation appears relatively sophisticated and prosperous. It possesses many of the features of a medium sized PLC, with a headquarters building, a glossy company magazine and the full range of policies, practices and management procedures, including a mission statement which places the customer above all else.

Models of best practice in performance management and development.

The purpose of this part of the assignment is to explain what performance management is and to establish a model against which to compare the practices of Otis PLC. In making my review of the literature on performance management, I have found two closely related issues that are particularly significant to the HRD function. The first is that there is a tension between two aspects of performance management, the desire to measure and control results and the need to develop employees’ capability to achieve results. The second is the significant practical difficulty of establishing meaningful criteria that can both evaluate development needs and measure performance. I will explore these issues more fully below.

Establishing a definition of performance management.

There are several definitions of performance management available, Armstrong and Baron (1998:50), for example, list eight. Commenting on the definitions, they note that there are frequent references to the need to align individual and organisational objectives but only one reference to development. From my own reading Taylor and Hendry et al (1997) cited by Walton both stress the systemic nature of the process while Harrison (1997) citing Lockett (who is included in Armstrong and Baron’s review) emphasises the link to organisational strategy.

The definition that I find most useful is by Armstrong and Baron:
“a strategic and integrated approach to delivering sustained success to organisations by improving the performance of the people who work in them and by developing the capabilities of teams and individual contributors.”

They put particular emphasis on four parts of their definition, Firstly the strategic nature of the process, i.e. its alignment with the strategy of he organisation and its ability to respond to changes in that strategy. Secondly, they emphasise the degree of integration both with other functions, with the organisation’s HRM process and, ideally, with the needs of individual employees. Thirdly, they stress its concern with performance improvement and finally they identify its concern with development, which they state is “perhaps the most important function of performance management.”

Inherent tensions in performance management systems.

Armstrong and Baron include both improvement of current performance and development of the individual within their definition. Other writers have also identified this dual role but express concern about potential tensions between the two aspects.

Although writing specifically about appraisal processes, McGregor (1957) cited by Newton and Findlay identified the tensions that are inherent in performance management.

“The modern emphasis on the manager as a leader who strives to help his subordinates achieve both his own and the company’s objectives is hardly consistent with the judicial role demanded by most appraisal plans.”

Harrison also notes the tension between measuring and controlling outputs and providing the development of capabilities (inputs) to achieve them. She cites Crabb’s (1990) case study of tensions within the performance management system of British Rail. Crabb found that, although his overall impression of the system was favourable, “many managers were going through the motions and not following through on the results of the reviews”. He suggested that there was probably too great a tension between those objectives of the appraisal scheme that were to do with controlling performance against targets and those to do with developing people.” Walton and Bevan and Thompson, make similar points.

Harrison cites Harris’ (1995) study into Haringey Council’s housing department’s and Fowler’s (1995) study of performance management systems in the National Health Service as examples of performance management systems that integrate the drives for control and development. It is worth noting that both examples are from not for profit organisations where the pressure for achievement of measurable results, while still significant, may be less strongly felt.

Stiles et al found that organisations were adopting harder edged performance management processes and that employees had deep concerns about the accuracy and fairness of performance management processes. This is very much the situation that Otis finds itself in.

The difficulty of establishing meaningful measurement criteria.

As noted above there are two, potentially conflicting aspects of performance management, development of future performance and control of existing performance and this division is reflected in criteria for measurement. Firstly, in terms of development, there is the issue of how the individual does their job, i.e. an evaluation of their input to it. This can be contrasted with the results they achieve, their output, which is related to control of performance. In the case of both sets of measures there are issues of validity and reliability to be considered.

Armstrong and Baron and Gammie both review the question of measuring inputs. Gammie identifies the tendency for measurements to focus on outputs, and suggests that individual performance should be measured at two levels, firstly what is achieved within their job and secondly against defined standards of teamworking or collaboration. Armstrong and Baron suggest that a competency model can provide the framework for these measures. They found that 31% of organisations had introduced some form of competence assessment into their performance management process.

Issues of validity in this area are concerned with identifying relevant and appropriate standards against which to assess. Harrison comments that the increasing popularity of competency based frameworks must be treated with caution in this context with the risk that too great a focus can be placed on the defined competencies at the expense of more generalised abilities to survive in an unpredictable future. She cites Healy (1995) and Sparrow (1996) as having expressed similar concerns. There is an extensive body of literature on the subject of developing an effective competence model but space does not permit me to review it here.

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