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Transcript of Design and Impln Perf Man KPIs RCs CaseStudy
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Design and implementation of performance
management systems, KPIs and responsibility
centres : A case study
Dwarkanath Prabhu ([email protected])
IIM Bangalore
PGPPM Office, IIM Bangalore, Bannerghatta Road, Bangalore 560076
Cell : +91 81 477 53043
Sateesh Hegde ([email protected])
IIM Bangalore
PGPPM Office, IIM Bangalore, Bannerghatta Road, Bangalore 560076
Cell : +91 94 480 91428
mailto:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected] -
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Design and implementation of performance management systems, KPIs
and responsibility centres A case study
Abstract
Responsibility centres, balanced score cards, EVA, performance management system, KPIs
etc are organizational systems of great significance for creating corporate performance.
Glories of successful corporate transformations using these systems have been well
documented and studied in depth. However, there have also been multitudes of partial or total
failures of such organizational transitions which are often neglected by researchers. Study of
failure cases can provide the control group necessary to test the critical factors influencing
successful transformations which are often credited to top management involvement,
charismatic leadership, capacity building etc. Moreover, most case studies are about large,
especially fortune 500 companies, usually headquartered in the US or Europe the lessons
from whose experience may not be applicable to Asian companies, particularly those in the
SME and MME sectors. This paper describes and discusses a case study of a small Indian
enterprise in order to highlight the issues required to be considered when designing and
implementing organizational transformation programs for smaller Asian organizations.
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Design and implementation of performance management systems, KPIs
and responsibility centres A case study
As the Binoy roy, CEO of TechEdge, walked out of the meeting room followed by the
Vice Presidents of the different departments, the expressions on their faces betrayed various
feelings ranging from relief to frustration. It was not easy to develop a consensus even among
the top management team on such a critical issue as performance management.
TechEdge was a system integration company in core business of providing IT solution
and services for multiple industry verticals. The company partnered with various technology
vendors in various capacities such as System Integrator, Value Added Technology Partner,
Technology Consultant etc. It was a B2B business model. TechEdge sold their technology
consulting services, Business Technology Optimization services, project implementation
services and maintenance services for complex information technology infrastructure. The
main departments of the company were sales, consulting, support and services, backoffice
operations, finance and software. The formal structure of the company was very lean. Each
department was headed by a vice president who was assisted by managers who in turn
handled teams independently. The branch offices across the country had a similar structure
with the branch manager (a V.P. level position), reporting directly to the CEO.
All the vice presidents were at the same level in the hierarchy, but at different pay
scales depending on their experience and perceived importance or the criticality of the
department for the company. Sales was supposed to be the most powerful department,
followed by support & services and finance. All VPs reported directly to the CEO in terms of
day to day business activities, internal financing for new assets, salaries, etc.
Reporting Structures and the Role of HR
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Though the roles and responsibilities of each department were clearly defined within
the department, members of all departments were required to work in temporary teams with
members of other departments for delivering projects. The role of HR was reduced to routine
recruitment. The individual department needs of training, appraisal, performance
measurement, and the like were completely driven by individual VPs. The HR department
was never taken into confidence on people management issues and they responded to such
issues as if they were under learnt helplessness.
Though all the departments worked together to deliver the final project, none of them
was answerable to each other. Each department had a clear focus on their individual tasks.
Within each temporary team, the project leader was responsible for the teams performance
but each member of the team reported directly to his/her own VP. The project leader usually
was from the support and services team. The entire business transaction comprised broadly of
understanding the customers business problem, creating a feasible solution to address the
problem, selling the contract for concept design, consulting and delivering the desired
service, mobilizing resources to meet the contract obligations, and collecting the payment.
All the departments had a clearly mandated goal to provide the best service to the customers.
The people
Binoy was a soft spoken person with a great individual charm and ability to motivate
people by his sheer conduct. He had a keen sense of organizational ethics, people orientation,
work culture, employee satisfaction, organizational culture of honesty, independence,
flexibility and such other softer and finer qualities of the organization. To that effect, he set
high standards through personal excellence and commitment by example. He was a great
believer in the efficacy of efforts and worked hard for the singular reward of personal
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satisfaction. Yet, as a CEO he was equally concerned about the revenues, profitability and
cost control. His management style was a unique combination of consultative and
authoritarian where he made people a part of the decision making process, but at the same
time pushed the organizational agenda in a rather unobtrusive manner. He only served as a
convenor of the think tank meetings, usually making each one feel that he/she had played a
significant role in the decision making and that each one had an important stake in the
organizations strategic directions and business initiatives.
The vice presidents were also excellent and dedicated performers, worked closely
with each other and shared a great sense of bonding. However, each one had concerns of his
or her own. Ram, VP-Sales, was concerned about the increasing difficulty in getting new
contracts due to increased competition in the market and increasing customer demands.
Kishore, VP-Services, was constantly overstretched and there was a tremendous strain on
talent due to attrition. He also seemed to complain that his people were overworked fulfilling
unreasonable customer demands which he believed were due to the tall promises made by the
sales teams. This feeling was also echoed by the VP-Software who felt that the sales team
often undersold their value. All the teams felt that they had inadequate support from the
operations department while Aparna, VP-Operations, had her own story of woes. She
complained about overload of work and dependencies on external factors beyond her control
such as delays from other suppliers. She also felt that the other departments took her for
granted and never gave enough time to mobilise the resources required for a project. Rajesh,
VP-Finance, complained about lack of funds and issue of collections. He seemed to be
convinced that the sales team did not do enough to follow up on the outstanding payments.
Rams stand on this was that they could not ask for payments in the absence of proper
documentation and timely and satisfactory achievement of milestones, for which the
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administration and the support delivery teams were responsible. All the VPs shared a
common feeling that there were never enough people and pressed hard for additional
resources. Given the cost of headcount, getting people was a highly competitive activity and
more often than not, they tried to squeeze in more people within the same budget allotted to
them, just to take care of attrition and provide for redundancy. The VP-HR, Monica, was
perennially challenged for recruiting high quality talent at lower costs. You cannot get the
best at the lowest costs, she argued.
The challenges
In the increasing competition, Binoy was under pressure to increase sales and profits.
Ram shared the opinion that the sales team was performing at suboptimal levels. He
attributed this to 5 major reasons - a weak level of motivation to perform, low quality of
people, cost and time required for training and re-training, attrition of trained resources and
low visibility of the company in the market place. Trained performing people are lured away
by the competition such as IBM, CAP Gemini, Accenture etc even though we pay as
handsomely as they do. What is the point in training people for competitors, was his remark.
At the same time he also had a point that people were not motivated enough. The sales teams
worked at fixed salaries and yearly increments were based on their annual performance. The
sales team therefore focussed on getting the large and complex contracts which had a much
higher contract value and a long sales cycle. Also since the organization culture supported a
value system where efforts, skills and knowledge were perhaps more important than results,
the sales team found higher respect in working with a few larger cases rather than a large
number of small quick opportunities. Such larger cases were intensely competitive and often
resulted in substantial price cutting situations, reducing the overall profits. In addition since
the projects were also long term, the revenues were delayed. Finally, when it came to really
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at a fixed/variable pay structure of 60:40, the sales team settled for a ratio of 70:30. Since it
did not fit in with Binoys ideology to cut down peoples monthly cheques overnight, he
adopted a very generous approach. The prevailing salaries were treated as the fixed 70%
component, and 30% variable component was declared over and above that as performance-
based variable pay, for which challenging but achievable targets were set. The achievement
slabs were fixed in such a way that it seemed very fair and just to the entire sales team. (See
table below)
Sales Achievement Entitlement
Upto 60% of the target Fixed salary component only
61-80% of the target Fixed plus 50% of variable component
80-95% of the target Fixed plus 75 % of variable component
96-100% of the target Fixed plus 100% of variable component
>100 % Fixed + Variable + Acceleration points
The acceleration point treatment seemed to be quite complex on which there were
serious differences of opinion. The entire team seemed completely drained out after hours of
deliberation, and hence Binoy proposed to decide on it at a later stage. However, Ram was
keen on pushing his way through till the end. He knew that it would be difficult to make any
changes later. Besides, he also wanted to use this opportunity to address the burning issue of
attrition. Since we have already come so far, lets go the extra few steps to give at least an
outline rather than keep it for yet another day, Ram persisted. Lets get it over in a few
minutes. I think that keeping a track of all sales records and making claims on a monthly
basis will be very difficult for the team. I suggest that we have a quarterly system of the
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incentive payout. Let us also have the flexibility of adjusting the targets by balancing over
two consecutive quarters, but keep the year-end as sacrosanct. The team was not too happy
about the prospects of postponing their monthly incentives to the end of the quarter. Ram was
able to convince them about the practical difficulties in processing the data and payments on
a monthly basis due to long sales cycles, time required for the claim process, and the
advantage that once a quarter they would get a little fatter sum rather than getting smaller
payments each month. Lastly, I suggest that for every 1% extra achievement, one gets a
bonus point. These bonus points will be used for considering the next years appraisal. In
addition 5 % of the entire gross profit generated by the team in the year would be distributed
as an ex-gratia payment on a pro-rata basis within the entire sales team. By then the energy
levels of the team were already running very low. Sensing this, Ram kept pushing the scheme
gently, but firmly and managed to get his way through.
The very next morning Ram circulated a mail with a few additional eligibility
conditions such as timely payment collections, customer satisfaction, minimum profit
margins to be met to qualify for incentive even if one had met or surpassed the revenue
targets, and minimum achievements across multiple business lines, etc. Though none of these
conditions had been discussed in the meeting, they were not contested too much because they
were perceived as legitimate. One cannot argue much against what is ethically correct, was
the view of Ram.
The initiative was a decent success (through not grand) in the first year. The sales
team seemed to have picked up a competitive spirit. Yet there were a few who still refused to
run that extra mile for the additional incentives. There were also other issues and some
dissatisfactions about losing out on incentives because of somebody elses problems and
inefficiency. Ram privately agreed. Another concern on his mind was that while they had all
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reached or surpassed the collective profit targets, none of the sales persons had crossed the
100 % mark in terms of revenue, though it should have easily been possible for at least a few
of the lot. He wondered what could have been wrong. Also he had been getting complaints
that disbursement of incentives was not timely. The finance team had to check the claims
made by the sales teams and more often than not they found disparities within their accounts
and the claims. On further investigation, he found that these disparities were more due to
allocation of the customer payments across multiple invoices. Neither the sales team nor the
accounts maintained a consistent method. Often, customers also added to the confusion due
to their own cost allocation methods resulting in multiple queries and clarifications that went
back and forth. Ram decided to keep an eye on such teething problems and arrive at a
permanent solution in the next year. However, he had a constraint that the problem did not
entirely lie in his domain.
Initiatives for organizational orientation towards a performance-driven culture
Monica had been watching the entire sales appraisal system and the sales team
dynamics throughout the year. There had not been a single attrition case from the sales
department this year. She thought it would be a good idea to implement a performance-based
pay system for the entire organization. The trouble was that sales were easy to measure. The
other departments functions needed to be quantified first and a measurement scale needed to
be established. She decided to talk to Binoy about it.
Binoy welcomed the idea. He suggested that Ram and Monica chart out the scheme.
He urged them to involve the other VPs as well. Monica offered to take the challenge of
creating the yardsticks of measurement. Ram was more than happy to let her do it. Some
worthwhile work for HR, finally! he teased. Monica didnt seem to mind it and came out
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with a nice-looking plan in about a month. She had charted out the entire organizations
workflow process and identified all the time intervals required at each stage in the workflow
that added up to the entire delivery cycle. At a glance, Ram was convinced that there was a
lot more work to do. They called for a meeting of all the VPs. After much deliberation, they
decided to keep Binoy out of this in the beginning. He would be called in at a later stage.
The groups reaction was short of a commotion. While it was obvious to everyone
that the workflow chart was as accurate as it possibly could be, they refused to accept the
internal time lags that boldly stared out at them. Please understand, these time lags are not
just due to us. We are dependent on someone else too. How do we cut down that time?
argued Aparna. Kishore said that many times customers demanded out-of-turn services which
caused delays in other cases as well. How was he to rectify that problem? He could not
possibly antagonise the customer just to keep his time lines look neat. Rajesh argued that his
team was always short of manpower and especially with such kind of system, he would be
needing even more people to absorb the additional load. It was time Monica did something
about her own deadlines rather than talk about other departments timelines Ram and Monica
sensed that the meeting was not going anywhere and was leading to more and more internal
allegations about who should own the responsibility of sticking to timelines. Arguments and
accusations flew in the air. Finally the comprehensiveness of the workflow itself got under
scanner and each member claimed that the process was far more complex than the chart could
possibly cover. Heated arguments finally ended with a simple question. If all this is in the
organizations interest, why is Binoy not here? The meeting was adjourned without any
concrete decision, a very unusual occurrence at TechEdge. Usually they had always been able
to come to quick solutions and consensus on issues. This was the first time a VP-level
meeting had ended without any conclusion.
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Ram and Monica spent a rather uneasy time for the rest of the entire week in office.
Their otherwise nice colleagues were suddenly not as nice any more. No one was being nasty,
and work did not suffer; however the undercurrent seemed to be full of strains. One could
almost feel it in the air. Even Binoy could feel the tension among his VPs. He could guess
that it must have been because of some discussion on Monicas performance-based pay-plan.
Though he himself liked the idea because it ensured that good money was spent only on good
work, he was not sure how it could be implemented for other departments. He mulled over
the idea of hiring an external consultant and decided to discuss this with Monica and Ram.
Binoy, I think we can understand our business and our people much better than an
external consultant, reasoned Monica and promised him to figure out a way. Binoy knew his
peoples capabilities too well to doubt her. But his dilemma was to choose between the
cohesive integration of the team versus the mathematical precision of efficiency. He decided
to leave the matter to the team and keep a close tab on the relationship factor so that he could
step in when appropriate.
Ram and Monica decided to put to use the learning they had acquired from their MBA
courses which had been pushed to the background in the rush of daily routines. They changed
their approach and decided to win over the VPs one by one instead of all together. Another
change was that they constructed a whole new performance measurement instrument with a
minor weightage to the time of response for each activity being measured, but with a large
weightage to all those factors that would ensure the response times. Further the tool would
adjusted for each departments needs with some of the parameters common and others
changed to suit the needs of different departments. Each department head was to specify the
parameters unique to their department. It almost looked like a balanced score card. This time
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they first took it to Binoy. Their first experience had taught them that it wont move without
Binoy pushing it himself.
Binoy liked the overall idea, but could not attend to it because he was under
tremendous pressure for time due to his other commitments. He also wanted to postpone it a
bit in the view of the strains that had developed recently in the relationship among his
chieftains.
Besides he wasnt very much convinced about the success of Rams initiative in the
last year. The team had delivered better results than the previous year. But the team had not
completely met their target. None of the sales people had been able to cross the 100% mark.
Yet, their revenues had gone up by about 30%. The PAT had increased by 25% over the
previous year. The collection had remained at the same level as previous year. The creditor
column in the balance sheet was disturbing him. Some of the projects would run for more
than 3 years. Though the contracts looked profitable on paper, the uncertainties of long term
contracts were too many to say that the company would actually be profitable at the end of
those projects. The attrition rate with services and software departments was as high as ever.
That had a potential to create future customer satisfaction problems. There were too many
questions on his mind that he first had to attend to. He was also mulling over the idea of
designating the sales, services and software teams as profit centres. But he was not sure
whether to convert the Internal Administration, IT, and Finance into some sort of
responsibility centres.
Notwithstanding Binoys reservations, Ram and Monica were determined to push this
through and after about a month of their persistence, Binoy called a meeting of all VPs.
Monica and Ram briefed Binoy completely about the entire Key Performance Indicator (KPI)
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system and the reward workings. Binoy was not fully convinced that all the KPIs were
required. He was also not very sure about the efficacy of the reward system. He held the view
that KPIs should be specified only for external customer-facing and finance-related activities
where measurements were easy. For internal activities, it was impractical and unnecessary
according to him. He believed that people have a certain value system inculcated in them and
they behave accordingly. A KPI-based formal workflow will never work. People dont work
by looking at charts. They work through their habits, was his argument. But we need to re-
orient their habits of working. KPIs serve as the directions for them. Once they start working
in this way, it would automatically become a new habit over a period of time, reasoned
Monica. Finally after intense discussion, they decided to go ahead with the KPIs as defined
by Ram and Monica. But Binoys outlook prevailed over the rewards and penalties. Both
Ram and Monica felt that the rewards were too less for internal KPIs, though for the external
facing KPIs, they were comparatively high. The penalty system also seemed to be skewed
towards the external-facing teams. The internal misses faced much lower penalties. Though
the lower penalties were consistent with lower rewards for the internal-facing teams, and
vice-versa for the external-facing teams, Monica was not completely convinced that there
should be such discrimination in the first place. Ram cribbed about the penalty part, but
decided to go along with Binoy. Furthermore, the Sales team, Consulting team, Service and
Support team and Software project delivery teams were constituted as profit centres. The
backoffice team was designated as an investment centre and finance team was made the cost
centre.
The rollout and the results
The proposal was rolled out by Binoy, which was a bit abnormal. He usually had
someone else put forward any proposal and would endorse it. However considering that
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Monica and Ram had already gone through the first round of discussions and had faced bitter
resistance, Binoy felt it would be good to neutralize that effect. The meeting went not without
resistance. The internal-facing teams felt that their KPIs were too stringent and the rewards
were not commensurate with the same. The external-facing teams felt their penalties were
stiff and they were not really directly responsible for many of the KPIs. Moreover, since this
was the beginning of recession, they had apprehensions that their performance targets may
not be met. After prolonged resistance, finally the proposal was accepted without change on
the condition of a pilot year. TechEdge would run with the new system of performance
management for a year and revisit the same later. They would have a quarterly audit of the
new system and a final review after one year wherein the necessary modifications would be
made.
Three months into the new model, there were serious inter-departmental allegations.
Each department claimed to have incurred a loss of incentive due to the lethargy of the other
department. The finance team was annoyed since the payment collection had fallen almost
15% below the normal rate. The sales team defended it alleging that the payments had been
delayed due to late commissioning of projects. The services team seemed to say that the sales
team had overcommitted, and the scope of the project had extended much beyond the initial
agreement. The sales team did not agree to this allegation and blamed the services team that
they themselves had agreed to service the customers extended demands for which the sales
team should not be held responsible. The sales team also pointed out that the overall C-SAT
(Customer Satisfaction) for existing customers had come down due to call-ageing. Support
team declared that C-SAT had come down due to hardware and software resources not being
available in time from the logistics people in the backoffice operations. The backoffice team
promptly pointed out to the finance team saying that they did not get approval for purchases
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in time. Finance defended its delays saying that they were restricted by cash flows as well as
their mandate of cutting costs at least by 10%.
While the bickering amongst managers intensified, employees were continuously
demanding for their increments which had been stalled due to recession. This added to the
frustration of the VPs including Monica. Every VP had a resource crunch, and Monica had no
extra resources to give to anyone due to budget constraints. Finally in the 4th
month, Binoy
called a meeting of all VPs. In an unusually abrupt way, Binoy simply announced the roll-
back of the performance-management initiative. Well, guys, I am doing away with this
performance-management system that we piloted some time back. Its causing too much of
unnecessary conflict and bitterness among all of us. I dont think this system works for an
organization such as ours. At 120 crores we are too small for these things. Perhaps we may
adopt the system in the next 3 years when we reach our 500 crore target. We may go back to
our original working style. The Sales team shall continue to work on the variable
compensation plan like earlier. But all others can forget the KPIs and measurements. The
team spirit is more important than a program-driven behaviour. We are an IT consulting
company. Such balanced score-card-oriented methods may be great for manufacturing.
Perhaps not for a services company like us. Let us get back to our earlier ways of working
together as a family and give our complete cooperation to all so that each one of us performs
in the larger interests of the organization was the decisive statement by Binoy.
Binoys talk ended in a deafening silence. Ram looked crestfallen, angry and
humiliated. Kishore looked confused. Aparna was relieved. Rajesh seemed happy. Monica
appeared thoughtful. Though each one tried to hide their emotions, it was all out in the open
when Ram simply said with an audible sigh, I guess the meeting is over, Binoy. Lets hope
we get to 500 crores soon. But itsnot possible without this throttle., blurted out Kishore.
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He was among the worst faring in terms of performance. Such reaction from him surprised
everyone including Binoy. I was the one complaining the most, I agree. But that does not
mean we should throw out the system. I was only unhappy about the way it was implemented
and the amount of load it was exerting on my team. Rajesh seemed to want to object, when
Ram calmly responded, I guess Binoy is right. This cant work here. We will need the system
when we become large enough. The way he said it, Monica instinctively guessed it would
have to be without Ram.
Teaching Note
Money as a control instrument is observed to produce mixed results. It can be effectively
used as an incentive through performance-based pay systems, but not without its pitfalls
(Hertzberg et al.,1959, Eisenberger et al., 1999 ; Banker et.al., 2000). The TechEdge case
brings out various aspects of design and implementation of a performance management
system. It also illustrates how the organizational culture and history which is a part of its
corporate identity have an impact on implementation of such systems (Steiner, 1979 ;
Mintzberg 1994a,b, Mooraj et al., 1999). It may be noted that the KPIs in this case were
decided considering the entire organization as a single monolithic entity. The responsibility
centres were created later, and the same KPIs were adopted for all. The pilot implementation
of the KPI system in the sales team where they introduced a performance-based variable pay
also did not see much success in terms of increase in revenues or profits. It may be interesting
to investigate whether the variable component was not attractive enough or whether the fixed
component itself was above industry standards, so much so that the sales team may have been
satisfied with the fixed component itself. The impact of various leadership styles and issues
related to each style, ranging from leading by example to authoritarian decision making can
also be illustrated using this case. Internal relationships among the managers are also an
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interesting point of study. It is observed that in the absence of any control structures, the
managers are extremely cooperative. As control systems are implemented through KPIs and
performance starts getting measured objectively, managers start behaving with a selfish
motive resulting from competition and driven by the desire for performance-numbers which
may mean different things to different people - ranging from monetary incentives to
recognition and ego satisfaction. Also, as performance starts getting reflected and
documented in numbers, managers may engage in fault finding exercises in the event of
shortfalls from targets which may eventually turn the employees attention away from the
organizational goals. Whether this means that the laissez faire system is better than using
controls for directing managerial behaviour is a point to ponder. The CEOs leadership style
contexts and constraints are very different from the VPs style, constraints and contexts.
Another important point to think about is what criteria should be used for creating
responsibility centres. For most companies, the change from a monolithic organization to a
structure based on responsibility centres needs to be gradual, so that the required
temperamental capacities may be developed so that the people are able to accept and
implement the change (Chenhall and Euske, 2007). It may be a good idea to initially start
with one or two least critical responsibility centres and then gradually expand the system to
other departments, one at a time. Notwithstanding this, it may be noted that there is no single
clear formula for a successful implementation of change. For a big bang approach to change
to be successful, an organization needs to have a dedicated change management team
(Brumback,2003). This change management team needs to guide the organization through the
troubled waters of change by gradually building empathy and engaging people in the
transformation-generating energy, who in turn pump in the energy and vibrancy required for
facilitating enforcement of the new norms (Marks, 2007). The effectiveness of the change
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management team depends on many aspects such as their charisma, vision, persuasiveness,
commitment etc. Apart from having these intrinsic capabilities, change managers further need
to be empowered with the ability and authority to administer rewards and penalties and they
must use these as tools to enable desirable behaviour (Brumback, 2003). Even with the best
of intentions, half hearted approach towards ushering in structural and/or processual changes
in an organization is bound to fall flat. Lastly, growing to a large size is not a pre-requisite
for an organization to create appropriate management systems for itself. In fact, it may be
better to have systems in place while the organization is small and young rather than bring in
radical changes at a later stage (Chenhall and Euske, 2007). It is easier to bring in desirable
transformations in a smaller company and more often than not, a transformed small company
holds the potential of growing into a well organized large business organization.
The TechEdge case may also be used to discuss issues such as efficacy of
performance-based pay and effects of performance-based pay on inter personal relationships
among individuals, teams, and managers. Finer subjects such as self gratification, tendencies
to push personal agenda ahead of organizational goals, agency behaviour, etc. may be
explored as potential results of a mis-managed performance-based incentive system. In
organizations where cross departmental teams are formed for temporary projects, inter-
departmental conflict is usually the most common fallout of performance management
systems. The TechEdge case may be useful to highlight and discuss cause-effect relationships
of such conflicts. The case also brings forth aspects of intrapreneurial leadership. Based on
this case, the CEO -intrapreneur relationship may be highlighted. How should CEOs
empower, encourage and manage ambitious intrapreneurs and how intrapreneurs should
support their CEOs in organizational building may be an interesting point for study.
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