Stop reviewing people. Start reviewing systems.
Value Creation Plan Newsletter #113
Your portfolio company just fired its third Head of Sales in 3 years. The board is furious about the time wasted. The Head of HR promises to find the right candidate this time around…
No one dares to raise the root issue that the previous Sales leads failed because of the same broken Sales to Finance to Product handoff that was never fixed.
Most companies have a system problem, but most investors only get to see the people problem.
The limitations of performance reviews
A few years ago I lived in New York and worked for NBC Universal, a General Electric subsidiary.
GE had a very famous annual performance rating ritual, originally established by Jack Welch to rank and rate all employees. It was a highly structured feedback process, resulting in a bell curve of performance where you are force ranked against your peers. The top ranked get access to advanced training and a fast-track managerial track. The bottom 10% are shown the exit.
This traditional approach to people performance reviews was then found to be deeply flawed and demotivating. It has now changed significantly and companies including GE have moved to real-time feedback and discussions on immediate goals to focus on true constant improvement.
Still, most companies still line up employees once or twice a year to assign ratings, provide feedback and discuss bonuses. It feels rigorous and scientific but it is built on the false premise that individual performance can be separated from the system in which people operate.
The truth is, underperformance in most companies isn’t about individuals. It’s about the design of the system with the incentives, workflows, and feedback loops that shape behavior.
Dr. W. Edwards Deming, the father of modern quality management and statistical process improvement, considered performance appraisals one of management’s Seven Deadly Diseases. In his words:
“A bad system will beat a good person every time.”
Private Equity is especially vulnerable to this trap
Performance reviews in isolation often reward visible effort rather than systemic improvement. The best companies do something different first: they review the system before they review the people.
When margins slip or growth stalls, most organizations under private equity ownership replace the CFO or bring in a new CRO. The new leader inherits the same misaligned incentives and cross-functional friction to then end up stuck in the same trap.
Of course, this doesn’t mean hiring the right people doesn’t matter. A great CFO can redesign the planning cycle; a strong CRO can rebuild the go-to-market engine. But those hires only create value when they work in companies that are open to reshaping systems and processes across departments.
Private equity backed companies are especially vulnerable to this trap. Timelines and board pressure reward speed over structure. Everyone tends to get into firefighting mode. You hear more often“Who failed to deliver?” rather than “What in the system made this outcome inevitable?”.
We have a tendency to be more comfortable discussing people performance, we often don’t know when to start when it comes to systems thinking.
Systems Thinking Is Rare - where to start?
Systems thinking is slower, less visible, and requires cross-functional cooperation. Leaders prefer the optics of “heroic” interventions with new hires or new dashboards over the hard work of redesigning feedback loops and incentives.
One portfolio company I know replaced performance reviews with weekly workflow reviews between Sales, Ops, and Finance to focus on bottlenecks instead of blame. Within six months, time to market reduced by 20%. The fix wasn’t in the individuals, it was in addressing the lack of collaboration that was grinding work to a halt. The best companies run some level of system reviews as part of their operating rhythm.
Focus on your system health
To get started, you need to raise awareness of the issues at exec level, and a good way to do that is through a simple “system health ratio” that helps align the team on the urgency of change.
The health ratio is simple:
System Health Ratio = Value-Add Time / Total Lead Time
Do would do this for 1 or 2 of your critical processes that drive value and capture:
Total Lead Time: From start to finish (include all waiting, approvals, handoffs)
Value-Add Time: Only the hours/days where someone is actually creating something the customer would pay for
Sales example: Consider all the time between “customer says yes” and “we deliver value,” how much is actually productive work versus waiting, approvals, rework, and handoffs?
An enterprise SaaS company closes a $200K deal, then reality bites:
Day 1-3: Contract sits in Legal’s queue
Day 4-7: Legal reviews, sends back redlines
Day 8-11: Sales and Customer Success argue over who owns onboarding
Day 12-14: Finance won’t provision the account until IT creates the license
Day 15-17: IT is backlogged, waiting on Security approval
Day 18-22: Customer Success finally onboards the client
Total lead time: 22 days
Actual value-creating work: 4 days (contract review, system setup, onboarding)
Your System Health Ratio: 18%, which means 82% of the elapsed time added limited value in poorly designed system processes.
What does good look like
It really varies by industry, and this is what I have come across in past experiences:
In professional services firm, you are lucky to get to 20% health ratio.
In tech-enabled businesses you are looking at a 30-50% range.
In digital pure plays you should be able to push above 50%.
Would love to hear about your own experiences and stats!
Getting the conversation started at board level
At board level, there are some exploratory questions that can help the CEO understand the importance of truly understanding the system issues:
Which two departments blame each other most often?
What incentive misalignment causes it?
If we removed one layer of approvals to improve velocity in the company, which one would that be?
Exploratory questions then open the door to doing proper process reviews. It takes time to embed that cultural change, but when you successfully tackle one bottleneck you will start getting higher engagement from employees on this and it becomes easier to make system reviews as routine as financial reviews.
If you change the incentives and process design you can change the behaviour faster than changing the individual.
In summary: Average companies review people to fix a problem. Great companies also review systems to drive value creation in a scalable way.
Stop blaming the players and start redesigning the game,
Juan
Fantastic read, thank you. If AI mostly speeds up value-creating work, the health ratio may not move much when the real drag is governance and handoffs. It might even drop if value-add time shrinks but waiting doesn’t. But AI could also attack the idle time via triage, approval bypass, and cleaner handoffs. Would you frame this as two separate workstreams, or one combined system redesign effort with AI as a lever?