7 step problem solving process mckinsey

Master the 7-Step Problem-Solving Process for Better Decision-Making

Discover the powerful 7-Step Problem-Solving Process to make better decisions and achieve better outcomes. Master the art of problem-solving in this comprehensive guide. Download the Free PowerPoint and PDF Template.

StrategyPunk

Introduction

Mastering the art of problem-solving is crucial for making better decisions. Whether you're a student, a business owner, or an employee, problem-solving skills can help you tackle complex issues and find practical solutions. The 7-Step Problem-Solving Process is a proven method that can help you approach problems systematically and efficiently.

The 7-Step Problem-Solving Process involves steps that guide you through the problem-solving process. The first step is to define the problem, followed by disaggregating the problem into smaller, more manageable parts. Next, you prioritize the features and create a work plan to address each. Then, you analyze each piece, synthesize the information, and communicate your findings to others.

By following this process, you can avoid jumping to conclusions, overlooking important details, or making hasty decisions. Instead, you can approach problems with a clear and structured mindset, which can help you make better decisions and achieve better outcomes.

In this article, we'll explore each step of the 7-Step Problem-Solving Process in detail so you can start mastering this valuable skill. At the end of the blog post, you can download the process's free PowerPoint and PDF templates .

Step 1: Define the Problem

The first step in the problem-solving process is to define the problem. This step is crucial because finding a solution is only accessible if the problem is clearly defined. The problem must be specific, measurable, and achievable.

One way to define the problem is to ask the right questions. Questions like "What is the problem?" and "What are the causes of the problem?" can help. Gathering data and information about the issue to assist in the definition process is also essential.

Another critical aspect of defining the problem is identifying the stakeholders. Who is affected by it? Who has a stake in finding a solution? Identifying the stakeholders can help ensure that the problem is defined in a way that considers the needs and concerns of all those affected.

Once the problem is defined, it is essential to communicate the definition to all stakeholders. This helps to ensure that everyone is on the same page and that there is a shared understanding of the problem.

Step 2: Disaggregate

After defining the problem, the next step in the 7-step problem-solving process is to disaggregate the problem into smaller, more manageable parts. Disaggregation helps break down the problem into smaller pieces that can be analyzed individually. This step is crucial in understanding the root cause of the problem and identifying the most effective solutions.

Disaggregation can be achieved by breaking down the problem into sub-problems, identifying the contributing factors, and analyzing the relationships between these factors. This step helps identify the most critical factors that must be addressed to solve the problem.

A tree or fishbone diagram is one effective way to disaggregate a problem. These diagrams help identify the different factors contributing to the problem and how they are related. Another way is to use a table to list the other factors contributing to the situation and their corresponding impact on the issue.

Disaggregation helps in breaking down complex problems into smaller, more manageable parts. It helps understand the relationships between different factors contributing to the problem and identify the most critical factors that must be addressed. By disaggregating the problem, decision-makers can focus on the most vital areas, leading to more effective solutions.

Step 3: Prioritize

After defining the problem and disaggregating it into smaller parts, the next step in the 7-step problem-solving process is prioritizing the issues that need addressing. Prioritizing helps to focus on the most pressing issues and allocate resources more effectively.

There are several ways to prioritize issues, including:

• Urgency: Prioritize issues based on their urgency. Problems that require immediate attention should be addressed first.
• Impact: Prioritize issues based on their impact on the organization or stakeholders. Problems with a high impact should be given priority.
• Resources: Prioritize issues based on the resources required to address them. Problems that require fewer resources should be dealt with first.

It is important to involve stakeholders in the prioritization process, considering their concerns and needs. This can be done through surveys, focus groups, or other forms of engagement.

Once the issues have been prioritized, developing a plan of action to address them is essential. This involves identifying the resources required, setting timelines, and assigning responsibilities.

Prioritizing issues is a critical step in problem-solving. By focusing on the most pressing problems, organizations can allocate resources more effectively and make better decisions.

Step 4: Workplan

After defining the problem, disaggregating, and prioritizing the issues, the next step in the 7-step problem-solving process is to develop a work plan. This step involves creating a roadmap that outlines the steps needed to solve the problem.

The work plan should include a list of tasks, deadlines, and responsibilities for each team member involved in the problem-solving process. Assigning tasks based on each team member's strengths and expertise ensures the work is completed efficiently and effectively.

Creating a work plan can help keep the team on track and ensure everyone is working towards the same goal. It can also help to identify potential roadblocks or challenges that may arise during the problem-solving process and develop contingency plans to address them.

Several tools and techniques can be used to develop a work plan, including Gantt charts, flowcharts, and mind maps. These tools can help to visualize the steps needed to solve the problem and identify dependencies between tasks.

Developing a work plan is a critical step in the problem-solving process. It provides a clear roadmap for solving the problem and ensures everyone involved is aligned and working towards the same goal.

Step 5: Analysis

Once the problem has been defined and disaggregated, the next step is to analyze the information gathered. This step involves examining the data, identifying patterns, and determining the root cause of the problem.

Several methods can be used during the analysis phase, including:

• Root cause analysis
• Pareto analysis
• SWOT analysis

Root cause analysis is a popular method used to identify the underlying cause of a problem. This method involves asking a series of "why" questions to get to the root cause of the issue.

Pareto analysis is another method that can be used during the analysis phase. This method involves identifying the 20% of causes responsible for 80% of the problems. By focusing on these critical causes, organizations can make significant improvements.

Finally, SWOT analysis is a valuable tool for analyzing the internal and external factors that may impact the problem. This method involves identifying the strengths, weaknesses, opportunities, and threats related to the issue.

Overall, the analysis phase is critical for identifying the root cause of the problem and developing practical solutions. By using a combination of methods, organizations can gain a deeper understanding of the issue and make informed decisions.

Step 6: Synthesize

Once the analysis phase is complete, it is time to synthesize the information gathered to arrive at a solution. During this step, the focus is on identifying the most viable solution that addresses the problem. This involves examining and combining the analysis results for a clear and concise conclusion.

One way to synthesize the information is to use a decision matrix. This involves creating a table that lists the potential solutions and the essential criteria for making a decision. Each answer is then rated against each standard, and the scores are tallied to arrive at a final decision.

Another approach to synthesizing the information is to use a mind map. This involves creating a visual representation of the problem and the potential solutions. The mind map can identify the relationships between the different pieces of information and help prioritize the solutions.

During the synthesis phase, it is vital to remain open-minded and consider all potential solutions. Involving all stakeholders in the decision-making process is essential to ensure everyone's perspectives are considered.

Step 7: Communicate

After synthesizing the information, the next step is communicating the findings to the relevant stakeholders. This is a crucial step because it helps to ensure that everyone is on the same page and that the decision-making process is transparent.

One effective way to communicate the findings is through a well-organized report. The report should include the problem statement, the analysis, the synthesis, and the recommended solution. It should be clear, concise, and easy to understand.

In addition to the report, a presentation explaining the findings is essential. The presentation should be tailored to the audience and highlight the report's key points. Visual aids such as tables, graphs, and charts can make the presentation more engaging.

During the presentation, it is essential to be open to feedback and questions from the audience. This helps ensure everyone agrees with the recommended solution and addresses concerns or objections.

Effective communication is vital to ensuring the decision-making process is successful. Stakeholders can make informed decisions and work towards a common goal by communicating the findings clearly and concisely.

The 7-step problem-solving process is a powerful tool for helping individuals and organizations make better decisions. By following these steps, individuals can identify the root cause of a problem, prioritize potential solutions, and develop a clear plan of action. This process can be applied to various scenarios, from personal challenges to complex business problems.

Through disaggregation, individuals can break down complex problems into smaller, more manageable parts. By prioritizing potential solutions, individuals can focus their efforts on the most impactful actions. The work step allows individuals to develop a clear action plan, while the analysis step provides a framework for evaluating possible solutions.

The synthesis step combines all the information gathered to develop a comprehensive solution. Finally, the communication step allows individuals to share their answers with others and gather feedback.

By mastering the 7-step problem-solving process, individuals can become more effective decision-makers and problem-solvers. This process can help individuals and organizations save time and resources while improving outcomes. With practice, individuals can develop the skills to apply this process to a wide range of scenarios and make better decisions in all areas of life.

7-Step Problem-Solving Process PPT Template

Free powerpoint and pdf template, executive summary: the 7-step problem-solving process.

The 7-Step Problem-Solving Process is a robust and systematic method to help individuals and organizations make better decisions by tackling complex issues and finding practical solutions. This process comprises defining the problem, disaggregating it into smaller parts, prioritizing the issues, creating a work plan, analyzing the data, synthesizing the information, and communicating the findings.

By following these steps, individuals can identify the root cause of a problem, break it down into manageable components, and prioritize the most impactful actions. The work plan, analysis, and synthesis steps provide a framework for developing comprehensive solutions, while the communication step ensures transparency and stakeholder engagement.

Mastering this process can improve decision-making and problem-solving capabilities, save time and resources, and improve outcomes in personal and professional contexts.

Please buy me a coffee.

I'd appreciate your support if my templates have saved you time or helped you start a project. Buy Me a Coffee is a simple way to show your appreciation and help me continue creating high-quality templates that meet your needs.

7-Step Problem-Solving Process PDF Template

7-step problem-solving process powerpoint template.

Lidl SWOT Analysis: Free PPT Template and In-Depth Insights

Discover Lidl's strengths, weaknesses, opportunities, and threats with our free PowerPoint template. This in-depth SWOT analysis provides valuable insights to help you understand Lidl's market position and strategic direction.

Global Bites: PESTLE Insights into Nestlé (Free PPT)

Download our free PPT template for in-depth PESTLE insights into Nestlé's global strategy. Learn more today!

PESTLE Analysis: Decoding Reddit's Landscape (Free PPT)

Decode Reddit's global influence with our free PowerPoint PESTLE Analysis. Explore the hub of vibrant discussions and ideas.

Navigating the Terrain: A PESTLE Analysis of Lululemon (Free PowerPoint)

Explore Lululemon's business terrain with our free PESTLE analysis PowerPoint. Instant access!

How to master the seven-step problem-solving process The McKinsey Podcast

Structured problem solving can help address complex business challenges.

• Episode Website
• More Episodes
• 2024 McKinsey & Company

More by McKinsey

Skip Prichard | Leadership Insights

Ideas, Insight & Inspiration

7 Steps to Problem Solving

Bulletproof Problem Solving

Complex problem solving is the core skill for 21st century teams. It’s the only way to keep up with rapid change. Winning organizations now rely on nimble, iterative problem solving, rather than the traditional planning processes. I had the opportunity to speak with Charles Conn and Robert McLean, two McKinsey alums who share a seven-step systematic approach to creative problem solving that will work in any field or industry. Their new book is BULLETPROOF PROBLEM SOLVING: The One Skill That Changes Everything .

New Skills Required

Would you share a little about the evolution of managerial skills and what skills are needed in the current era?

This new era of focus on creative problem solving has been ushered in by massive disruption of the old order in business and society. New business models are rapidly emerging from revolutionary Internet, machine learning, and bioscience technologies that threaten the status quo in every field. Technology change is speeding business up and providing an edge for disruptive innovators.

As a consequence of accelerating change, the old model of managerial skill development and application is no longer effective.  It used to be that you could learn the core skills for a career in college and graduate school – think management, accounting, law – and then apply it over forty years.  Strategic planning in business assumed an existing playing field and known actors. Today savvy business leaders are prioritizing complex problem solving skills in hiring rather than old domain knowledge, and emphasizing agile team problem solving over traditional planning cycles. This approach rewards the ability to see and quickly respond to new opportunities and threats over the slower traditional big company departmental responses.

We are seeing growing awareness of this. David Brooks of the New York Times said recently, “It doesn’t matter if you are working in the cafeteria or the inspection line of a plant, companies will only hire people who can see problems and organize responses.” And The World Economic Forum in its Future of Jobs Report placed complex problem solving at #1 in its top 10 skills for jobs in 2020.

For those who feel ill-prepared for this era, what are the best ways to acquire the needed skills?

Unfortunately, despite an increasing recognition in the business press that problem solving is the core 21 st century skill, our universities and graduate schools rarely teach systematic problem solving or modern team decision making skills. This is starting to change, and we are seeing that in moves by the OECD and Council for Aid to Education (CAE) which administers the College Learning Assessment plus test.

The OECD Program for International Student Assessment (PISA) started testing individual problem solving skills in 2012 and added collaborative problem solving skills in the 2015 assessments. One of the interesting early findings is that to teach students to become better problem solvers involves other capabilities than simply teaching reading, mathematics, and science literacy well. Capabilities such as creativity, logic, and reasoning are essential contributors to students becoming better problem solvers. That is what this book is about.

You share seven steps in your bulletproof problem solving approach. How did you develop it?

The 7-steps approach to problem solving has its roots in the hypothesis-driven structure of the scientific method, but was developed into an approach for business problem solving at McKinsey & Company.  Charles wrote one of the early internal documents to systematic problem solving in McKinsey, and both of us have developed the approach further for application more broadly to personal, social and environmental problems at all scales in later work with the Nature Conservancy, the Gordon & Betty Moore Foundation, the Rhodes Trust and in start-up companies where we are investors.

1: Define the problem.

2: Disaggregate.

3: Prioritize.

4: Workplan.

5: Analyze.

6: Synthesize.

7. Communicate.

Is there one part of it normally missed or not focused on as much as it should be?

What are some of the best methods for overcoming biases in decision making?

The most important biases to address are confirmation bias, anchoring bias, and loss aversion.  These are deep seated in our psyches and often reinforced by traditional hierarchies. We use some simple team approaches to fight bias, including perspective-taking (the act of modeling another team member’s assertion or belief to the point that you can describe it as compellingly as the other), role playing (where you act out one side or the other of difficult choice, sometimes in a red team/blue team structure), team distributive voting on analyses and solution paths (one approach we have used is to assign each team member 10 votes, represented by sticky notes, and have each team member use them to vote on their favorite analysis, allowing cumulative or bullet voting, with the most senior person voting last, so as not to bias the choices of more junior members). The most important team norm to encourage is the obligation to dissent, which means every team member is required to verbally contest decisions when they disagree, regardless of seniority.

What do leadership teams most struggle with in the new environment?

The biggest challenge is the speed of change, which pressures all the management approaches we were taught in business school, particularly around planning cycles.  The leadership teams that get good at this typically form and re-form cross-functional teams to deploy on issues as they arise, rather than waiting for conventional departmental responses.  And they are comfortable using rapid design cycles to prototype and test products/services in the market, rather than depending on traditional marketing analysis.

How will AI impact the bulletproof approach?

We believe good organization problem solving will increasingly utilize advances in artificial intelligence to predict patterns in consumer behavior, disease, credit risk, and other complex phenomena.  Machine learning is getting better at pattern recognition than most humans. But that isn’t the whole story. To meet the challenges of the twenty-first century, mental muscle and machine muscle have to work together. Machine learning frees human problem solvers from computational drudgery and amplifies the pattern recognition required for faster organizational response to external challenges. For this partnership to work, twenty-first century organizations need staff who are quick on their feet, who learn new skills quickly, and who attack emerging problems with confidence.

For more information, see BULLETPROOF PROBLEM SOLVING: The One Skill That Changes Everything .

Continue Reading

Popular posts.

Learn the important power of prioritizing sleep

Subscribe today and receive a free e-book.  Get  Your Guide to a Solid Night of Sleep   free  when you sign up to receive blog updates via email.

Thank you! Please check your inbox to confirm your subscription.

Pin it on pinterest.

• Print Friendly

Similar to The McKinsey Podcast

1 HBR IdeaCast

Harvard business review, 1 what's next with tiffani bova, tiffani bova, 1 outsource accelerator podcast with derek gallimore, derek gallimore, 1 the partnership economy, david a. yovanno and todd crawford, 1 manager tools, manager tools, 1 the entreleadership podcast, ramsey network, 1 the kara goldin show, kara goldin, 1 marketing against the grain, hubspot podcast network, 1 knowledge at wharton, knowledge at wharton, 1 story of the day : npr, podcasts worth a listen, the mckinsey podcast « » how to master the seven-step problem-solving process.

See www.mckinsey.com/privacy-policy for privacy information

304 episodes

How to master the seven-step problem-solving process

The McKinsey Podcast

17,528 subscribers

published 3y ago

All episodes

Welcome to player fm.

Player FM is scanning the web for high-quality podcasts for you to enjoy right now. It's the best podcast app and works on Android, iPhone, and the web. Signup to sync subscriptions across devices.

Quick Reference Guide

The Leading Source of Insights On Business Model Strategy & Tech Business Models

7 Steps To Problem-Solving

The 7 steps to problem-solving is a disciplined and methodical approach to identifying and then addressing the root cause of problems. Instead, a more robust approach involves working through a problem using the hypothesis-driven framework of the scientific method. Each viable hypothesis is tested using a range of specific diagnostics and then recommendations are made.

Table of Contents

Understanding the 7 steps to problem-solving

The core argument of this approach is that the most obvious solutions to a problem are often not the best solutions. 

Good problem-solving in business is a skill that must be learned. Businesses that are adept at problem-solving take responsibility for their own decisions and have courage and confidence in their convictions. Ultimately, this removes doubt which can impede the growth of businesses and indeed employees alike.

Moving through the 7 steps to problem-solving

Although many versions of the 7-step approach exist, the McKinsey approach is the most widely used in business settings. Here is how decision makers can move through each of the steps systematically.

Step 1 – Define the problem

First, the scope and extent of the problem must be identified. Actions and behaviors of individuals must be the focus – instead of a focus on the individuals themselves. Whatever the case, the problem must be clearly defined and be universally accepted by all relevant parties.

Step 2 – Disaggregate the problem

In the second step, break down the problem (challenge) into smaller parts using logic trees and develop an early hypothesis. Here, economic and scientific principles can be useful in brainstorming potential solutions. Avoid cognitive biases, such as deciding that a previous solution should be used again because it worked last time.

Step 3 – Prioritize issues

Which constituent parts could be key driving factors of the problem? Prioritize each according to those which have the biggest impact on the problem. Eliminate parts that have negligible impact. This step helps businesses use their resources wisely.

Step 4 – Plan the analyses

Before testing each hypothesis, develop a work and process plan for each. Staff should be assigned to analytical tasks with unique output and completion dates. Hypothesis testing should also be reviewed at regular intervals to measure viability and adjust strategies accordingly.

Step 5 – Conduct the analyses

In step five, gather the critical data required to accept or reject each hypothesis. Data analysis methods will vary according to the nature of the project, but each business must understand the reasons for implementing specific methods. In question-based problem solving, the Five Whys or Fishbone method may be used. More complicated problems may require the use of statistical analysis . In any case, this is often the longest and most complex step of the process. 

Step 6 – Synthesise the results

Once the results have been determined, they must be synthesized in such a way that they can be tested for validity and logic. In a business context, assess the implications of the findings for a business moving forward. Does it solve the problem? 

Step 7 – Communicate

In the final step, the business must present the solutions in such a way that they link back to the original problem statement. When presenting to clients, this is vital. It shows that the business understands the problem and has a solution supported by facts or hard data. Above all, the data should be woven into a convincing story that ends with recommendations for future action.

Key takeaways

• 7 steps to problem-solving is a methodical approach to problem-solving based on the scientific method.
• Although a somewhat rigorous approach, the strategy can be learned by any business willing to devote the time and resources.
• Fundamentally, the 7 steps to problem-solving method involves formulating and then testing hypotheses. Through the process of elimination, a business can narrow its focus to the likely root cause of a problem.

Key Highlights

• Definition : The 7 Steps to Problem-Solving is a structured methodology rooted in the scientific method. It emphasizes systematic hypothesis testing and data analysis to identify and address the root cause of problems, avoiding surface-level solutions.
• Problem-Solving Skill : Effective problem-solving is a learned skill that fosters responsible decision-making, boosts confidence, and supports business growth .
• Define the Problem : Clearly outline the problem’s scope and impact, focusing on actions and behaviors rather than individuals.
• Disaggregate the Problem : Break down the problem into smaller parts using logic trees and form early hypotheses. Avoid biases from past solutions.
• Prioritize Issues : Identify key driving factors of the problem and prioritize them by impact. Eliminate parts with minimal impact to allocate resources efficiently.
• Plan the Analyses : Develop work and process plans for hypothesis testing, assigning staff and setting completion dates. Regularly review and adjust strategies.
• Conduct the Analyses : Gather critical data to accept or reject hypotheses. Use methods like Five Whys, Fishbone diagrams, or statistical analysis .
• Synthesize the Results : Combine and analyze results to determine their validity and implications for the business . Assess if the problem is solved.
• Communicate : Present solutions that link back to the original problem statement, supported by facts. Create a compelling story ending with recommendations.
• The 7 Steps to Problem-Solving is based on the scientific method.
• It requires a structured approach to formulating and testing hypotheses.
• Businesses willing to invest time and resources can learn and apply this method effectively.

Connected Decision-Making Frameworks

Cynefin Framework

SWOT Analysis

Personal SWOT Analysis

Pareto Analysis

Failure Mode And Effects Analysis

Blindspot Analysis

Comparable Company Analysis

Cost-Benefit Analysis

Agile Business Analysis

SOAR Analysis

STEEPLE Analysis

Pestel Analysis

DESTEP Analysis

Paired Comparison Analysis

Related Strategy Concepts:  Go-To-Market Strategy ,  Marketing Strategy ,  Business Models ,  Tech Business Models ,  Jobs-To-Be Done ,  Design Thinking ,  Lean Startup Canvas ,  Value Chain ,  Value Proposition Canvas ,  Balanced Scorecard ,  Business Model Canvas ,  SWOT Analysis ,  Growth Hacking ,  Bundling ,  Unbundling ,  Bootstrapping ,  Venture Capital ,  Porter’s Five Forces ,  Porter’s Generic Strategies ,  Porter’s Five Forces ,  PESTEL Analysis ,  SWOT ,  Porter’s Diamond Model ,  Ansoff ,  Technology Adoption Curve ,  TOWS ,  SOAR ,  Balanced

Read Next:  Mental Models ,  Biases ,  Bounded Rationality ,  Mandela Effect ,  Dunning-Kruger Effect ,  Lindy Effect ,  Crowding Out Effect ,  Bandwagon Effect ,  Decision-Making Matrix .

• Business Models
• Business Strategy
• Marketing Strategy
• Business Model Innovation
• Platform Business Models
• Network Effects In A Nutshell
• Digital Business Models

More Resources

About The Author

Gennaro Cuofano

Discover more from fourweekmba.

Subscribe now to keep reading and get access to the full archive.

Type your email…

Continue reading

• 70+ Business Models
• Airbnb Business Model
• Amazon Business Model
• Apple Business Model
• Google Business Model
• Facebook [Meta] Business Model
• Microsoft Business Model
• Netflix Business Model
• Uber Business Model

Use This 7-Step McKinsey Framework to Solve Any Problem

Too Long; Didn't Read

This Twitter Thread is by Julia MacDonald @julia_m_mac (source: 12-16-2022 ). MacDonald is a Fractional Growth Executive.

At McKinsey, we charged $400k+ per presentation. Here’s the simple 7-step framework we used (steal it for free) 🧵: McKinsey is paid to solve complex problems. They created a process that helps find solutions: The Hypothesis-Driven Framework. Let’s dive in. 👇 Start by Gathering Facts. Most people skip this step. That's a huge mistake. Take a few hours to understand the problem. Talk to a couple of experts. Ask: • What are the causes? • How often does it happen? • How solutions have you tried? Now you're ready to start solving.

Generate an Initial Hypothesis. Problems remain unsolved when people look for a solution without direction. Ask yourself: “Based on initial facts, what do I believe is causing this?” That’s your Initial Hypothesis. Build an Issue Tree Solving one big problem is hard. Solving 20 small problems is easy. Break the issue down into its smallest components: 1: Profits are down 1.1: Revenue is down 1.1.1: 30% of our clients moved to our cheap product 1:1.1.1: That product was recently upgraded

Understand the Big Picture. You’ve analyzed 20 micro problems. Now “zoom-out” again. Take a look at the big picture. • What’s causing the main problem? • How can this be fixed? Summarize into one clear recommendation Now you are ready to present.

Set the Stage. People don’t know how you came up with your recommendation. The S.P.Q.A. framework helps set the stage: • Situation: what’s the problem? • Problem: why is this a problem? • Question: client’s main question • Answer: what do you recommend Example:

Convince the Stakeholders Persuasive presentations allow McKinsey to charge what they do. They use the Pyramid Principle: • Re-state the recommendation • Show supporting arguments • Finish with evidence The resulting “pyramid” will be easy to understand and hard to dispute

Make the Impact Clear Explain how the problem will go away after you implement the solution: • Whats the step-by-step solution plan? • What will the outcome look like? • What steps can be taken for extra impact? That's how you persuade the client AND upsell new engagements. TL:DR Use this 7-step McKinsey framework to solve any problem: • Gather Facts • Build an Issue Tree • Make the Impact Clear • Set the Stage with SPQA • Understand the Big Picture • Formulate an Initial Hypothesis • Persuade with Pyramid Principle Thanks for reading! If you enjoyed this, 2 requests: Drop me a follow @julia_m_mac for ideas on business growth, startups, leadership 2. Share the thread so others can read Just click below and up you go 👇

Feature image generated via HackerNoon Stable Diffusion Prompt of ‘Use This 7-Step McKinsey Framework to Solve Any Problem’

About Author

THIS ARTICLE WAS FEATURED IN ...

RELATED STORIES

"The McKinsey Way" Book: A Comprehensive Summary

The McKinsey Way is a book by Ethan M. Rasiel , published in 1999, about what McKinsey&Company does, how McKinsey organizes and what working at McKinsey is like.

20 years after publication, the book still holds significant value, offering timeless insights into the world’s most prestigious management consulting firm: McKinsey&Company. In this article, we’ll provide a detailed summary of all the lessons and insights from The McKinsey way . We’ll re-organize the content and occasionally insert supporting insights to make it more friendly to the reader.

The McKinsey Way has 5 Parts (Sections) with 180 pages:

• Part 1: The Problem Solving Methodology of McKinsey

Part 2: Logistics of how a McKinsey project works

Part 3: insights into the actual works of consultants, part 4: how to excel as a junior consultant, part 5: exit opportunities and life after mckinsey.

Table of Contents

Part 1: The McKinsey problem-solving methodology

The McKinsey problem-solving process can be summarized in the 5 steps: define the problems, find the root cause, use “hypothesis-driven” process, analyze with “issue tree” and propose solutions.

1. Define the problem: Every consulting project revolves around a “problem”. But the “problem” is NOT always the problem!

One symptom may have different causes and we as doctors should never rely on the patient to diagnose.

So, always dig deeper. Get facts. Asks questions. Poke around. Challenge the client… until you find the real problem.

2. Find the root cause: Don’t jump straight to the solution, because you might just be fixing the symptoms. The problem will come back if the root cause is not properly dealt with.

3. Use “hypothesis-driven” process: Make educated guesses of possible root-cause A B C and test with data (a.k.a: facts). We’ll sometimes call this a fact-based process.

4. Break down and structure the analysis with the “ issue tree ” framework: A “hypothesis-driven” process may take forever as there are millions of possible root-causes. We need to test hypotheses from the top to the bottom of the issue tree – a top-down fashion. These issue trees need to be MECE.

5. Propose solutions: When the root causes are identified, consultants propose solutions targeting them directly.

A few notes when using this methodology

No.1: Don’t force the facts to say what you want.

When you propose or work extensively with a running hypothesis , it’s easy to get emotionally attached and turn the problem-solving process into a proving exercise. So keep an open mind and listen to what the data have to say.

No.2: Let the hypothesis come to you naturally.

You will not be able to form an initial hypothesis every time. The clients may not even know their problems. The scope of the project is often large and vague. So, dive in, gather facts, conduct analyses, and the hypotheses will show themselves.

No.3: Don’t reinvent the wheel.

Business problems often resemble each other more than they differ. With suitable techniques, you can apply what you and the firm learned from other projects. After all, one of the values consulting firms bring is to provide the “best practice” – what the top players in the game are doing

No.4: Make sure your solution fits your client.

The most brilliant solution is useless without proper implementation. So know your client’s weaknesses, strengths, and capabilities and tailor your solutions accordingly.

No.5: Be mindful of politics.

There are always politics in projects. Many times, McKinsey gets involved in fights between corporate factions. This creates friction that prevents you from doing your job (late data; rejected interviews, etc.).

So think about how your solutions affect the players in an organization and always build a consensus along the way. If consensus requires you to change your solution, try to compromise. It’s no good devising the ideal solution if the client refuses to accept it.

It’s highly recommended that you refer to the following video for a general view on how McKinsey organizes and a better understanding of the insights from this part.

There is a whole system behind how McKinsey solve a business problem. In this part of The McKinsey Way, Ethan Rasiel describes how the company sells their projects, builds a team and manages its hierarchy.

Selling a study/project

McKinsey typically does not sell. The firm does marketing through a constant stream of books, articles, and scholarly journals like the McKinsey Quarterly, etc. The Firm also invites organize press releases and generates quite some coverage by journalists.

These publications help McKinsey Partners build and nurture a vast network of informal contacts with potential clients. And when a problem arises, the client knows who to contact.

Assembling a team

Almost all projects need a full-time team of consultants. Typically, the process goes like this:

• The ED (a.k.a: Project Owner) signs a contract with the client
• The ED hires an EM from within the McKinsey network, from any offices (a.k.a: Project CEO)
• The EM then hires a group of staff, consisting of BAs (a.k.a: Business Analyst) and Associates.

It’s solely the EM’s responsibility to keep the team happy and functional. McKinsey projects have a few common practices to do so:

• A monthly “team-bonding”. 
• A “team temperature” (a.k.a: morale) weekly survey.

The hierarchy

The chain of command in McKinsey is very clear and strict. So is the responsibility funnel. In the ED’s eyes, the EM is responsible for everything in the project. In the EM eyes, the BA is responsible for everything within the assigned workstream. Even when a BA messes things up, to the ED, it’s not the BA’s fault, but the EM.

To provide the best solution for the clients, consultants need tons of skills in preparing presentations; conducting researchs and interviews; presenting the final products in a simple structure; communicating with clients; and brainstorming.

Making presentations, a.k.a: the final deliverable documents

Most consultants spend a big portion of their time making presentations (often in PowerPoint). Utilize the support team! Keep it structured, from top to bottom, from end to end.

Note that there are diminishing marginal returns to your effort, meaning that the last miles toward perfection are always much harder than the beginning. So, resist the temptation to tweak your presentation at the last minute. Try to assess its gains vs those of a good night’s sleep for you and the supporting cast.

Visualizing data with charts and exhibits

We subconsciously admire the people who talk in sophisticated language, so we make complex charts. However, simple and easy-to-follow charts go a long way in consulting. Charts are just a means of getting your messages across, not a Ph.D. project.

Also, don’t forget to:

• Write clear chart titles
• List out units of measurement in all axes
• Mark legends and side notes
• Provide data sources

Managing internal communications

• Over-communication is always better. Keep that information flowing. Make sure that your team is up to date with at least the broad outlines of your workstream and your boss up to date with your team’s progress. There are many channels for this: email, voicemail, messaging, small talks during cigarette breaks, meetings, etc.
• Keep your communication brief, yet comprehensive and structured.
• Look over your shoulder – always. You never know who is listening. Remember that your client’s confidentiality is a must.

Working with clients

This is a big one as the true hierarchy at McKinsey is “Client -> Firm -> and then You”. The client is your biggest boss.

There are many tips on client management, but the general principle is to bring the client to your side. You never win by opposing the client. Remind them about mutual benefits. Do it everyday!

Some of the client members can be “liabilities”. There are 2 types of them:

• the merely “useless”.
• the hostile ones. 

With both types, the number 1 option is to subtly trade them out of your realm. When that is not possible, the next best option is to play ignorant. Leak out information only with the right “secret audience”.

No matter what, engage the client members in the process. The more they feel everybody is on the same boat, the more they would support you.

You should also get buy-ins throughout the organization along the process. Every important party has to agree with you. Ideally, the final document has already been discussed many times through many rounds with the client before the official presentation.

Doing research

Don’t reinvent the wheel! Whatever you are doing, chances are that someone, somewhere has done something similar. Building upon someone’s work is the best way to save time and energy while achieving the highest standard.

Besides, here are some research tips:     

• Start with the annual report. All public companies have them available on their website.
• Look for abnormal patterns (things that are especially good or bad). That’s where all the insights lie.
• Last but not least, look for the best practice. Find out what the best performers in the field are doing and learn from them.

Conducting interviews

This is one of the most effective ways to gather qualitative facts during a project. You will find yourself interviewing multiple industry and function experts as well as key client leaders.

Here are a few tips:

• Be prepared. Know exactly what you want to get out of it. Know as much as you can about the interviewee. Writing an interview brief for yourself is not a bad idea.
• If possible, have the interviewee’s boss set up the meeting.
• Start with some general and open-ended questions then move on to specific ones. Let the content flow naturally.
• Sometimes, it’s useful to use the indirect style. Take time to make the interviewee comfortable with you and the interview process.   
• Include some questions you know the answer to. This gives insights into the interviewee’s style, knowledge, and honesty.   
• Don’t ask too much. Focus on what you really need (what you prioritize in the interview brief).
• Listen and let the interviewee know you are doing so. 
• Paraphrase what you hear in your own words. Confirm whether you understand correctly. This also gives chances for the interviewee to add or amplify important points.
• Near the end, use this last trick to flush out any possible missing insights: “Is there anything else you would like to tell or any question I forgot to ask…?”.       
• Adopt the Columbo tactic. Wait until a day or two passes, then drop by the interviewee’s office. “I was just passing by and remembered a question I forgot to ask”. This is a less threatening way to keep the conversation going.
• Lastly, always write a thank-you note. A short and sincerely one always does the work.

Brainstorming at McKinsey

In McKinsey, we often use the word “Problem-Solving” interchangeably with brainstorming sessions. It’s a very topic-focus meeting within the McKinsey team, consisting of the consultant in-charge, the EM, and sometimes even the ED and experts.

Before the session, prepare in advance as much supporting data as possible. It will come handy in the process.Inside the White room: Start with tabula rasa — a clean slate. When you get your team into the room, leave your preconceptions at the door. Bring in only the facts, and find new ways of looking at them.

Management consulting is an interesting yet challenging job. To survive and thrive at McKinsey, here are some advices for you:

Tip 1: Find your own mentor

At McKinsey, every consultant is officially assigned a mentor, who may not be in the same office. How much you benefit from the official mentor is pretty much a matter of luck. If you want great guidance, you have to go out and get your own. Get a few too, don’t stick to just one.

Tip 2: Survive the road                                 

Business travel can be exhausting and difficult, here are some note you can take to deal with it:

• Look at business travel as an adventure.
• Do proper planning. These simple logistics can make a big difference
• Treat everyone with tremendous respect

Tip 3: Have a list of items to bring when traveling

Here is the list:

• Clothing: extra shirts or blouses, spare ties, spare shoes, casual clothes, cashmere sweaters
• Tools: writing pad, copy of whatever you send to the client, calculator
• Personal care Items
• Things to keep you organized and in touch

Tip 4: Treat your assistant well

Having a good assistant is a lifeline. Treat them well. Be clear about what you want. Give them room to grow. Take time to train them well. Answering their questions and showing them the ropes.

Tip 5: Have boundaries to keep your life balance

Since you have a large amount of work to cover as a consultant, there is almost no work-life balance. However, if you want a life, lay down some rules. For example:

• Make one day a week to be completely free of work, both physically and mentally. Tell your boss about it! He/she will respect it. And so should you.
• Don’t take work home. When you are home, you are home!
• Plan long ahead, especially when you travel.

Tip 6: The 80 / 20 Rule

80% of the wealth is owned by just 20% of the population. 80% of the output can be produced by 20% of the effort. 20% of the problems can cause 80% of the trouble.

So if you wanna save time and effort. Always try to find those 20% and act upon them!

Tip 7: Don’t try to analyze everything

If you don’t take shortcuts, there is simply too much to do. Be selective. Find the key drivers. Focus on the core problem, then apply analysis. This helps avoid going down blind alleys and boiling the ocean.

Tip 8: The Elevator Test                             

Concise communication is crucial in consulting. Anytime the EM asks you for your workstream status, you have to be able to give him a 30 seconds summary. Short yet insightful. This skill takes practice. Try doing it every day in various contexts!

Tip 9: Pluck the Low-Hanging Fruit 

Solving only part of the problem can still mean increased profits. Those little wins help you and your customers. Try to see such opportunities and grab them first.

Tip 10: Hit singles                           

Get your job and only your job done, don’t try to do the work of the whole team.

It’s impossible to do everything yourself all the time. Even if you manage to pull it off once, you raise unrealistic expectations and once you fail, it is difficult to get back credibility.

Tip 11: Look at the big picture

When you are feeling swamped, take a step back, figure out what you are trying to achieve, and then look at what you are doing. “Does this really matter?”

Probably not! All of these troubles will go away!

Tip 12: Just say “I don’t know”

The firm pounds the concept of professional integrity: Honesty. If you don’t know something, just say “I DON’T KNOW” in an empowering fashion. Admitting that is a lot less costly than bluffing.

“Leaving McKinsey is never a question of whether—it’s a question of when”

There are not many people who stay with McKinsey for their whole career life. In the last part of The McKinsey Way , Ethan Rasiel and other ex-McKinsey consultants share their valuable lessons and memories from working at the company.

• “Structure, structure, structure. MECE, MECE, MECE. Hypothesis-driven, Hypothesis-driven, Hypothesis-driven.” – Former associate in Dusseldorf and San Francisco offices
• “The quality of the people. In the corporate world, the average-caliber employee is far below McKinsey’s least intelligent.” – Wesley Sand
• “What stays with me is the rigorous standard of information and analysis, the proving and double-proving of every recommendation, combined with the high standard of communication both to clients and within the Firm.” – Former associate in the Boston and New York offices
• “When faced with an amorphous situation, apply structure to it.” – Kristin Asleson, New York office, 1990-93; now working in Silicon Valley
• “Execution and implementation are the key. A blue book is just a blue book, unless you do something with it. Getting things done is the most important thing.” – Former EM in the New York office

Scoring in the McKinsey PSG/Digital Assessment

The scoring mechanism in the McKinsey Digital Assessment

Related product

McKinsey Comprehensive Package

Unlock all materials helping you land the next job in McKinsey!

Among MBB firms, people tend to say McKinsey is slightly better than the other two in three factors: prestige, people, practices, and offices

At McKinsey, the salary for entry-level consultants ranges from $90,000 to $110,000/year, while the figure for experienced Associates can go up to $233,000

McKinsey hiring process including 3 phases: resume screening, PST test, and case interview. Each candidate will have to undergo 4-6 interviews during 4-8 weeks

In the spotlight: Performance management that puts people first

In volatile times, companies are under outsize pressure to respond to economic, technological, and social changes. Effective performance management systems can be a powerful part of this response. They’re designed to help people get better in their work, and they offer clarity in career development and professional performance. And then there’s the big picture: companies that focus on their people’s performance are 4.2 times more likely to outperform their peers, realizing an average 30 percent higher revenue growth and experiencing attrition five percentage points lower (see sidebar, “About the research”). Companies that focus on their people and organizational health also reap dividends in culture, collaboration, and innovation—as well as sustained competitive performance. 1 Alex Camp, Arne Gast, Drew Goldstein, and Brooke Weddle, “ Organizational health is (still) the key to long-term performance ,” McKinsey, February 12, 2024.

Today, company leaders lack full confidence in most performance management systems—despite these systems’ importance and value—citing fragmentation, the existence of informal or “shadow” systems, misalignment, and inconsistency as common challenges. What sort of systems fit the company’s needs? Should rewards focus on individual or team goals? Where are limited resources best spent?

About the research

The insights in this article draw from a comprehensive review of industry best practices, including the experiences of more than 30 global companies across sectors, as well as research by the McKinsey Global Institute (MGI) into how companies gain a competitive edge and deliver top-tier financial results. Specifically, MGI studied more than 1,800 companies with revenues of greater than $100 million. 1 Performance through people: Transforming human capital into competitive advantage ; MGI, February 2, 2023. The article’s author team also completed a study of more than 50 companies’ performance management practices, aiming to provide a nuanced understanding of how organizations approach and execute performance management.

An understanding of the four basic elements of performance management—goal setting, performance reviews, ongoing development, and rewards—provides a foundation for answering these questions and more. Of course, the right performance management system will vary by organization. Leaders who embrace a fit-for-purpose design built on a proven set of core innovations can build motivational and meritocratic companies that attract and retain outstanding employees.

How leading companies approach performance management

Our research across a set of global companies found that despite widespread agreement about certain performance management best practices—such as offering regular feedback outside of an annual review—many companies remain stuck in old ways of working. There are many design choices that can determine the characteristics of a performance management system, but some are more critical than others (Exhibit 1). These decisions—and how they interact with each other—will help determine how the performance management system maps onto the company’s overarching strategy.

Goal setting

Two critical design decisions relate to goal setting: the number of performance management systems used and whether to prioritize individual or team performance goals.

Degree of differentiation. The simplest and best option for many organizations is a single performance management system to address the needs of all employees. However, in more-complex companies with several employee groups, more than one system might be necessary. Manufacturing companies, for instance, may employ three performance management systems with few commonalities: one for sales, in which sales agents are provided direct incentives for the number of goods sold; one for production, with a monthly rhythm focusing on improving core production KPIs; and one for executives, in which the focus might be related more to annual objectives and leadership behavior.

Considerations for these choices often revolve around the nature of the work and the ease of quantifying outputs. For roles in which performance can be easily measured through tangible metrics, such as sales and production, a system emphasizing quantifiable outcomes may be more suitable. On the other hand, for roles involving tasks that are less easily measured, such as those in R&D, a performance management system should be designed to accommodate the nuanced and less tangible aspects of their contributions.

The nucleus of performance. Many organizations have traditionally placed a strong emphasis on individual performance, rooted in the belief that individual accountability drives results. In recent years, there has been a noticeable shift toward recognizing the importance of the team in achieving overall organizational success.

At a large European online retailer, for instance, the focus of performance management has been put on the team rather than the individual. Goals are set for the team, feedback is given to the team, and the performance appraisal is conducted for the team. Example performance metrics for teams can include project completion timelines, cross-functional collaboration success, and the achievement of collective milestones. On an individual level, the company assesses performance using a sophisticated model that prescribes skills and behaviors for 14 job families, each with up to four hierarchies.

Another prominent company in the automotive industry underscores the team as the cornerstone of performance. The teams could be defined along both functional and organizational lines—such as the division or the business line—and the company linked the organizational lines’ performance to the individuals’ compensation.

Performance reviews

Performance reviews raise the question of how to balance the individual objectives and their appraisal with respect to the “what” and the “how,” as well as whether review responsibility should lie primarily with managers, committees, or a combination of both.

Performance formula: What versus how. The balance between setting objectives and assessing what employees accomplish and how they go about their work is the central focus here. To measure the “what,” reviews have traditionally used KPIs, concentrating on quantifiable metrics and specific targets and emphasizing measurable outcomes and achievements. 2 For more on metrics best practices and how they can help leaders avoid pitfalls in their performance management systems, see Raffaele Carpi, John Douglas, and Frédéric Gascon, “ Performance management: Why keeping score is so important, and so hard ,” McKinsey, October 4, 2017.

However, for many roles and in many segments of the company, the work is complex, multifaceted, and fast-paced and can be difficult to capture with rather static KPIs. Consequently, many companies have reverted to using objective key results (OKRs) to link results to defined objectives. The objectives represent the qualitative, aspirational goals an individual or team aims to achieve, while the key results are the quantifiable metrics used to measure progress toward those objectives. The objectives provide context and direction, capturing the broader strategic intent behind the measurable key results.

Companies that explicitly focus a portion of performance reviews on the “how” consider qualities such as collaboration, communication, adaptability, and ethical decision making. Considering behavior and conduct, in particular, can help assess leaders whose teams’ outcomes are hard to measure—such as long-term projects, complex initiatives, or qualitative improvements that may not have easily quantifiable metrics. About three in five companies in our sample look at a mix of both what and how, which can equip managers with a more comprehensive understanding of not only tangible results but also the underlying approach and mindset that contributed to those outcomes.

Review responsibility. In structuring accountability for conducting performance reviews, companies tend to lean on managers, committees, or a combination of both.

Managers should play a central role, and their discretion should be a significant factor in performance assessments because they can judge the context in which an employee has been working. For example, when evaluating performance, it’s crucial to consider the headwinds and tailwinds that the business, team, or employee faced during the evaluation period. External factors, market conditions, and organizational dynamics can significantly affect an employee’s ability to achieve their goals, and considering them helps provide a fair and contextual assessment.

In this context, another design question emerges: whether to appraise employees against OKR fulfilment or the effort they put into achieving the desired outcome. Particularly in many large digital players, OKRs are set as “moonshot” goals—objectives so ambitious they are difficult to achieve. Managers can help ensure that, at the end of the performance cycle, an employee is assessed against not only OKR fulfillment but also—and to an even greater degree—how hard they tried given the resources available to them.

Managers’ points of view, formed with knowledge of the circumstances that produced employees’ performance, produce richer assessments that are sensitive to context—given that managers work closely with their team members and have firsthand knowledge of the challenges, workloads, and specific situations that each employee encounters.

Committees, meanwhile, bring diverse perspectives and can mitigate biases that might arise from individual managers’ subjectivity. Committees can provide a checks-and-balances system, promoting consistency and standardization in the evaluation process.

A combination of these two approaches can be an effective solution. Senior managers and high performers across hierarchies could be discussed in committees, while the rest of the workforce could be evaluated by their direct managers. This integrated approach leverages the contextual insights of managers while also incorporating the diverse viewpoints and standardization that committees offer, particularly for more-senior or high-impact roles.

Regardless of the review responsibility structure, it’s worth noting that more and more managers, committees, and employees are using generative AI (gen AI) to aggregate and extract information to inform performance reviews. For example, some employees may toil to define clear, specific, and measurable goals that align with their career aspirations; gen AI can help create a first draft and iterate based on their role, helping the employee focus on their specific growth areas as well as gauge improvement on an ongoing basis. Managers and committees, meanwhile, used to spend a lot of time gathering performance metrics from different sources and systems for employee evaluation. Gen AI can aggregate input from various sources into a consolidated format to provide managers with a more comprehensive starting point for reviews.

Beyond employees’ formal professional-development opportunities, their managers’ capability to set goals, appraise performance fairly and motivationally, and provide feedback is one of the most critical success factors for an effective performance management system. As a result, many companies have pivoted to invest in focused capability building.

Ongoing development

Another key aspect to consider when designing a performance management system is the focus of the assessment: will it evaluate past performances, or will the emphasis be placed on creating an understanding and foundation for further growth?

A backward-looking assessment will focus on fulfillment of the what and how objectives to create a fair basis for ranking and related consequences. However, many companies are pivoting to complement this assessment or are even focusing entirely on a developmental appraisal. In this approach, the focus is on truly understanding the strengths and weaknesses of the individual as a basis for further development, capability building, and personal growth.

Against that backdrop, rather than concentrating solely on top performers, an inclusive developmental system should cater to the growth needs of employees across all levels and backgrounds. McKinsey research emphasizes the importance of ongoing development for all employees, including—crucially—efforts tailored specifically for women 3 Women in the Workplace 2023 , McKinsey, October 5, 2023. and other underrepresented groups. 4 Diversity matters even more: The case for holistic impact , McKinsey, December 5, 2023. Such development programs not only foster a more equitable culture but also help unlock the full potential of the entire workforce.

Traditionally, many companies have used relative ratings to compare and rank employees against one another, often resulting in a forced distribution or curve. Employees are placed into categories or tiers based on their relative performance, with a predetermined percentage falling into each category (for example, top 10 percent, middle 70 percent, and bottom 20 percent).

Many companies today are simplifying their ratings systems so employees understand where they stand while shifting toward development approaches tailored to individuals’ strengths and weaknesses. The goal is to identify areas for growth and provide targeted support to help employees enhance their capabilities and skills.

While assessing performance remains important, the emphasis should be on using those assessments as a starting point for identifying developmental opportunities, with an understanding of both strengths and weaknesses and the specific development needs to improve performance. The focus shifts from mere evaluation to understanding the underlying factors that contribute to an individual’s performance, be it skills gaps, mindsets, or environmental factors.

Four reward categories—compensation, career progression, development opportunities, and recognition—remain the core pillars of an effective performance management system. Most leading companies provide individual rewards (as opposed to team- or corporate-driven ones), with equal relevance given to short- and long-term incentives, looking at impact holistically and balancing investment in all four reward categories.

Under certain circumstances, it may make sense to emphasize financial rewards, particularly in sales functions or other roles where monetary incentives are highly valued. Indeed, some organizations may double down on monetary compensation, offering significantly higher pay packages to their top performers, because money is seen as a key motivator in these roles.

In other cases, it may be more effective to take money off the table and emphasize nonfinancial rewards, such as recognition, flexibility, and career development opportunities. While base pay may remain the same across the firm, high performers can be rewarded with faster career progression, more recognition, and better development opportunities. A 2009 McKinsey survey found that “three noncash motivators—praise from immediate managers, leadership attention (for example, one-on-one conversations), and a chance to lead projects or task forces” were “no less or even more effective motivators than the three highest-rated financial incentives: cash bonuses, increased base pay, and stock or stock options.” Furthermore, “The survey’s top three nonfinancial motivators play critical roles in making employees feel that their companies value them, take their well-being seriously, and strive to create opportunities for career growth.” 5 “ Motivating people: Getting beyond money ,” McKinsey Quarterly , November 1, 2009. More than a decade later, McKinsey research found that managers and employees remain misaligned: specifically, employers overlook the relational elements—such as feeling valued by a manager and the organization and feeling a sense of belonging—relative to how important these factors are to employee retention (Exhibit 2). 6 “ ‘ Great Attrition’ or ‘Great Attraction’? The choice is yours ,” McKinsey Quarterly , September 8, 2021. Indeed, the importance of nonmonetary incentives represents a consistent theme in performance management research and inquiry.

Given the time and effort required to effectively implement nonfinancial rewards, it’s crucial for organizations to carefully consider how to deploy these rewards strategically with employee groups. The decision of where to place emphasis should align with the organization’s culture, values, and the specific workforce’s motivations.

It’s worth noting that companies focusing on team achievement over individual performance also tend to value praise of the team. Public recognition and praise for effective teamwork and joint accomplishments can foster a sense of unity, camaraderie, and motivation.

Things to get right

Of the global companies we observed, there was a shared set of enabling factors across those with effective performance management systems. These things are fairly intuitive, but they are hard to practice well. Done consistently, they can produce powerful results.

• Ensure that performance management systems are agile. Systems should allow for goals to be easily updated so the workforce—and therefore the organization—can respond to quickly changing conditions. The processes themselves should also be agile. For instance, relationships and interactions between managers and employees should allow for coaching that is close to real time so employees are consistently being pushed in the right direction—and learning to create that momentum themselves.
• Provide regular feedback. Annual reviews can create a bottleneck on managers and the C-suite. More regular performance conversations can be successful in a variety of formats; quarterly, weekly, and casual check-ins should supplement formal reviews. Conversations can be about both the what and the how of the work and be a source of ongoing coaching.

If reviews remain once a year rather than more frequent, top management may consider prioritizing their direct involvement in the evaluation process to keep a pulse on employee sentiment and progress. A leading financial institution in Europe chose this route and found it was able to build a strong capability-building program around a feedback culture that is unafraid of difficult conversations.

• Establish an effective fact base. According to our research, only two in five companies use both upward and downward evaluation in individual performance reviews. To establish a more comprehensive fact base, organizations can implement robust 360° review processes that solicit feedback from an employee’s manager, peers, direct reports, and even customers or stakeholders outside the company. Many leaders have found that 360° reviews offer a comprehensive understanding of an individual’s performance because such reviews consider perspectives from both those who are led and those who are in leadership roles.
• Maintain rating and differentiation. Many companies have reassessed their approach to employee ratings and the subsequent differentiation of consequences. While some companies have eliminated ratings altogether, most companies have been evolving their systems to drive motivation, recognize and incentivize performance, and create a “talent currency.” This means a high performer from one division is considered by the organization to be of the same caliber as one from another division. Overall, leaders are pushing for simplification, such as moving from a seven-tier approach to a four-tier or even three-tier system. There is also a stronger link between ratings and outcomes, as well as a shift from forced distribution to distribution guidance.
• Employ gen AI. Gen AI—the latest technology to change the business landscape—can be a tool to support select elements of performance management, such as setting goals and drafting performance reviews. A manager could use the technology to aggregate and synthesize input from different sources to draft communications to and about employees more efficiently, freeing them to focus on the core value driving parts of performance management and giving more time for personal interactions with their employees, such as coaching and feedback. 7 For more, see People and Organization Blog , “ Four ways to start using generative AI in HR ,” blog post by Julian Kirchherr, Dana Maor, Kira Rupietta, and Kirsten Weerda, McKinsey, March 4, 2024.

Getting started

Companies can get started by understanding where they are now. Specifically, they should assess their organizations’ current performance culture, including the level of adoption of the existing performance management system and its quality. Decision makers should then use the following three questions to check the health of their performance management efforts and outline their ambitions for performance management:

• Are we getting the expected returns from the time invested in the performance management process, and does it drive higher performance and capabilities?
• Does the current performance management system reflect the needs and context of this particular business or workforce segment?
• Do we have a performance culture? (Hint: How frequent are employees’ coaching interactions? How clear and differentiated is feedback?)

Many traditional approaches to people management are unlikely to suffice in today’s top-performing organizations. The research-backed benefits of prioritizing people’s performance, from enhanced revenue growth to lower attrition rates, underscore the strategic importance of these systems. By embracing a fit-for-purpose design anchored in the key elements of performance management, organizations can position themselves as dynamic and adaptive employers.

Simon Gallot Lavallée is an associate partner in McKinsey’s Milan office, where Andrea Pedroni  is a partner; Asmus Komm is a partner in the Hamburg office; and Amaia Noguera Lasa is a partner in the Madrid office.

The authors wish to thank Katharina Wagner, Brooke Weddle, and the many industry professionals who contributed to the development of this article.

Explore a career with us

Related articles.

Gen AI talent: Your next flight risk

Increasing your return on talent: The moves and metrics that matter

CEO excellence: How do leaders assess their own performance?