The originator of MBO (Management by Objectives) was Peter Drucker. He described it in his book (The Practice of Management). MBO facilitates a result-oriented approach to leadership and management. The goal of MBO is to improve organizational performance It is a methodology that implements Drucker’s conviction that effectiveness is more important than efficiency and thus it should be the foundation of every organization.
MBO is a tool for insuring that all resources are being applied to the most important goals and that management at all levels is receiving regular feedback on progress. It facilitates managers having a clear understanding what is expected of them and how their activities relate to the achievement of their organization’s goals. MBO was popularized by companies like Hewlett-Packard, who claimed it led to their success.
Intel under the leadership of Andy Grove used MBO with some important modifications that he originated. MBO with his modifications has come to known as OKR (Objectives and Key Results).
OKR enhanced MBO in several important ways:
- OKR like MBO is about setting strategic goals; however, it goes further than MBO, breaking down strategy and execution. With OKR you set goals (Objectives) and then you define how the objective will be accomplished (with one or more Key Results).
- Objectives were no longer of a consistent time period (usually one year for MBO as it was tied to a company’s annual review process). This allowed objectives to be tactical, strategic or an aspiration. OKR at Intel was a quarterly process but for some organizations monthly might be beneficial.
- Key results were written to be time bound and measurable. It was expected that they would be completed before the next scheduled OKRs were to be created.
- When it was time to write the next quarterly OKR, the current OKR would be scored. Each Key result would be scored with its percent complete. The scoring would be reviewed by that person’s manager.
- Unlike MBO, the OKR process also included many individual contributors.
I learned about MBO with the Grove enhancements at Intel directly from Andy Grove. When John Doerr (who sat a couple of cubes from mine) left Intel to join Kleiner Perkens, he gave MBO with the Grove enhancements the name Objectives and Key Results (OKR). He taught OKR to Google and OKR spread from there.
The process of OKR looks like this. The leader of the company or organization creates and publishes the OKR for the entire organization. The each direct report receives a copy of their managers OKR and evaluates what their role is accomplishing the organizations objectives and key results. Then they publish the OKR for their organization. This process cascades down through the layers of management to individual employees who create their OKR. Then the OKRs are cascaded up the organization starting with the employees sending their OKR to their manager for review. At this point the manager needs to determine if his organization can commit to their key results.
If there are issues with meeting the key results a manager has a number of options:
- Reallocate tasks
- Seek additional resources
- Determine if another organization has the bandwidth available to assist with their key results.
The entire organization should have a well communicated schedule for this top down, bottoms up and sideways process. At Intel this process took about one week. OKRs tend to be created through team discussions where the team deciding how to support the goals that were assigned to their organization. Every OKR from the CEO on down are accessible by all employees.
The Key Results are expected to be SMART, i.e.
- Aggressive while being achievable
- Time bound
Since Key Results should be aggressive, it is okay to not achieve them all. Getting 60% or 70% might represent good performance. In a company that takes risks there has to be a willingness to let people fail in order to encourage innovation.
The benefits of OKR include:
- There is participation at all levels of the organization in setting of goals, determining the course of action and making decisions
- Improved communication and coordination
- Linkage between subordinate objectives and the organization’s objectives
- Everyone is more self-directed
- Team members become aware of the roles that others are playing
- The work assigned is mutually decided
- Team members work together towards the organization’s goals
- Understanding the interdependency and inclusion in the goal-setting process results in a higher level of commitment
My suggested enhancements to OKR:
- Managers should consider how to meet both individual and organizational goals. What does the employee want out of work? How do their needs and desires change over time? The organization benefits from factoring in the employee’s objectives. The organizational task becomes one of understanding the employee’s needs, and assessing how well they can be met in this organization, doing what the organization needs to have done. The highest level of motivation occurs when there is a match between an individual’s needs and the organization’s needs. When the two sets of needs do not mesh, the employee and the manager should discuss where the employee wants to go, where the organization is going, and how significant the discrepancy is. The employee might be better off elsewhere and the organization might be better off having someone whose needs better align with the organization’s requirements.
- The OKR process needs to encourage groups of managers to formulate their collective goals and define ways of helping one another to achieve the common task.
- Direct reports should have input to setting and grading goals that impact the individuals in that manager’s organization. For example, managers should have goals to develop each individual in their organization. While an individual is not in a position to judge a superior’s overall performance, they the most qualified to judge how well the superior has helped them to do their job (i.e. how well the superior is helping to increase their proficiency and visibility).
Examples of Objectives:
- Company performance: Increase customer retention rate to 96.5%
- Marketing: Increase website visitors by 35%
- Sales: Achieve average deal size of $120 000
- Human Resources: Increase employee retention rate to 95%
- Software Engineering: Launch the beta testing phase
- Product Management: New product achieves $1M in quarterly revenue
- Customer Support: Decrease call abandonment to 2.5%
- Finance: Complete the annual financial plan
- Operations: Reduce logistics expenses by 5%
Start your Journey towards better strategy and management by scheduling a call with IMG.