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MBO 2.0: Making Management by Objectives Work for Today

Chris Palmisano

Posted by Chris Palmisano
February 3, 2017

Since its heyday in the 1960s and ’70s, management by objectives (MBO) has declined in popularity—and hipness. First Balanced Scorecard came along in the 1990s, presenting itself as a more sophisticated approach to corporate performance management. Now, we’re seeing the rise of objectives and key results (OKR), the Intel-born goal-setting model endorsed by tons of Silicon Valley startups. 

That doesn’t mean that we at Khorus don’t run into companies that still use MBO, many of them successfully. It’s a logical system for translating corporate targets into supporting objectives that each person will be accountable for. When done right, it works. HP cofounder Dave Packard noted, for example, that “no operating policy has contributed more to Hewlett-Packard's success” than MBO.

You can read a full definition here, but the essentials of MBO, as outlined by “Father of Modern Management” Peter Drucker, are:

  1. Leadership sets company-level objectives.
  2. Measurable goals are set by each employee in collaboration with a supervisor, in support of company objectives.
  3. Employees are rewarded based on how well they progressed toward their goals at the end of a period.

Sounds reasonable, right? Who would be against such a system?

MBO 1.0 Has Plenty of Detractors

Well, plenty of people are skeptical of MBO, and have been for quite a while. One of the most well-known management manifestos of the past thirty years, W. Edwards Deming’s “Fourteen Points” includes this recommendation, which has become one of the most cited sections of the text: 

Eliminate management by objectives. . . . Substitute leadership.

Ouch. To imply that MBO can be substituted with “leadership” is a harsh criticism indeed. Deming also stated that MBO is “an attempt to manage without knowledge of what to do.” Even earlier, in 1970, Harry Levinson, a psychology professor at Harvard Medical School, had written that

management by objectives and performance appraisal processes, as typically practiced, are inherently self-defeating over the long run because they are based on a reward-punishment psychology that serves to intensify the pressure on the individual while really offering a very limited choice of objectives. 

These quotes from Deming and Levinson get to some of the most common criticisms leveled against MBO: it’s punitive, it’s demotivating, it’s “management by numbers,” it prevents people from truly excelling, it’s less concerned with measuring real success than tracking a few (possibly irrelevant) metrics. In his later years, even Drucker himself walked back his commitment to the management model he fathered, writing

MBO is just another tool. It is not the great cure for management inefficiency . . . Management by objectives works if you know the objectives: 90% of the time you don't.

“Just another tool,” says Drucker, one that can be used for good or ill. If you read the writing of MBO's detractors, you see that their negative outlook toward MBO stems not from a fault of the methodology itself but rather from the way it is typically implemented, often by managers who deploy it incompletely or with the wrong aims (e.g., maximizing short-term results, “grading” employees). In the wrong hands, MBO can indeed become a cudgel, a morale-killing exercise in corporate oversight. 

A Return to Drucker’s Intentions, And an Update for Today

But that was never Drucker’s intent. In fact, reading The Practice of Management, the book that first outlined MBO fully, you’re struck by Drucker’s understanding of the human, creative side of organizational performance. His conception of the company is far from a Taylor-esque collection of automatons, graded on arbitrary production goals. 

“The enterprise is a community of human beings. Its performance is the performance of human beings,” he writes at one point. Nor is his description of objective-setting narrow or uninspiring. He sees management by objectives as a fundamentally creative process:

It is management’s specific job to make what is desirable first possible and then actual. Management is not just a creature of the economy; it is a creator as well.

So how can we take MBO back to Drucker’s original vision while simultaneously making the model work for the twenty-first century?

Well, one simple answer is to look into OKR. In many ways, OKR is an MBO for today, replicating the best of model (collaborative goal setting, regular feedback, line of sight to top company objectives) while introducing features that lessen its potential for harm (more on that in a second).

Another option? Use Khorus as your company’s goals system. The platform supports the essence of MBO while allowing for much more flexibility and all the recommendations outlined below.

Whether you’re fully committed to MBO or engaged in a looser type of goal setting, here are five considerations to ensure that you’re not falling into the traps can make management by objectives less than effective. 

5 Critical Updates to MBO

 1. Think twice before linking goal outcomes directly to compensation

One hallmark of MBO is that employees who meet their objectives are rewarded monetarily. “If one can ‘get fired’ for poor performance,” wrote Drucker, “one must also be able to ‘get rich’ for extraordinary performance.” 

Again, Drucker’s viewpoint was more nuanced than how this advice is commonly implemented. In the paragraphs following this statement, Drucker warns against giving bonuses only to the people who make the most visible and easily quantifiable contributions to the business; instead he encourages managers to look deep into each person’s performance and reward contributions that may not be directly measurable or may not pay off for years in the future.

At Khorus, our own thinking is that any link between compensation and completion of objectives should be carefully considered. The pitfalls are just too many:

  • a sense of unfairness when circumstances change and put your goal out of reach,
  • temptation to artificially inflate performance to hit the target,
  • neglect of key tasks for which there is no measurable outcome,
  • temptation to “sandbag,” setting goals so low that there’s no doubt of meeting them.

Not to mention research showing that trying to improve employee motivation with money alone is a fool’s errand.

This is one improvement OKR has made on MBO—it explicitly recommends that discussions of performance against objectives take place separately from compensation discussions. That’s a reasonable approach to us. Instead of making people strive after goals hoping for a payout, pay competitive wages across the board based on role and experience, and reward your A players with learning and growth opportunities. 

2. Make room for opportunism.

As many have noted, modern organizations operate in an increasingly service-based, creative economy. That means that managers can’t define a rigid set of objectives for an employee and call her “successful” if she simply achieves them.

So many times, real success in the role means breaking out of expectations to pursue newly arisen opportunities, or engaging in spontaneous creativity to achieve something that may not be codified in your objectives for the quarter.

As managers roll out an MBO program, it’s vital to check in consistently with employees to see how things are going and to assess whether any assumptions or circumstances have changed. Be open to new suggestions, or to a change in direction if the reasoning behind it is sound. This doesn’t mean goals and objectives should be changed willy-nilly, but it does mean that if an employee finds a new and better way to have a positive impact on the business, he should feel free to be opportunistic—to jump on the opportunity and act like a true entrepreneur

By decoupling goal achievement and compensation, you pave the way for this type of agility. Take it even further by talking to direct reports at least a couple of times per month about how their goals are going and whether the plan still makes sense.

3. Don’t just do goals to say you’re doing goals.

This is a big one. As a manager, you must position objective-setting not as an exercise intended to rank, grade, or quantify the abilities of employees. Rather, the process of MBO should be discussed as it was intended: a management tool for involving everyone in moving the organization forward, and for encouraging the personal growth and mastery of the employee.

If objectives and goals are merely seen as add-ons to a performance-appraisal system, established because, hey, we need something to measure . . . that’s when people start to have the negative reactions that Deming and Levinson worried about.

That’s when MBO starts to feel arbitrary and punitive. That’s when employees are encouraged to game the system so they look good on paper. 

The solution? Talk abundantly about why these goals were set in the first place. Always be open to digging into a discussion of whether these are the right goals to pursue. Talk about how they align with the aims of the company. Ask employees about the goals that best align with their own development path, too. When a goal is missed, don’t treat it as an outright failure, but look at the reality behind the miss and the lessons to be learned.

Remember what Drucker himself said about MBO: if you don’t know the right objectives, it’s not going to work.

4. Acknowledge today’s collaborative imperative.

One big reality that’s changed since Drucker’s day is the amount of collaboration each of us is involved in day to day. One study written up in Harvard Business Review found that “the time spent by managers and employees in collaborative activities has ballooned by 50% or more.” This means that the vast majority us rely on a fairly large network of stakeholders to achieve our objectives. 

An MBO program today must account for this. One simple step forward here is transparency on objectives across the organization—an essential feature of OKR. Transparency helps everyone see how goals interlock, and how one missed goal can cause a domino effect in other parts of the organization. When a goal goes off track, transparency helps you find the right people to talk to in order to reduce the harm caused. 

In the past, it may have been possible to set objectives without getting too deep into what your colleagues would be working on. But today, looking up, down, and side to side to ensure that your objectives make sense within a broader context is imperative. 

5. Take check-ins beyond backward-looking and quantitative.

Finally, any good MBO program involves regular check-ins on progress toward the established objectives. To optimize MBO for today, we highly recommend these check-ins be focused on the employee’s predictions and their personal assessment of work quality.

This solves for the fact that legacy goal systems are often focused on the historical and the numerical, with updates centered around what’s already happened: How much did you get done? What it your percentage complete? And so on.

Asking only these quantitative, backward-looking questions leaves highly valuable insight on the table. For instance, the employee may have gotten very far on an engineering project—80 percent of the way there—but have no clue how to pull off the remaining 20 percent. Or she may have beaten her sales goal ahead of schedule by closing deals with customers who will be huge onboarding or retention challenges.

This information is very important if the manager hopes to understand the true reality of team performance. That’s why ensuring that check-ins cover both predictions (does the employee forecast that the objective will be completed on time?) and quantitative insight (how are you feeling about the quality of the work you’ve done?) is so crucial. Not coincidently, these are the two questions that anchor weekly goal updates in Khorus.

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So, while MBO may no longer be the cool kid on the block, it’s a commonsense approach to goal setting that can still bring a lot of value to organizations. Just make sure you’re rolling it out in a way that won’t steamroll morale and serves both your employees and the long-term vision of the organization.

If you're looking to level-up your MBO program (or your OKR or other goal-setting program), drop us a line and schedule a demo of Khorus. We'd love to show you how organizations are using the platform to share strategic objectives and achieve more.

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Chris Palmisano

Chris Palmisano

Chris serves as VP of Sales at Khorus Software. Previously, he held sales leadership roles at SolarWinds and Google.

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