Effective Performance Management for Organizational Success: OKR Vs MBO.

Renowned management guru Peter Drucker first introduced the term Management by Objectives(MBO) in his 1954 book “The Practice of Management”. This strategic management theory aims to improve the overall performance of an organization through clearly defined goals that are agreed to by both the employee as well as management. Based on these models, the ability to contribute in setting goals and making action plans has a positive impact on employees, as this encourages their participation resulting in a feeling of commitment as they were part of the planning process.

Some sections though put forward the argument that setting certain objectives like production targets could lead to employees trying to achieve these targets by any means, even at the cost of maintaining the required quality standards.

Objectives & Key Results (OKR) is a development of the MBO model, with a few extensions that would structure one’s objectives and execute strategy in a much clearly defined manner. It was developed by Andy Grove who introduced the approach to Intel during his tenure there and documented it in his 1983 book “High Output Management”. The concept was explained and made popular by American investors and venture capitalist John Doerr.

OKR looks at the main ways in which success is defined, and the measures required to achieve the goal set. It is broken down into the objective portion, the key actions and results required portion.

With the MBO approach, how an employee or team achieve a goal, and how their performance is evaluated against the specific goal is somewhat open and negotiable.

The OKR method goes into much more detail, with the key result clearly defining what success should look like, and hence the things that need to be done to achieve the set objective. The results will translate into quantifiable performance measures.

In general, an MBO is reviewed on a yearly cycle while OKR is reviewed on a quarterly or sometimes even monthly basis. This shorter cycle allows one to keep a better track of the performance objective, identify if things are not going according to plan and to take necessary action.

Another aspect of MBO is that it is connected to salary increments and bonuses. This could lead to subjective or distorted results, and may not reflect the anticipated performance improvement.

The thing about OKR is that it is not tied to employee compensation as the objectives are rather aggressive and more aspirational in nature. Famous Canadian filmmaker and environmentalist James Cameron’s quote “If you set your goals ridiculously high and its a failure, you will fail above everyone else’s success” beautifully summarizes the desired outcome of OKR for an organization.