As a part of agile transformation solutions in a complex world, more and more companies of all sizes and industries are turning away from the traditional concept of Management by Objectives (MBO) and introducing OKRs into their companies. While OKR is often communicated as an improvement and modernization of goal management, many employees see OKRs merely as a continuation of MBO in a new conceptual guise. The following article differentiates between the two methods and explains how a change from MBO to the more contemporary OKR can work.
MBO stands for “Management by Objectives.” The concept was introduced in the 1950s by Peter Drucker, who was considered a pioneer in modern management theory. The basic idea of MBO is to align the tasks of all company units to set goals. Employees are free to choose how to reach their goals and their performance is measured based on results. To coordinate the employee, team and department tasks with one another, goals are cascaded from top to bottom. That means goals are first set at the company level and then, based on these, defined step by step for the lower levels down to the smallest company units, the employees.
OKRs have also been around for decades. The concept was introduced by Andrew Grove, former CEO of Intel, in the early 1980s and caught the attention of early Google investor John Doerr. Doerr picked up the approach from his time at Intel and brought it to Google, which is well known for its work with the OKR method. The term OKR stands for “Objectives” and “Key Results” and refers to a method for developing and managing goals. For a given period of time, usually quarterly, several Objectives are set. These are each broken down into two to five smaller Key Results. While the overarching goals are defined in a qualitative and demanding way, the respective Key Results ensure measurability. OKRs can be defined at all levels of an organization—for the entire company, a department or an individual employee.
You can find a more detailed explanation of OKRs in our article “Objectives and Key Results (OKR) - A Definition”
Of course, since OKR developed from MBO and essentially took the best parts of MBO and built upon them,the two have similarities. Both frameworks structure work around goals and apply them to all levels of the company, for example. They also offer a framework for communicating goals and measuring performance with employees. Both help companies execute strategy, meaning all work together to reach the same goals. This promotes responsibility and transparency in the organization and ultimately supports the overall strategy of the company.
Despite all their similarities, OKRs differ considerably from MBO. While the goals of MBO are quantitative and often formulated as KPIs, OKRs consist of qualitative Objectives that are broken down into quantitative findings through Key Results.
Through the detailed structuring of the goal and the definition of qualitative goals, OKRs highlight the process of reaching the goal, while for MBO, the focus is on the result. The fundamental difference between MBO and OKRs goes far beyond the mere goal setting technique and has an effect on all levels of a company.
1. Leadership: management vs. coaching
With MBO, goals are set once for a set period of time and then cascaded from top to bottom. During this period, care is taken to ensure employees are acting in accordance with that goal. At the end of the period, the degree of goal achievement is measured. In this way, MBO corresponds to the classic management philosophy of planning, controlling and monitoring. With OKRs, the path to a goal is the main focus. During an OKR Cycle, the status of goal achievement is discussed and employee performance feedback is given, generally in weekly meetings. At the end of a cycle, Retrospectives and reviews are used to analyze whether the goals were set correctly in terms of content and formality. The findings are then taken into the next OKR cycle. In this way, OKRs have a much stronger focus on employee development instead of results.
2. Coordination: top-down vs. top-down & bottom-up
Not only the process of reaching a goal, but also setting a goal differs between MBO and OKRs. With MBO, the company goals are set at the executive level. Departments, teams and employees are then given their goals based on these high-level goals. Goal setting, therefore, runs from the top down. With OKRs, the executive level also sets goals for the entire company and then department, team and employee goals are aligned with them. However, employees at each level also develop their own goals, shaping the goals of their teams, their departments and the company as well. Goal setting, therefore takes place from the top down as well as the bottom up.
3. Collaboration: specialization vs. coordination
The differences between MBO and OKRs in goal and performance management also affect how employees and departments collaborate with one another. Setting structured and clear goals for a long period of time, as done with MBO, gives most employees a clearly outlined and defined scope of duties. Through this method, employees can focus on their tasks and have a comparatively low need for coordination. With OKRs, goal setting is constantly developed and discussed. Through the development of more qualitative, ambitious goals, overlaps in employee and team activities are often also revealed. As a result, they can coordinate their procedures more closely with one another, use synergies and avoid duplicate work.
4. Goal horizon: Consistency vs. agility
With MBO, goals are generally set and measured once a year. This allows employees to work on clearly-defined goals over a longer period of time and allows for a consistent workflow. An OKR Cycle, on the other hand, usually lasts for one quarter. In addition, teams discuss and update the interim status of the goals on a weekly basis. This allows teams and employees to respond to changing circumstances and unexpected events very quickly.
5. Risk appetite: risk minimization vs. ambition
Along with consistency, MBOs tend to be risk-averse, while OKRs can be described as ambitious through their agility. In this way, MBOs strive to reach 100 percent of their goals, while the ambitious goals set with OKRs are rarely achieved 100 percent of the time. Failure is seen as part of the process. Since MBOs are linked with remuneration, employees tend to take fewer risks. In comparison, OKRs are not linked with remuneration and a certain amount of failure is expected. This encourages innovation.
6. Motivation and incentives: extrinsic vs. intrinsic
As previously discussed, OKRs primarily emphasize the process of reaching a goal and the tasks themselves, while MBO focuses on the results. This also has an effect on employee motivation. MBO works heavily with extrinsic motivation and incentives. This means that a reward, such as a bonus, is linked to a specific activity or, more precisely, its result. Companies with OKRs work less with rewards. The reasons being that OKRs should make employees more ambitious and willing to experiment. This can only be achieved if an employee's value is based on their approach to a goal, not the result itself.
7. Communication: control vs. transparency
The different concept of OKRs and MBO with regard to incentives and OKRs also has an effect on the communication within a company. The main aim of MBO is to ensure employees are working towards the higher-level goals set for them. This is done by measuring and controlling goal achievement. In this case, only the employees themselves and their superiors usually have insight into this achievement. OKRs, on the other hand, work to give all employees insight into the current goal and status of other team members, encouraging efficient collaboration. Accordingly, feedback is also provided on an ongoing basis. This is done, for example, through meetings conducted at least once a week.
In today’s dynamic times, OKRs are more effective than MBO when it comes to reacting to market changes. From a management perspective, a transition requires less operational intervention and, more than anything, a shift in thinking and an ability to let go. Instead of setting goals granularly for all employees and cascading them through the organization, it is sufficient to set the company goals and allow the employees to then set their own goals that feed into them.
The most important advantages of OKR at a glance:
OKR promotes focus and discipline
The most important goals are worked out and clearly communicated to everyone. To do so, indicators that make the progress of goal achievement visible and measurable are introduced.
→ Teams and their members know the goals the company is pursuing, what the strategy looks like and what is expected of them.
Coordination and alignment with the OKR method
Coordinating all teams and individuals at the beginning of the quarter ensures a sensible use of resources and increases efficiency.
→ The company is aligned in terms of strategies and goals. The teams work in a coordinated and aligned way with other teams.
Motivation and employee engagement
Each team member sees and knows how work is being done on a common goal. Each individual can be involved in goal planning, which increases motivation and engagement.
→ Each individual knows what contribution they are making in reaching the team or company goal, and the purpose of that individual’s work is clearly communicated to them.
→ Employee contribution is measurable and can be recognized accordingly.
OKRs visualize accomplishments and allow for their recognition. In addition, it is easier to learn from past performance and further develop when goals and progress are clearly documented. Reasonable limitations on transparency should be subsequently addressed.
→ Contributions of individual teams are communicated and made transparent (e.g., what “the people from Team X” are working on and whether it is relevant for your team).
The main challenge is to reinterpret the role of manager and increasingly take on the accompanying role as Coach. This includes allowing involved teams to develop initiatives that contribute to the goals.
A new error culture and new understanding of success is also part of successfully implementing OKRs. Goals that were not reached should not be categorized as failures. Instead, they should be understood as part of the learning process.
During the transition, a shift in thinking at the operational level is also necessary. While MBO favors working in silos, OKR forces cross-functional collaboration. That means initiatives promote a higher level of exchange and are designed for shorter periods of time in order to quickly gain and implement findings. Through self-organization, employees have a great responsibility to drive and develop initiatives. A rethinking of error culture at this level is also necessary and employees have to allow themselves to see goals not achieved as less of a failure and more as part of the learning process.
When comparing MBO and OKR, it is clear that both approaches differ at more than just the technical level. They also partly represent different corporate philosophies. MBO ensures structure, consistency and control in the company, while OKRs mainly promote flexibility, creativity and collaboration, the importance of which is increasing for many companies thanks to digitalization. This also explains why many companies are also turning to OKRs.
What is MBO?
MBO stands for “Management by Objectives.” The fundamental idea of MBO is to align the tasks of all company units to set goals.
What is OKR?
The term OKR stands for “Objectives” and “Key Results” and refers to a modern method for developing and managing goals.
What is an alternative for MBO?
In today’s dynamic times, OKRs are more effective than MBO when it comes to reacting to market changes. From a management perspective, a transition requires less operational intervention and, more than anything, a shift in thinking and an ability to let go
Are OKRs useful?
OKR is an agile leadership and goal management framework. Companies use OKR to execute strategy quicker and more effectively by setting measurable goals and improving transparency, alignment and employee engagement.
To what extent is OKR better than MBO?
While MBO favors working in silos, OKR forces cross-functional collaboration. That means initiatives promote a higher level of exchange and are designed for shorter periods of time in order to quickly gain and implement findings. Through self-organization, employees have a great responsibility to drive and develop initiatives.
What is the goal of MBO?
The goal of MBO is its results orientation. The main idea is to align the activities of all companies units with set goals. Employees are free to choose how they reach their goals and their performance is measured on the basis of results.
Who developed MBO?
The concept “Management by Objectives” (MBO) was introduced in the 1950s by Peter Drucker, who was considered a pioneer in modern management theory.