Mar 14, 2022

OKRs vs MBOs (Management by Objectives)

Performance evaluations give businesses the chance to evaluate the progress towards and achievement of goals and organizational priorities. Improving company-wide performance remains one of the top benefits of this exercise. They can identify areas of improvement by focusing on the activities executed during the quarter and the year. Reviews are also helpful for employees as it leads to better engagement and alignment with business priorities.

You have come across terms like OKRs (objectives and key results) and MBOs (management by objectives). These are goal-setting methodologies that organizations can use to build a culture that fosters working on shared goals. So, you might wonder, which one is right for you?

What are OKRs?

OKRs are a goal-setting framework, just like MBOs. It is a method of defining and conveying company objectives to get everybody to work on a shared goal. OKRs are more famous than MBOs. They have been standing out enough to get noticed because of their use in organizations like Google and Intel.

OKRs are not a new framework. It has been around for quite a long time. The idea got launched by Andy Grove, ex-CEO of Intel. However, John Doerr, an early investor in Google, popularised it. OKRs power organizations to isolate important goals from business-as-usual ones. They usually involve quarterly objectives.

OKR stands for Objectives and Key Results. OKRs are like business targets, but with one important twist: OKRs have three-time stages – the long-term goal, interim goals, and key results that need to be achieved in a shorter timeframe.

OKRs can be used as a guide for employees to think about what they should work on and their progress towards the organizational goals. OKRs are also useful for employees’ development plans, as OKRs allow them to see how they contribute to the organization’s objectives.

More organizations have been taking on OKRs because of their impactful objective-setting methodology. There are also measurable items to check the impact of these goals. OKRs are a direct methodology that uses clear-cut tools to check the accomplishment of objectives. You can have a quarterly and annual OKR cycle.

Businesses usually have two to three significant and quality objectives. Each of these objectives will have three to five key results. You can do an OKR evaluation at the end of the quarter.

What are MBOs?

Management by Objectives is a strategy that improves the performances of teams across the organization. MBO framework involves setting well-defined goals that both employees and the management agree upon. In 1954, Austrian-American management consultant Peter Drucker used the framework first.

Managers use the KPIs of an employee and link them with company objectives in this goal-oriented tool. Employees feel much more engaged, motivated, and committed to achieving the set objectives. Businesses that use MBOs can set quarterly goals and see a marked improvement in the performance of their teams. Here are some steps involved in the MBOs process.

  1. Set objectives

Businesses must identify whether they need to revise their existing objectives or set new ones. They should consider the overall organizational objectives when deciding.

2. Keep objectives that are easy to understand

The objectives should be SMART (specific, measurable, acceptable, realistic, time-bound). Furthermore, these should be straightforward so that everyone understands and achieve them better.

3. Encourage employee engagement

The best way to promote employee engagement is by framing individual objectives. Businesses must share the targets with employees and encourage them to set individual goals to meet the broader objectives.

4. Evaluate progress

Ensure that you keep the objectives measurable. It will help everyone understand the progress regarding the achievement of goals.

5. Share regular feedback

It will help your employees understand how their performance is affecting the overall progress. If there are any weak areas, you should make your employees overcome them for better business benefits.

What is the difference between OKRs and MBOs?

MBO is a well-known methodology that may work only for some businesses. The system has existed ever since performance management came to the fore. On the other hand, OKRs help make the goal-setting process motivational and engaging for employees. It is because they align the team objectives with those of the company.

MBOs help monitor the personal performance of individuals. However, OKR planning is for companies and teams looking to innovate and improve their business outcomes and performance culture. Since it heavily focuses on outcomes, OKRs help companies achieve the desired results. Let’s further look at the differences between the two through various parameters.

  1. Goal types

OKRs are aspirational and promote an aggressive intent to achieve the objectives. They are also transparent and lead to a collective approach in the team. Even if your team accomplishes each objective 60-70%, it is considered good progress. If there is 100% achievement, it means the objectives were not challenging enough. What ultimately matters is if your team was able to innovate and go beyond the norm.

MBOs are pragmatic and free of any risks. One of the primary reasons is MBOs remain linked with employee compensation. So, when they do not achieve the objectives fully, the bonus gets reduced. So, employees would naturally set goals that aren’t difficult to achieve.

2. Scope

OKRs are all about the how and what. Objectives show what you need to achieve, while the Key Results indicate how to get there comprehensively. The framework concentrates more on improving operations instead of managing performance.

MBOs tell employees the goals they need to achieve. It will further assess how well employees performed based on the goals set for them by their manager. The focus is more on the result instead of the roadmap to achieve it.

3. Levels

OKRs are straightforward and focused on teams. Meanwhile, key results are set up through group discussion and shared with everyone. Groups can align better with one another as they work towards accomplishing the same thing. Departments contribute towards broader objectives based on their expertise. Organizational goals set the tone for all the teams.

MBOs get assigned to employees based on the discussion with their managers. Objectives are secret, and the leader will not share them with the remainder of the group. This secrecy is essential because there is a direct link between employee compensation and MBOs.

4. Timeline

The OKR framework involves reviewing goals regularly. Teams can set them every quarter and have review meetings each week to measure the progress. Organizations can iron out issues or capitalize on existing opportunities rather than letting the year pass to work on problem areas.

The MBO framework involves performance reviews annually. Businesses can set the objectives at the start of the year and review them only at the end. Such goals can often be vague without pinpointed focus.

5. Evaluation

The Key Results in OKRs focus on numbers and measurable outcomes. Teams get a clear view of whether they have achieved objectives by evaluating the key results. As a comprehensive tool, OKRs focus on tangible outcomes instead of business-as-usual activities.

The evaluation in MBOs is all about scores that show objectives you want to achieve and the evaluation methods. Measurement here focuses on individual employees and the effort they put forward. It doesn’t look at what the business impact of the exercise was.

6. Compensation

OKRs do not have a link with compensation so that employees set easily achievable goals and remain in their comfort zone.

MBOs are linked with the performance review model and are a base to identify the compensation for an employee. They also focus on individual goals. The progress of these objectives gets evaluated based on targets set at the start of the year.

Conclusion

Goal-setting and organizational planning are always the most critical areas that businesses need to focus on. Based on the management style and structure, companies use various goal-setting tools. This OKR vs. MBO guide will guide you towards choosing the best one for your organization. OKRs adopt a problem-solving approach, making them effective in any scenario. They are also usually the preferred option for most businesses.

Sunder Nookala

Sunder Nookala

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