OKRs vs. MBOs

Key Differences Every Manager Should Know

Goal-setting is what takes either individuals or whole organizations a step closer to the things they wish to achieve. Depending on the circumstances in which the goal-setting process takes place, different methodologies could be used. And as we grow smarter and wiser over time, the older methodologies are also replaced with newer approaches to have better results.

Introduction to OKRs and MBOs

The main difference between OKRs and MBOs is the purpose and desired value of the goal-setting process. 

MBO stands for Management by Objectives. MBO  is an individual performance assessment approach rooted in micromanagement and its purpose is primarily to calculate individual annual bonuses of employees. 

OKRs stand for Objectives and Key Results. They however, are used to improve the company and grow as fast as possible to the new heights. 

Some might argue because in the fifties MBOs were presented as a methodology that helped to improve the organizational performance. And at the time it was considered effective but that was before hundreds and thousands of organizations have gone through their own trial and error journeys. The time has moved on and human and organizational psychology has moved far from the beliefs that you should be constantly punishing and pushing employees, having a really strict power hierarchy and replacing the employees who don’t immediately match the standards. 

Peter Drucker (the father of MBOs), as well as Frederick Taylor (one of the founders of management theory), have definitely improved the goal-setting approach that was considered a norm in the last century but that doesn’t mean the first solutions developed so many years ago still work the same in the new era. 

The business world has started to value the benefits of teamwork, creativity and innovation which MBOs unfortunately do not support or inspire. Still, MBOs give us three important learnings that are improved and built upon in the newer OKR methodology:

1) we need goals to move forward;

2) we need something measurable to prove that we have achieved success and

3) we need to set a timeframe to have the feeling of urgency. 

What are MBOs?

MBOs aka Management by Objectives is a management approach designed by Peter Ducker and presented to the public in 1954. Since then, the possible and practical impact of the methodology has changed. Let’s explain what MBOs mean for organizations now. 

MBOs are used for individual performance management to calculate bonuses. The Objectives are agreed by both managers and employees and certain alignment with Company strategic goals has to be achieved. The MBOs set should follow the SMART (specific, measurable, achievable, realistic and time-bound) principles. 

For example, a sales manager can have a specific sales target that is agreed with the management. Once the sales team reaches this set revenue target, the managers and possibly the employees get an annual bonus. 

MBOs do not improve the performance, they set expectations

This is the biggest misconception there is around MBOs and performance management. They are about setting different expectations, either for the whole company, team, or just individuals. It doesn’t tell us how those expectations connect to a bigger picture of what we need to focus on in order to have such achievements. Telling a salesperson that he or she needs to sell 100 products is completely different from guiding the sales team to develop the best sales approaches which might even sell more products than expected. 

Objectives within the MBO approach are individual, siloed and hidden from the rest of the company. That drives individualism, criticism, and sometimes even unhealthy jealousy-based competition between team members that could achieve more together. That being said, it doesn’t mean you can’t do any personal goal-setting or performance management, just this can’t be the main focus. You can have goals that focus on personal improvement but you should definitely have goals that focus on organizational improvements. 

This is where OKRs come in. 

What are OKRs?

The OKR (Objectives and Key Results) methodology has some similarities with MBOs, like both are goal-setting approaches, both need to be specific and time-bound but they serve completely different purposes. OKRs are for teams and organizations to facilitate growth, improvement and innovation (while MBOs evaluate personal performance). It’s an outcome-driven framework that guides organizations to think about the results they really need to achieve. 

OKRs are mostly set quarterly on a company and team level. Individuals should never be pressured to set OKRs as personal OKRs can easily hurt your team. OKRs are meant to be ambitious, inspirational and, in most cases, achieving an OKR requires thinking outside of the box, trying new things, taking risks. And that is why OKRs are always divorced from compensation. 

Team Alignment is achieved through ongoing communication and exchange of ideas. It starts from management setting the overarching company Objectives which teams later will align with. OKRs don’t cascade, teams can pick their own approaches and challenges they want to overcome. All OKRs are transparent for everyone in the company. 

Read more about OKRs and how to set them here.

Primary differences between OKRs and MBOs

Frequency of retrospective meetings

Companies that deploy MBO-style performance management, review performance annually. Objectives are set at the beginning of the year and then evaluated at the end. Goals tend to be broad and strategic versus focused and tactical.

OKRs operate under the premise that goals need reviewing a lot more frequently. Instead, they are set quarterly and reviewed and updated every week during the Team OKR check-in. It allows an organization to take impactful opportunities and make decisions based on current information rather than wait an entire year to address important issues.

Measurement and scoring

MBO measurements and scores are a mix of “what I am going to do” and “how I am going to be evaluated”.  This evaluation is narrowly focused on a particular individual and prioritizes output (how much effort was produced) rather than outcome (how did this effort impact the business).

With OKRs, the Key Results are always quantitative and focusing on measurable outcomes. With Key Results you will prove if your Objective was achieved or not. OKRs focus on results (outcomes) and not on the activities (outputs). Read more about the difference between outcomes vs outputs

The role of managerial input

Within the MBO approach, managers tend to discuss feedback and results privately with an employee. All goals are personal and the manager does not share them with the team. 

OKRs are team-focused and not set on individual levels. They are also transparent, shared and reviewed together with the rest of the company. 

Compensation

MBO sets the stage for determining an employee’s level of compensation based on the annual performance review model. Goals like this always focus on individual performance and their progress is evaluated based on the targets set for the employee at the beginning of the year.

OKRs should never be tied to compensation. Otherwise, people would fall back into their comfort zone and set less ambitious goals to make sure they can definitely achieve them. This goes against the whole point of OKRs.

Why OKRs are becoming preferential

MBO is a famous approach and it might work for some organizations. This methodology has been around since the dawn of performance management. However, the OKR framework makes the goal-setting process much more engaging for business teams since they align their objectives with the company’s bigger picture directions.

Here are a few additional reasons as to why OKRs are on the rise:

OKRs create intense focus for the team

OKRs are not business-as-usual operations, they focus on team growth and improvements. OKRs are like the north-stars for the team, those are the priorities for the quarter. Projects and other things that people will work on should be aligned with OKRs: if a project doesn’t help to achieve the Objective, maybe it should not be worked on. This helps the team to prioritize and work together towards specific outcomes. 

With OKRs your whole company can be aligned

Company Objectives set the direction for everyone. That means teams can be better aligned with each other because at the end of the day they are all trying to achieve the same things. Each team just contributes from their own angle based on their expertise. It’s a really successful way of solving complex company challenges. 

OKRs bring growth, improvement, and innovation

It’s about finding the small challenges to solve or new opportunities to try. Goal-setting and strategic planning in organizations has been really vague for many years and it meant communicating just the high-level expectations. Knowing what is expected doesn’t mean people know how to achieve it. The OKRs help to choose together what are the things that would help to reach those expectations faster, with fewer resources, and happier and more motivated people. 

Read more about OKRs in this free ebook

Step by Step Guide to OKRs

Step by Step Guide to OKRs

OKRs are not the easiest methodology to pick up, as countless articles and books out there would have you believe. Most books on the subject start by highlighting how they can revolutionize your company and boost productivity across your entire company, but they don’t give you much info on how to actually go about it. 

That’s why the “Step by Step Guide to OKRs” was created to offer concrete, real-world examples to help you start setting impactful and meaningful goals. This book will teach you how to adapt and implement OKRs in your business so that you can become a better manager and leader.

Final thoughts and considerations on OKRs vs. MBOs

The most significant similarities and differences between OKRs and MBOs include:

  • The MBO approach is used for performance management and the OKRs to improve the company and teams.
  • Objectives within the MBO framework are set on a personal level annually and OKRs are set quarterly on the company and team level. 
  • Objectives in MBO are tied to compensation and that makes them more risk-averse while OKRs are divorced from compensation and should be ambitious. 
  • Objectives in MBO are private and siloed and OKRs are transparent while alignment is achieved with cooperation and communication. 

Shifting from the old traditional MBO framework to OKRs to have better growth and innovation requires a change in the culture and change in the management process. It’s not just a new tool that you will be using, it’s the new mindset that the whole company needs to adapt to. Here’s the best practice process to successfully go through a change in organizational culture.  

Using OKR Software

If you’re considering introducing your team or company to OKRs, then be sure to use the best tools available. With Weekdone, you’ll be able to speed up the OKR implementation and learning process thanks to visual dashboards, intuitive reports, and most importantly, direct and unlimited OKR Coaching for you and your team.

Sign up to Weekdone for today – free for 3 users or try free for 14 days if you’re a bigger team.