We believe that many organizations implementing OKRs are making a big mistake. At the very least, OKRs will not solve the problems companies are expecting them to resolve.
OKR (Objectives and Key Results) is a simple way to align the organization’s goals with its strategy. Companies define their strategic themes, then create Objectives and respective Key Results to align everyone with the most important strategic goals.
The concept is like Management by Objectives; senior managers place their vision on the top, then cascade down to the bottom of the organization as they define their strategic goals, but let’s take a better look at the differences.
OKR and MBO – What is the difference?
OKR is evolved from MBO (Management by Objectives), taking the best practices out of and adding a few on its own. MBO was introduced by Peter Drucker in 1954. Both MBO and OKR are goal-setting frameworks. Their principle is to evaluate and enhance the performance of employees over a period of time. They are however few differences, like the way in which they measure performance, frequency or their end purpose.
Important differences between OKR and MBO
Let’s take a look at the most important differences between OKRs and MBO.
Frequency of review
Companies that use MBO normally perform yearly performance reviews. They set the objectives for employees for the entire year, so the performance is analyzed and the end of each year. The goals are broad.
OKRs have a higher frequency of reviews. Companies set goals monthly or quarterly and are then evaluated accordingly. This allows people make corrections earlier when there is still a chance.
Mode of measurement
MBO scoring models are flexible, they´re open-ended and use both qualitative and quantitative measures.
OKR measurement is quantitative and is precise. OKR rely on SMART goal setting technique.
MBO is strictly confidential as it is done between a manager and his employee. Objectives are set individually for each employee. The performance directly influences compensation.
In OKR, the key results of individual employees are aligned with team and company objectives. There is no confidentiality. The objectives need to be linked together to achieve company goals.
Purpose of review
The main purpose of MBOs is to resolve the compensation of employees based on their annual performance. The focus is always on the individual performance.
Compensation is not affected by the achievement of OKRs. The main focus is to push to achieve excellence.
With MBO, you are expected to achieve 100% or more. If you achieve less, your compensation is affected.
Normally, 60-70% achievement is expected with OKRs. The goal setting should be ambitious, but also realistic.
Everything looks good but…
The OKR method allows every staff member to have a very clear understanding of the company’s vision and mission. Everyone in the organization can create their own objectives to fulfill the company’s strategic goals. Managers can then create their objectives to support the staff goals.
In theory, this is a fantastic approach because society is moving so fast, and we live in a very complex world. Frontline workers are the best people to understand the customer’s needs and fulfill their requirements. Therefore, they should be the ones who create the products that delight customers.
Because they understand the customer’s pains, the team defines their objectives to create great products. Managers can then create their goals to support the line below and so on.
In truth, this practice does not work. In the following section, we will present several reasons why OKRs will not solve the big problems in your organization.
It is very difficult for Executives to give up their power
OKRs require a completely different mindset from management. If OKRs are applied properly, executives must delegate their responsibility to the whole team. Many executives feel like they have lost their power, which is very difficult for most leaders to do.
In many cases, when organizations apply OKRs, they apply the process the in the same format as Management by Objectives: using a Top-Down Approach. But this format does not create value for the organization because the top managers do not understand what the customer’s real problems are. When defining the objectives, they are usually not in alignment with the company’s current reality.
How consultants are selling OKRs to organizations
Another issue we see with implementing OKRs is that many consultants are selling OKRs as the new way for the organization to become Agile. We need to be very careful with this thinking. Implementing a tool will never make your organization Agile if the culture and management style does not change first.
OKRs often create very challenging objectives that cannot be achieved. Consultants defend this by maintaining that reaching 70% of the OKR is a great work. However, optimally, you want to create an environment that encourages employees to achieve 100% of their goals, not 70%. In our opinion, by telling your employees it is OK to achieve only 70% is fostering a culture of underachievement.
In most of the companies where OKRs were implemented, we noticed that people do not reflect on how the OKRs impacted the business. At the end, OKRs just become a checklist for the managers to check if people fulfilled their OKRs.
In summary, we believe that in theory, OKRs could be a great tool. However, in practice, OKRs do not deliver the results they promise. Now you might say “How come when Google uses OKRs?”
That may be true, but let’s face it, your company is not Google! You do not have the same culture or the same developers that Google has. In our opinion, Google can try whatever they want; the result will always be good. Just think about a great football team, the coach can change a couple of players, but the team will still be great.
Most of us believe that copying another company’s best practices is the solution for our problems, but most of the time, this does not work.
So, if OKRs are not the best option; if they do not bring extra value to the organization, what is the alternative? What is the solution?
What should we do instead?
We coach, train, and consult organizations to implement an Agile Portfolio Management. In our opinion, this is a more interesting approach because the leaders in an organization can define their own budgets for strategic projects. Executives can define what projects or products the organization should work on in the next six to twelve months. They can also allow the people working on those projects to create their own “product backlog”.
As part of this process, the organization must list all the ongoing projects and map all the people who will be involved in each project.
This is a huge step that 90% of the organizations do not take. It creates complete transparency in the amount of work that is ongoing in the organization. The process proves that it is not possible to deliver the products as they should be delivered because there are too many parallel things happening simultaneously, and no real focus by the company.
After you identify your revenue streams – the products that are bringing the revenue to your company – it is time to start terminating or stopping the projects that are not directly connected to the strategy of the organization.
You can work on the strategic projects that you believe will add revenue to your company. In most cases, you will quickly learn that you do not have enough people to do everything. You will have to prioritize projects based on their business impact and not some gut feeling.
At Evolution4all, we usually work in three-month cycles to help organizations define the most important goals they want to achieve within the next three months of their Revenue Streams.
The teams provide product backlogs based on the customer’s needs. These goals are structured to define expected revenue, expected cost savings, improvements, and other measures that make sense for the organization.
If you start connecting your vision to your strategy, your strategy to your portfolio, and your portfolio to your products using clear goals for three months, you can create a highly focused organization that delivers its best work to their global market.
At the end of the three months, you can reflect on the business impact your product delivery has made. This is the point where we see most of the companies failing.
Many people talk about Agile Retrospectives, but no one does a “Business Retrospective”. We find this piece is missing in most of the companies. Of course, the scope of this activity differs significantly from a regular Agile Retrospective.
Often, companies produce “stuff”, hoping to get some business benefit out of it. Very seldom do we encounter companies that reflect on the impact that their development has caused the company.
When you apply Agile Portfolio Management, you can perform a business retrospective to find out what you have delivered in the last three months.
When we say three-month intervals, it does not mean that you deliver your product after the three months. It means, you should be delivering every day, every minute, and every second, whenever your organization can deliver. Three months is an interval timeline for when your company makes its public release and analyses the business delivery to the market.
When you implement this process into your organization, you can start analyzing every task your teams perform. By doing this, you will have a better understanding of the impact that your actions and your development have on your business. Then, if you inject the learning and experiments into the next three months, you will start to see spectacular results. Your company will become Agile, Innovative and a Learning Organization.
Did you like this approach? Would you be interested in trying this out in your organization? Well, we´ve got a perfect training tackling this path. Why don´t you look at the Agile Portfolio Training for Leaders? Check for more information here.