MBO vs OKR: A Comparative Analysis
Objective-key results (OKRs) and management by objectives (MBOs) are popular approaches to setting organizational goals. They both emphasize the need for clear and concise objectives focusing on long-term outcomes, but there are key differences between them.
OKRs are more focused on the process rather than setting specific targets. They emphasize innovation and growth, while MBOs focus on tangible goals with measurable results. OKRs also tend to be more agile, allowing for frequent course corrections as needed.
Creating an efficient goal-setting system is a key part of any successful organization.
It helps ensure everyone is working towards the same objectives and can measure progress. Having objectives also encourages transparency, accountability, and better communication.
You must understand how these two approaches differ and what advantages each one has to offer.
In this article, we’ll compare MBOs and OKRs and help you decide which is best for your organization. We’ll also provide practical examples to illustrate how each approach works.
What is MBO?
Management by objectives (MBOs) is a procedure where the employees and management agree on specific goals and develop a strategic plan to reach them.
It helps improve an organization's performance by encouraging commitment and participation from both parties.
One of the most critical processes in the MBO approach is the monitoring and evaluating of employees against set objectives. Involving employees when setting goals and creating action plans to achieve them motivates them to fulfill their duties.
How does the MBO process work?
The MBO approach uses objective standards to measure a company's performance and its workers. It compares productivity to set standards allowing the management to identify weak areas and improve.
MBO requires every employee to have at least two or three objectives that are reviewed annually.
Let us look at the steps involved in this approach:
1. Determine company objectives
The management should identify clear, realistic, measurable goals aligning with the organization's objectives. Your company's primary objectives give you a metric to help measure employee contributions.
It also unifies the company's path toward improvement and innovation. The management should communicate objectives to all employees so everyone understands and contributes towards them.
2. Translate organizational objectives to employees
Once you determine your main objectives, translate and allocate them to employees. Make it clear to employees what they must do and how their efforts contribute to the company's success.
Eliminate all doubts by clearly explaining each objective and setting the expectations right.
The employees should have an understanding of how their tasks contribute to the achievement of the company's objectives.
3. Monitor and review progress
A successful MBO system requires regular reviews of the progress made by each team or employee. This helps identify any gaps in performance and take corrective action.
You should give your employees the resources they require to track their progress to determine if they deliver the expected results.
If they meet the targets, they experience professional growth and are motivated to continue their good performance.
4. Evaluate and provide feedback
Employees love it when they receive honest feedback about their performance. It shows that you recognize and appreciate their efforts.
The MBO process should also include evaluating individual performance and providing feedback on the results achieved.
5. Reward success
Employees who are rewarded for achieving their objectives feel valued and motivated to do more.
Rewards can be bonuses, extra vacation days, or even public recognition for their contributions.
What are OKRs?
Objective-Key Results (OKRs) is a goal-setting system that sets measurable objectives and associated key results. It serves as an effective way to align your team's goals with the company’s objectives.
OKRs are mainly used to measure individual performance and progress toward organizational goals.
They can be applied at the team, department, and individual levels to ensure that every employee works towards the same objectives.
The OKR model consists of two main components: objectives and key results.
An objective is what you want your organization to accomplish qualitatively. It should be achievable and motivating, and clear for everyone involved to understand.
The key results are the measurable goals that help you monitor your progress toward an objective. Effective key results should be specific and aggressive while still realistic.
They evolve as your work progresses, and once all are achieved, the objective is achieved.
How to use OKRs for performance monitoring
OKRs work best when measuring team or organizational performance. Using OKRs to measure individual performance and award employees can cause business problems.
It can create unhealthy competition and employees picking weak goals over challenging ones to get bonuses.
OKRs should be about the company goals and how each employee's performance contributes to the main objective.
Here are ways you can use OKRs in your business to monitor performance:
Write top-level OKRs for your team
While the management team directs the company toward an objective, it is up to departments and teams to set the flow. Bring your department members together and set the tasks you must complete to achieve specific results.
Working with the team makes it easier for everyone to understand their role. It also helps your team members feel more connected to each other and other teams.
Review your team’s OKRs
Outside of annual reviews and one-on-one meetings, it can be challenging to determine the best ways to support teams. OKRs can offer you data on gaps you need to fill to complete a project within the allocated time.
For example, you may find that a certain team requires more skilled people to accomplish a task. Providing adequate resources makes them feel supported, raising their motivation and determination.
Encourage and reward teamwork
OKRs provide a base system for teams to communicate and collaborate, making them successful. This is one of the ways to encourage teamwork.
When employees work together to achieve an objective, they share ownership in the end product, making them proud.
What's the main difference between MBO and OKRs?
These two frameworks set and communicate business objectives and monitor performance to achieve them. While they may sound similar, MBO mainly focuses on what you want to achieve, while OKRs set what you want to achieve and includes a set of measures of progress.
The goals set in MBOs are not as public as those in OKRs since they are mainly between the management and the individual. OKRs are more transparent, encouraging teamwork and quick conflict resolution.
MBO and OKR examples
Organizations can use the MBO or OKR goal-setting framework to determine and achieve objectives.
Here are real-life examples:
SydGel Inc. sets an objective to increase its media following by a minimum of 300% annually. The employees will first collect performance data to determine if the goal is achievable with the current resources.
The next step is to define the roles of everyone in the marketing team and crest a list of tasks for each member that contributes to the main goal. Team leaders determine what steps to take while adding new information to each team member’s goals.
A simple OKR example is setting an objective to please your customers. In that case, your objective will be “please our customers.” Your key results may include the following:
Increase customer retention from 90% to 95%
Collect feedback from a minimum of 50 customers monthly
Raise your net promoter score (NPS) to 9
MBO vs OKR - Pros and Cons
MBOs and OKRs offer numerous advantages to organizations. However, they also have their downfalls.
Pros of MBO
Here are some of the pros of MBO:
This framework encourages workers to set ambitious goals that align with the company’s main objective.
The more involved employees are, the more motivated they become in working toward taking the company to greater heights.
Employees work hand-in-hand with the management to set their goals, spending more time together.
This creates more opportunities for them to raise questions, concerns, and ideas that can positively impact the main objective.
Improved organizational performance
The MBO framework helps the management team provide clear direction to employees, which helps them perform better.
They can plan their time accordingly as they understand how their daily activities impact the organization’s success.
Cons of MBO
Here are some of the limitations of the MBO:
Long time investment
The initial stages of an MBO take a considerable amount of time. Your company can reduce the setup time by hiring someone already familiar with MBO to spearhead the process.
There are also a lot of meetings involved, which may lead to managers and employees getting less time to complete their tasks.
Strong focus on achieving short-term goals
Achieving a long-term organizational goal requires establishing and completing multiple short-term goals.
A company can sometimes lose its direction on long-term goals when it puts a lot of emphasis on short-term goals.
Pros of OKRs
Here are some of the pros of OKRs:
OKRs are short-term and therefore require monthly or once-a-quarter reviews. Teams hold meetings where everyone talks about their progress which is motivating.
When setting OKRs, everyone knows the goals and can contribute openly. This ensures clarity throughout the company, enhancing teamwork and overall productivity.
OKRs are qualitative
OKRs are objective, meaning you know when you achieve them. They are easier to manage, and you can cross them off your milestones as you progress toward your main objective.
Con of OKRs
Here is the limitation of OKRs:
Proper alignment is a challenge
OKRs are popular among organizations dealing with many changes, such as start-ups. Some become outdated, hampering a company’s ability to respond to new circumstances.
MBO or OKRs - Which one should you use?
MBOs and OKRs are both effective for businesses when conducted in the right way. They both help an organization move towards its strategic goals and achieve them on time.
But due to their drawbacks, OKRs are not ideal for companies that experience many changes, such as start-ups. They are more effective for well-established companies.
Kippy can help you make the right decision.
Learn more by reading: OKRs vs. KPIs vs. MBOs? Choosing the Right Framework (Comparative Analysis)
Takeaway: Achieve your organizational goals with MBO and OKRs
Businesses can use MBOs and OKRs as frameworks to set, track, and achieve their organizational goals.
They can help improve individual and team performance and communication between departments when managed correctly.
However, it is important to understand the pros and cons of each framework before determining which one works best for your organization.
Ultimately, the best framework comes down to your specific goals and how well they can be implemented with each approach.
Kippy is the perfect tool for businesses looking to implement MBOs and OKRs.
We provide an easy-to-use platform allowing businesses to manage their objectives easily, key performance indicators (KPIs), and projects.
For businesses needing help with their performance-management strategy, visit Kippy to book a free demo, learn more about our features, and get started towards achieving organizational goals.