How Do Goal Setting (OKR & MBO) and KPIs Interact and Work Together?
All companies over 25 employees must have a formal process for both monthly.
By Bob Norton, CEO Coach & Consultant, Author and Speaker, AirTight Management
First, I think it is important to give credit where credit is due and so you should know that OKRs, originally called MBOs, for Management By Objective, was invented by The Father of Management Peter Drucker in the 1960s. The concept has been rebranded by many others as SMART Goals, OKR (Intel and Google’s preferred handle) and many others. However, they are all based on the same psychological and Management Science principles that will not change in the next 100+ years. That is that people work most effectively when they have clear objectives, priorities and communications, and are guided by a longer-term vision. The bigger your company gets the more important this becomes. Most people do not think ahead more than they have to, so it is a Manager’s job to force that thinking and planning. However, almost everyone, even Managers, need some help connecting the dots to the bigger picture plans, and breaking these long-term objectives down into monthly priorities and focus. That requires some discipline and process but really separates the professional Managers from people who just have the title.
MBOs/OKRs are generally designed for projects that have a definable beginning and end.
While KPIs are designed to measure ongoing processes that a company is expected to do forever.
Every company should implement a formal MBO process by the time it has about 7 to 10 full-time equivalent employees. This is not my opinion but sort of the unbreakable laws of physics in business and people management. There are very few exceptions, like when the work is framed by forced external processes, like the law (attorney’s work process is regulated) and accounting (GAAP standards, etc.). These are industries where the professional does not control the process, the system they work in does to a great degree. These principles are proven by over sixty years of practicing Management Science and lots of research now. They are not debatable! In fact MBO when done right has been shown to increase corporate value creation by 56%! That is the difference between a market leader and a company that goes out of business. Huge! Companies that do not do this MBO/OKR process well, with few exceptions, will fail to achieve significant market share and continued growth. They will be beaten handily by those companies that do this fundamental blocking and tackling of management well. This is a cornerstone of excellence in execution.
Each “objective”, or the noun “MBO” or should be a significant goal and manpower generally. A goal is not an MBO. To turn a goal into an MBO it needs to a) become objectively and specifically defined (e.g. a written description, hard number to achieve), b) have a specific deliverable date and c) have a binary indication of “Done”. The size of the MBO will depend on the size of the company and who is doing the monthly or quarterly list of Objectives. These should cascade up, not down, in a multilevel organization. Priorities cascade down. I would say generally an MBO (one line on a list) should never be under about a person-day of effort as then there would be too many on the monthly list to manage well. Typically, any given person, or department, should have no more than 5-7 key objectives in a give time period. Smaller ones can be grouped by category. If it is monthly then there are smaller MBOs, if you are doing a quarterly MBO process they will just be larger objectives. One might be 5 person-years of effort in an annual MBO process (e.g. new software release, hire and train 20 new sales people, move an office to a new location). The concept of “Objective” (noun: MBO or Key Objective) can be applied at any level or size (e.g. a person, department, Division, Company). A single MBO can be a person-day, or 5-person years’ worth of work, literally.
The purpose of the MBO process is to get away from micromanagement and allow bigger goals to be “owned” by a single professional, team or department head. Delegation with total clarity. They can then be 100% responsible for a specific deliverable/goal at a certain time that is well defined. It also helps people grow in responsbility by slowly increase the size of their, or their department’s MBOs. Stretching their planning horizon and thinking. Once you start using MBO/OKR well you will never go back to a “managing by the seat of the pants” process that most “managers” use daily. This is for amateurs, not professional Managers. It is micromanagement, almost supervision for low level employees who need to be constantly watched. MIcromanagement is not for departments, high-performance teams or professionals.
What About KPIs?
Typically, the need for many Key Performance Indicators (KPIs) combined into a dashboard kicks in a little later as a company matures some, often being required by 15 to 25 employees. It can help to have a Corporate Dashboard as early as ten employees though but that is mainly for the Owner/CEO. This is when processes have matured and you need to start “Running the business by the numbers”. A formal dashboard collection, distribution and review process is needed monthly, at least. Some departments might look at them daily or weekly but the management team should review them together monthly at least. Like MBOs once defined KPIs can be used as a language at many levels in the organization. These metrics allow entire departments and individuals to be focused, accountable and have total clarity on their monthly priorities. When companies do these things well they will constantly improve their business (Kaizen) via this continuous feedback loop. This allows them to become market leaders over time. Because most companies fail to get these business basics right, and have the discipline to maintain them, doing these two things well can be a significant competitive advantage. However, if you do not do these and your competitors do you are toast. In time they will eat your lunch.
Typically, in a small business, let’s say with 20 to 100 people, has monthly OKR/MBO meeting that must be held to communicate across departments and tap into the brain trust of the company’s entire management team too. It should generally be an hour but might take 90 minutes or more the first couple times while people are learning the process. There is some prework in agreement of the priorities for the coming month with superiors, but this can be a quick 10-minute conversation that answers the question “What are your main priorities for next month boss?”. However, and this is critical and not optional, the process requires the owner of the objective to set the time frame, not the boss or superior. Why you say – oh so many reasons:
- The objective owner has the best information and controls the resources
- They know about other ongoing work and conflicts
- They are then forced to plan and figure out the needed resources and validate the deliverable is realistic (the ‘R’ in SMART). This actually stretches the objective’s Manager/Owner’s thinking abilities (neuroplasticity) to plan better. It has been shown that more than 80% of people have very limited forethought. The brain needs to be exercised in this to improve this capability, just like a muscle. Each month they will get better.
- Ownership of the timeline means that they then really own that goal, as their own, and cannot make excuses later easily, hence they are vested in its achievement. Goals or objectives handed down on from on high are often not even taken seriously and create hidden giggles and a lack of respect for upper management. Generally, this evolves into an expectation that few, if any, goals will be met, and management as usual, will have egg on their face for their unreasonable and dictatorial style at the end of the month. Nothing degrades morale faster than a CEO or Executives that act like they know everything and dictate goals and timeframes. This will degrade a company’s culture and performance over time and actually push out the best people who will lose faith in management and find better opportunities. A self-fulfilling prophecy of failure really.
- There is a psychological power that comes from standing up in front of a team and saying “My team (or I) will accomplish this for you in this timeframe”. And the others on the management team have an opportunity to drop in ideas, help, past experience and more to create a supportive and collaborative environment.
- The MBO owner is empowered and better respected by their own team because they are not a lackey to a superior but really in control of their business area, budget and deadlines. Of course, sometimes there are “must do” items, but that just means that becomes the #1 priority for all, it does not mean the boss gets to dictate the deadline. They can, however, ask “What will it take to accomplish X by Y date?” and still respect the vital principles of OKR/MBO.
I am happy to email forms that frame the MBO/OKR process and instructions to anyone that emails me atbnorton@AirtTightMgt.com with the subject line “MBO Forms Please”. However, I have found inevitably people need to be both trained and coached through the process to get it right. It is a shift in thinking away from past reflexes. Generally, the first three monthly meetings should be attended by an expert Coach to get the team doing the process right. It is abstract, and I do not entirely understand why, but I know for a fact that hardly anyone gets it right without some real-world examples and coaching first.
Unfortunately, few business schools teach the importance of these two crucial tools of management success, and how they work together. I guarantee if you do both MBO and KPIs well you will become a leader in your marketplace in time simply because most companies do not do both well. You will have higher productivity, more focus, a better culture to attract better talent and inevitably create some sustainable competitive advantage just via excellence in execution.
See my video on MBO/OKR here. We also have a full course posted at Udemy.com for a nominal fee. Access to our full training library is normally reserved for clients but we will design and deliver a custom Organizational Development (OD) program for a surprisingly low fee, using our on-demand video library and some remote coaching and a group webinar. This is guaranteed to turbocharge your company’s performance in 60-90 days.
KPIs – Or Key Performance Indicators
Ongoing or repeating goals are generally better measured by KPIs, or Key Performance Indicators, which are numerical metrics for mature, or well-developed process, events or even “weekly” or monthly performance metrics. A dashboard is a set of KPIs for a company, department or even a person. Again, like MBOs, the concept can be used at any level really. And over any time frame.
KPIs are usually the inputs and outputs of repeating processes. They can be activities, dollars, quality measures or productivity ratios. Usually is it best to have all these categories covered for any given process, department or even the entire company. I review many examples of dashboards and good KPIs in the video courses we offer.
KPIs are most valuable when they are tracked over time to see variations and changes happening to
uncover trends for management to act on and improve. As such they should be tracked in a spreadsheet matrix, not with graphs which prevent seeing relationships that are delayed in time between all KPIs. Pretty colors and graphs do not make an effective dashboard. A high ink-to-paper ratio allows you to see relationships between KPIs better.
However, if your business is all about events you likely should have a standard “Event Report” which would contain the Objectives and KPIs for each event, as this can vary. Then you would have standard results metrics (KPIs) that would compare for every event like profitability, productivity, quality and others. These would be aggregated in a company level dashboard report to Management monthly, so they can watch averages and trends over time for all events. See KPIs work at all levels and become a “language” to speak in shorthand and the math of the business. This attribute also allows a “drill down” to specifics on any report without drowning in data. The result is fully mathematical accountability and measurement of all key results, which also empowers employees and managers to “own” their results. It has over a dozen advantages and using these well is often the difference between a market leader, that constantly grows and improves, and an also-ran company.
Bottom line: If you have not mastered these in the past then bring in a professional to define them. Distance and objectivity is needed to do it well. It is short money given the large and ongoing impact it can have on a company’s revenue, sales, profit and culture for decades to come. These are what separate professional Managers from people with the title “Manager”.
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Dashboards are the key tool to run and scale businesses by getting things down to a science. They enable managers to put people and processes on auto-pilot so they can work “on” the business, not “in” the business. Dashboards enable Management By Exception (MBE), a more advanced management method. They allow people and processes to mature and be measured and accountable to results. They allow superior projection and the ability to constantly improve over time. No company becomes very successful without systematization and dashboards are the key tool for this.
We have a three-hour course on dashboards for executives, two hours for managers and one hour for individual contributors. Levels I, II and III. Developing the proper KPIs and OKR is art, not science and requires lots of practice. I have been doing this since about 1990 and so can do it very rapidly with high value for a company by getting it right the first time. I can design, train and implement it in most any company in two to four weeks. See: Dashboards And Metrics
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