Some believe that Management by Objectives (MBO) is a utopia. What is the reason for this opinion? Let’s figure this out with the KeepSolid Goals team!
Of Men and Objectives
In essence, the Objective is a fundamental property of almost all living things. A person thinks with goals, even if we may be unaware of the fact. We often try to imagine some kind of ideal resolution to a situation, which we later try to implement. Even animals can deliberately improve their behavior to achieve better results, for example, lions on the hunt.
Why then the principle of management by objectives often faces strong opposition in business? According to some studies in companies that use this approach, about 70% of employees are dissatisfied / disagree with it. At the same time, the practice of management by objectives has created and continues to create armies of motivated people. We will try to go into this problem.
Peter Drucker wanted to create a simple method that could help leaders achieve long-term goals by asking what does the organization want to achieve? and what are our goals in this regard? In 1954, Peter Drucker published his book The Practice of Management, where he describes the Management by Objectives approach.
According to this approach, the team should primarily focus on achieving the final result, not on performing the work to the letter. Before embarking on a task, an effective leader asks themselves the question What results are expected of me? The minutiae of the work, not to mention the specific methods of its implementation, should fade into the background for them.
What it looks like:
Goals are developed not only for the organization as well as for each of its employees. On the same note, the goals of employees should be linked to the goals of the organization.
Objectives are designed from the top down to link with the organization's strategy
At the same time, the goals are not just handed down - leaders and employees should develop them in cooperation and constant communication. During such discussion, answer the following questions:
What do you need to know to solve the problem?
What do you need to create to solve it?
What do you need to organize in the process?
In search of answers to these questions, both the manager and the employee begin to better understand what exactly needs to be done and how.
Communication when working on a goal should be as streamlined as possible.
The company sets objectives, which are then prescribed to divisions, and finally, short-term goals are assigned to employees.
The Essence of the Method, and Some Management Errors
Edward Deming (the father of TQM) once met with Peter Drucker. Deming drew Drucker's attention to how MBO is usually implemented with short-term numerical goals in mind, rather than as a strategic management tool that Drucker had originally envisioned. This prompted Drucker to investigate the actual application of MBO in organizations. He found that MBO is often misused in ways that are exactly the opposite of what Drucker had intended.
According to Drucker, management by objectives is, first of all, the practice of correct, robust communications. The key to achieving the goal is clarity and depth of understanding in communication between the manager and the subordinate.
Objectives should never become the basis for control, for one person dominating the other. Drucker emphasized that work on goals should be used for self-reflection and knowledge, not as a tool of top-down control. By Drucker, goals are a special type of relationship between a manager and an employee where the focus is on finding opportunities and exploring the challenges associated with the organization's strategy.
Unfortunately, instead of that, MBO is often used by managers to set quotas for their subordinates. Instead of seeking to improve the system, the relationship between manager and employee becomes a short transaction, and the goal becomes a bargaining chip and a game. This is the source of the evil that generates a perverse understanding of this approach - to achieve goals in any way.
This (mis)understanding of the approach often leads to unethical behavior, and sometimes the failure of the entire business. Suffice it to recall how outsourced dispatch police employees made 999 calls during “quiet” times of their shifts to achieve their goal of answering 92% of calls within 10 seconds. Or how doctors switched from treating critically ill patients to those with minor problems to meet the quota of reducing the waiting time to 4 hours.
There are only three ways to your KPI results:
manipulate numbers (see meetings of some companies before reports to shareholders)
manipulate the system that gives those results (for example, cut the cost of capital repairs to increase EBITA, which will inevitably lead to problems in the next year)
improve the system and the processes that give those results - the most unpopular method, but at the same time the only healthy one
Both Drucker and Deming called for the breaking down of barriers within organizations. Ultimately, a company always wins as a team. Simplistic and incorrect application of MBO achieves the opposite effect - useless quotas and the struggle for their goals divide the company into fragments that begin to compete with each other because each department and each person in such an organization is for themselves.
It is human to choose the path of least resistance. Organization-wise, the consequence of such a dynamic is that MBO practice becomes a lash, and the focus shifts from strategy to short-term goals. Drucker would most likely call such a perverse understanding of MBO and quota governance mere manipulation, not management.
The fact is, in most companies it is very difficult for a manager to achieve the resources and plans needed for the long-term improvement of the business processes and systems. Sometimes, an employee may actually be punished for such initiatives, rather than appreciated.
Drucker was seriously concerned that the abuse of MBO led to increased employee turnover. All the power of MBO has come down to using it as a hammer to knock out short-term goals, rank people, and determine bonus payments. This was due to some pretty “creative” interpretation of this approach on the part of “effective managers”.
Owners who misunderstand Drucker make many management mistakes. Such misinterpretation leads to bad consequences. Also worth mentioning are the “gurus” who teach the misunderstood MBO.
Key Points of MBO
At first glance, MBO looks simple. But trying to achieve multiple short-term goals while interpreting this method pretty ambiguously often causes unintended consequences. And as a result, bringing displeasure of the general public upon the MBO approach.
What is the source of growth and sustainability in business that we need to develop?
productivity (competitiveness)
innovation (competitiveness)
precise solutions
Based on the main human value, the main property of a free individual - the ability to set goals - Drucker formulated the true essence of management:
Proactive management (goal setting), instead of passive responding to external impulses
Development by setting and achieving the goals of the enterprise, instead of merely surviving
Vital principle: the main task of management is to increase energy in the organization!
The point of MBO is not so much in tracking factors as in the involvement of all employees - both managers and subordinates - in setting the organization's goals and taking responsibility for achieving them.
In 1999, Drucker wrote the book Managing Oneself. By the end of his career, he declares that the main need and mission of a modern person is to control themselves, instead of doing what they’re told. Employees should focus on their own values as the only criterion for choosing a place in life. And also - on taking responsibility for relations in the organization, since modern organizations are based on "trust and understanding."
“Skilled people should manage themselves,” Drucker recommended, adding:“ They should have independence in decision making.” With this, he pointed out a very important criterion for the successful implementation of his approach.
Goal Management is about volunteering to improve yourself. The criterion for the success of such work is the goals of the team and the company that the person takes as his own.
Our knowledge, claims Drucker, is a perishable product, and the process of their accumulation and subsequent immobilization occurs faster than any other in the body. To maintain a certain level of development, the company needs competent specialists in the field of training and retraining.
What You Need to Know About Financial Objectives
There is a curious profit-related effect in MBO. The thing is, Profit is a bad key target. It is the result of correct decisions, actions, strategies, but not an end in itself.
To illustrate what we mean, take the game of tennis. What is the purpose of the game? The simple answer is victory, i.e. score. But good players know that the real goal of the game is the best possible shots to the opponent's side, as they are what ultimately determines the score. Focusing on the score usually leads to loss, while focusing on doing your best shots - to victory!
Drucker said that a business whose objectives go beyond just making money lives longer and is more successful. To illustrate, here are the top 3 reasons for the failure of startups:
No market need
Run out of cash
Not the right team
Translated into the language of objectives, this would mean that of the three, at least two reasons are non-financial.
“You Can Only Manage What You Can Measure” - Really?
The notion that you can only manage something if you can measure it is often attributed to Drucker, but he never said that. Firstly, there is an official message from the Drucker Institute about this. Secondly, Drucker was talking about obviously opposite things. Indeed, in a conversation with his client, Drucker lists the following most important personality assets in business:
relationships with people
developing mutual trust
identification of people
team building
Drucker said to his clients that such assets cannot be measured or easily defined. And these are not just key functions. Only the leader themselves can implement these principles in their company.
Conclusion
The problem with applying the Management by Objective approach is that MBO is:
not about numbers
not about KPIs and remuneration
By now, the business world has accumulated a lot of experience with these approaches, albeit not always successful, and increasingly returns to Peter Drucker to understand what was done wrong. As Drucker himself said, Management by Objectives works if you think through your Objectives first. But in reality, in 90% of cases, this is done backward.
Peter Drucker considered himself a "social ecologist." So it’s no wonder that his Management by Objectives approach can be misused in organizations where people are viewed simply as tools to achieve goals.
Drucker was a close friend of renowned economists Joseph Schumpeter (who considers innovation the key function of entrepreneurship) and Karl Polanyi. But in the end, he decided not to become an economist, because he was more interested in living people than in abstract models and numbers.
The MBO process, at its core, is an attempt to:
be fair and reasonable
predict performance and evaluate it more carefully
empower people to be self-motivated by setting their own goals
Implementing the Management by Objectives approach requires a significant investment of energy on the part of management. Human nature drives us away from any discomfort towards the place of least anxiety. This is another reason why MBO implementation works best in mature teams with extensive collaboration experience and high levels of trust.
The team must be lead by example, the team needs fuel and fire!
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