Wondering if your company is OKR ready?

Wondering if your company is OKR ready?

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OKRs and MBOs: How do they differ?

30 March, 2022
4 mins

Objective and Key Results (OKRs) and Management by Objectives (MBOs) are two of the most renowned goal-setting methodologies that are used widely for making teams perform at a superior level. They are quite identical as OKRs are known to have evolved from the MBOs. Both of these frameworks have been helping organizations in establishing strategic objectives. So, it is very significant for you to have a clear understanding of OKRs and MBOs, how they differ and the advantages they can bring to your organization. 

OKRs and MBOs

Source: pexels

Both OKRs and MBOs involve writing down an internal state of outcomes that your organization wants to achieve. While the MBO goal setting is centric on the “what”, OKRs go one step ahead of MBOs as it encloses a set of benchmarks of progress. Beyond their structures, other prominent differences are the extent of autonomy, method for reviews, and how quickly and continually objectives change. Let us now take a look at both of these platforms specifically.

What is MBO?

An extremely renowned goal-establishing practice, MBO starts from the top leadership deciding and directing the objectives of the organization for the cycle. A typical MBO cycle lasts for around a year. In this framework, leaders establish the objectives for each employee working under them for the cycle. Although, the employees do have the autonomy to align tasks for accomplishing their benchmarks. Attaining the objective is expected during the MBO goal cycle and therefore, the employee’s performance evaluation, compensation, and bonuses are all tied to the success of the objective. 

The very first step of the MBO process is for individual departments to set objectives that support the objectives of the top-line organization. In the MBO process, it is the managers who decide what the employee’s individual contribution during the cycle is going to be. 

Examples of MBO –

a. Increase product sales by 20%

b. Develop an annual strategy for customer service. 

c. Raise $1 million in funding for online branding. 

d. Increase debt collection by 8%

Unlike the OKRs, MBOs don’t provide the context about the relevance of the objective. Plus, there are no additional qualifiers for what the progress is going to look like. Referring to the examples of the MBOs above, the version of OKR will look something like this:

a. Acquire the biggest market stake in our region by selling more products. 

b. Make the customer success so incredible that the majority of the customers come back to us again.

c. Approve product-market fit, as measured by raising $1 million from the investors. 

d. Improve our cash flow via an efficient collection of debts. 

What is an OKR? 

OKR stands for Objectives and Key Results and evolved from the MBO goal-setting methodology after Andy Grove acclimated to Intel’s MBO process during the 1970s. OKRs outline the organization’s success in a more specific manner. The objectives define what is to be done and the Key Results define how the progress is to be tracked. Each of the set objectives is convoyed by 3 to 5 key results. The objectives tend to be qualitative, while the key results got to be measurable. OKRs change a few times annually, typically after each quarter. While employees and teams still hold the autonomy to decide how to accomplish the key results, everyone in the organization works toward a common set of benchmarks of success. 

What are the differences between MBO and OKR?

MBOs are known to be risk-averse, while OKRs are generally aspirational. Following are more differences between the two:

a. The goals under MBO are more focused on the ‘what’ aspect, while OKRs link the ‘what’, ‘how’, and the ‘why’. Unlike the OKRs, the MBO strategy states the objectives without defining the benchmark of success throughout the process. In the OKRs, a set of key results is used to achieve the set objectives. 

b. The goals under MBO are private while under OKRs they’re public. Under the MBO approach, the goals are more about the performance of the individual. Conversations are held between the manager and the objective’s owner which are private too. On the contrary, OKRs are visible to everyone in the organization. 

c. The MBO cycle is  annual while for the OKRs it is generally quarterly MBOs are reviewed perennial while most OKRs have quarterly reviews. Consequently, MBOs are not regulated as regularly as the OKRs. Changes are harder to make in the MBO goal cycle. The faster pace of quarterly reviewed OKRs provides more prospects to adapt over time. 

Why do organizations prefer OKRs to MBOs?

OKRs are known to be more effective than MBOs as:

a. Organizations desire to have a focus on their overall efforts. The OKR cycle initiates with the thought of choosing the most important thing for the organization in the next three months. OKRs enable the leaders to provide their team with a compass and baseline for assessment. 

b. Nowadays it has become extremely crucial for organizations to align their day-to-day activities to the overall vision and mission of the organization. OKRs enable organizations to break down the long-term objectives into shorter-term achievable objectives. 

c. Each and every leader wants to promote innovative thinking in their organization. OKRs give organizations and their employees the much-needed push to strive beyond what they thought was possible. 

d. Organizational success is dependent on more than one factor. By connecting the quantitative key results with the qualitative key results OKRs protect against the harm that can be caused by success at any point. 

Even though MBOs and OKRs have been highly popular throughout the years, organizations are more inclined towards the OKRs for the reasons elaborated above. Your organization too can thrive with the help of the OKR tool. So what are you waiting for? Contact us today.