MBO (which stands for “management by objectives”) has been a popular management tool for decades. But there’s an alternative approach that’s gaining a lot of traction at the moment: OKR (or “objectives and key results”).

If you’ve read anything about OKRs, you might have noticed it has some distinct similarities to MBO. However, as we’ll see in this article, there are some clear differences between the two.

Defining MBO

MBO was formulated by Peter Drucker in his 1954 book The Practice of Management as a way to improve organisational performance. In essence, MBO describes a process of defining specific and clear objectives for employees and is designed to create a culture of working towards common organisational goals. The concept spread widely, and has become the “norm” for many companies. Indeed, if you think of the classic way of managing performance – i.e. a manager agrees objectives with each employee, and then their performance (and compensation) is assessed against these objectives – what you’re thinking of is MBO.

Digging into OKR

Because it’s getting a lot of attention at the moment, and has been popularised by tech companies like Google, you might think OKR is a new approach. In fact, OKR has been around for decades. The concept was introduced by Andrew Grove, former CEO of Intel, in the early 1980s and caught the eye of venture capitalist (and early Google investor) John Doerr. Doerr picked up the approach from his time at Intel and took it to Google, who loved it, and OKR spread from there.

Like MBO, the OKR approach is about setting strategic goals. However, it goes further than MBO, breaking down strategy and execution into two parts: the objectives (the Os) and the key results (the KRs). Essentially, this means you set a goal and then define how you will achieve it.

So what exactly is the difference?

It’s clear that the MBO and OKR approaches are related – OKR evolved from MBO, essentially cherry-picking some of the best bits of MBO and building on them. And ultimately, both provide a framework for setting and communicating goals, as well as measuring performance. Both move people towards achieving common objectives.

That said, there are some clear differences between the two approaches, namely:

MBO sets out what you want to achieve, while OKR sets out the what and how
The MBO approach is about defining what it is you’re trying to achieve. How an employee or team achieves that goal, and how their performance is measured against that goal is relatively flexible and open.

OKR, on the other hand, drills down into much more detail. The key results clearly define what success looks like, and therefore what needs to be done to achieve the goal, and these results translate into quantitative performance measures.

MBO is reviewed annually, while OKR is usually quarterly
Traditionally, MBO works on an annual cycle, setting goals for the year ahead, which are then evaluated and revised a year down the line. I say “traditionally” because this annual review cycle isn’t so suitable for today’s fast-paced world, and many companies are now choosing to review MBOs more regularly. (Indeed, if Peter Drucker was writing his book today, I’ve no doubt he would specify more regular reviews.)

OKR is designed with a shorter cycle in mind, with goals and progress being reviewed at least quarterly, sometimes even monthly. This allows you to better track performance, highlight where things might not be on track, and take appropriate action.

MBO is private and siloed, while OKR is public and transparent
MBO objectives are set in a confidential discussion between an employee and their line manager, and the objectives remain private. Partly this confidentiality is because MBO is linked to compensation (which we’ll get to below).

In contrast, OKRs are much more transparent and tend to be created through wider team discussions, with the whole team deciding how to support the bigger-picture company goals. Anyone can see anyone else’s OKRs, from the CEO to the shop floor worker.

This highlights another key difference between MBO and OKR: the former is a top-down process, with the manager setting goals (that have, in turn, been cascaded down to him or her from the leadership team), while the latter is more of a bottom-up and sideways process.

MBO is tied to compensation, while OKR (usually) isn’t
Pay rise and bonus decisions are heavily influenced by MBO – an individual’s annual performance determines their compensation. As I’ve written about extensively, this can lead to some skewed results, and not necessarily the desired performance improvement.

OKR is divorced from compensation – or, at least, that’s the idea. Because OKRs tend to be quite aggressive and aspirational (see the next point below), they are not tied to compensation. The idea is to aim high, try new things and push boundaries, not to determine how big Kevin’s bonus should be this year.

MBO is naturally risk-averse, while OKR is aggressive and aspirational

When compensation is linked to objectives, as it is in MBO, the expectation is that people will achieve their objectives in full. Otherwise, it’s a reduced bonus for you, Kevin. Therefore, with MBO, people are expected to achieve their objectives, and this means objectives are often “safe”.

OKR is quite radically different in that it’s okay to not achieve all of your objectives. The goals should be aggressive, aspirational and tough (although not impossible) to achieve, so getting only 60% or 70% of the way still represents great performance. This makes perfect sense if you think about it; consistently achieving 100% of your objectives means you’re not being challenged. There’s a willingness to let people fail (at least, in part) with OKR, and this encourages innovation.

In conclusion, while MBO remains a popular way of setting goals and measuring performance, the OKR approach is gaining a lot of traction. And with good reason. Particularly because of its more regular review cycle and aspirational quality (and, let’s be honest, its association with Google), I think we’ll be hearing a lot more about OKR in the near future.