Tuesday, October 11, 2011

Management By Objectives (MBO)

Motivating People By Aligning Their Objectives With The Goals Of The Organization

Create congruent goals.

© iStockphoto/danleap

For many people working in modern business environments, it's hard to remember a time when non-managerial employees weren't involved with, and interested in, corporate strategy and goals. We are regularly reminded about the corporate mission statement, we have strategy meetings where the "big picture" is revealed to us, and we are invited to participate in some decisions. And we're aware of how our day-to-day activities contribute to these corporate goals.

This type of managing hasn't been around forever: It's an approach called Management by Objectives; a system that seeks to align employees' goals with the goals of the organization. This ensures that everyone is clear about what they should be doing, and how that is beneficial to the whole organization. It's quite easy to see why this type of managing makes sense – when the parts work in unison the whole works smoothly too. And by focusing on what you're trying to achieve, you can quickly discriminate between tasks that must be completed, and those that are just a waste of valuable time.

Management by Objectives was introduced by Peter Drucker in the 1950s and written about in his 1954 book, The Practice of Management. It gained a great deal of attention and was widely adopted until the 1990s when it seemed to fade into obscurity.

Partly, the idea may have become a victim of its own success: It became so much a part of the way business is conducted that it no longer may have seemed remarkable, or even worthy of comment. And partly it evolved into the idea of the Balanced Scorecard, which provided a more sophisticated framework for doing essentially the same thing.

Using Management by Objectives

Peter Drucker outlined the five-step process for MBO shown in figure 1, below. Each stage has particular challenges that need to be addressed for the whole system to work effectively.

These steps are explained below:

1. Set or Review Organizational Objectives

MBO starts with clearly defined strategic organizational objectives (see our article on Mission and Vision Statements for more on this.) If the organization isn't clear where it's going, no one working there will be either.

2. Cascading Objectives Down to Employees

To support the mission, the organization needs to set clear goals and objectives, which then need to cascade down from one organizational level to the next until they reach the everyone.

To make MBO goal and objective setting more effective, Drucker used the SMART acronym to set goals that were attainable and to which people felt accountable. He said that goals and objectives must be:

  • Specific
  • Measurable
  • Agreed (relating to the participative management principle)
  • Realistic
  • Time related

Notice the "A" in SMART is "agreed." This is sometimes referred to as "achievable" but, with MBO, agreement about the goals is a critical element: It's not enough for the goals and objectives to be set at the top and then handed down. They must flow, or trickle, down through various stages of agreement. The only goal that is going to be met is one that is agreed on. How much easier is to get buy in when the person responsible for achieving the goal had a hand in developing it?

For each objective, you need to establish clear targets and performance standards. It's by using these that you can monitor progress throughout the organization. These are also important for communicating results, and for evaluating the suitability of the goals that have been set.

3. Encourage Participation in Goal Setting

Everyone needs to understand how their personal goals fit with the objectives of the organization. This is best done when goals and objectives at each level are shared and discussed, so that everyone understands "why" things are being done, and then sets their own goals to align with these.

This increases people's ownership of their objectives. Rather than blindly following orders, managers, supervisors, and employees in an MBO system know what needs to be done and thus don't need to be ordered around. By pushing decision-making and responsibility down through the organization, you motivate people to solve the problems they face intelligently and give them the information they need to adapt flexibly to changing circumstances.

Through a participative process, every person in the organization will set his or her own goals, which support the overall objectives of the team, which support the objectives of the department, which support the objectives of the business unit, and which support the objectives of the organization.

In an MBO system, employees are more self-directed than boss-directed. If you expect this type of independent performance from employees, you have to give them the tools they need.

Once you have established what it is that someone is accountable for, you must provide the information and resources needed to achieve results. You must also create a mechanism for monitoring progress towards the goals agreed.

4. Monitor Progress

Because the goals and objectives are SMART, they are measurable. They don't measure themselves though, so you have to create a monitoring system that signals when things are off track. This monitoring system has to be timely enough so that issues can be dealt with before they threaten goal achievement. With the cascade effect, no goal is set in isolation, so not meeting targets in one area will affect targets everywhere.

On the other hand, it is essential that you ensure that the goals are not driving adverse behavior because they have not been designed correctly. For instance, a call centre goal of finishing all calls within seven minutes might be useful in encouraging the staff to handle each call briskly, and not spend unnecessary time chatting. However, it might be that customers' calls were becoming more complex, perhaps because of a faulty new product, and call centre operators were terminating the call after 6 minutes 59 seconds in order to meet their target, leaving customers to call back, frustrated. In this situation, the monitoring process should pick up the shift in the goal environment and change the goal appropriately.

Set up a specific plan for monitoring goal performance (once a year, combined with a performance review is not sufficient!) Badly-implemented MBO tends to stress the goal setting without the goal monitoring. Here is where you take control of performance and demand accountability.

Think about all the goals you have set and didn't achieve. Having good intentions isn't enough, you need a clear path marked by accountability checkpoints. Each goal should have mini-goals and a method for keeping on top of each one.

5. Evaluate and Reward Performance

MBO is designed to improve performance at all levels of the organization. To ensure this happens, you need to put a comprehensive evaluation system in place.

As goals have been defined in a specific, measurable and time-based way, the evaluation aspect of MBO is relatively straightforward. Employees are evaluated on their performance with respect to goal achievement (allowing appropriately for changes in the environment.) All that is left to do is to tie goal achievement to reward, and perhaps compensation, and provide the appropriate feedback.

Employees should be given feedback on their own goals as well as the organization's goals. Make sure you remember the participative principle: When you present organization-wide results you have another opportunity to link individual groups' performances to corporate performance. Ultimately this is what MBO is all about and why, when done right, it can spur organization-wide performance and productivity.

When you reward goal achievers you send a clear message to everyone that goal attainment is valued and that the MBO process is not just an exercise but an essential aspect of performance appraisal. The importance of fair and accurate assessment of performance highlights why setting measurable goals and clear performance indicators are essential to the MBO system.

Repeat the Cycle

Having gone through this five-stage process, the cycle begins again, with a review of the strategic, corporate goals in the light of performance and environmental monitoring.

When you reward goal achievers you send a clear message to everyone that goal attainment is valued and that the MBO process is not just an exercise but an essential aspect of performance appraisal. The importance of fair and accurate assessment of performance highlights why setting measurable goals and clear performance indicators are essential to the MBO system.

Tip 1:
Implemented on a team level, MBO shows itself in clear team briefing, in effective goal setting, in successful use of reviews, in effective delegation and in the giving and receiving of feedback. These are many of the key techniques needed for effective team management.

Tip 2:
Implemented on an organizational level, MBO needs the full commitment of the organization, and an underlying system for tracking goals and performance. Because goals must be transmitted from level to level with agreement, goal transmission can inevitably be slow. Full implementations of MBO can therefore be slow and difficult, particularly if non-accounting-based goals are included. This is perhaps why MBO has evolved into the idea of the Balanced Scorecard: MBO on its own may too-easily slip into being nothing more than a financial management mechanism.

Tip 3:
MBO is essentially a managerial process. Don't use it as a substitute for good leadership: The two should work together!

Tip 4:
There's so much more to motivating people than using MBO! Take our How Good Are Your Motivation Skills? self-test to find out which aspects of team motivation you can improve on.

Key Points

Management by Objectives is a powerful tool for aligning employees actions with an organization's goals.

Its overarching premise is that of employee empowerment. By empowering employees to take responsibility for their performance and allowing them to see how their achievements impact the organization as a whole, you increase people's motivation, dedication, and loyalty. When you bring that full circle and link performance to evaluation and appraisal, you have a strong system that supports and values employees and facilitates great performance.

Thanks to Mind Tools Ltd


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