Management by Objectives

Management by Objectives (MBO)

Management by objectives (MBO), also known as management by results (MBR), is a process of defining objectives within an organization so that management and employees agree to the objectives and understand what they need to do in the organization in order to achieve them. The term "management by objectives" was first popularized by Peter Drucker in his 1954 book The Practice of Management.

Aligning Objectives With Organizational Goals

In many organizations, it's hard to remember a time when non-managerial employees were kept in the dark about strategy. This type of managing hasn't been around forever. It's an approach called Management by Objectives (MBO), a system that seeks to align employees' objectives with the organization's goals. In this article, we'll look at how you can use MBO to motivate and engage your team.

About the Tool

Peter Drucker developed MBO, and published it in his 1954 book, "The Practice of Management." It received a great deal of attention, and it was widely adopted until the 1990s, when it seemed to fade into obscurity.

The idea may have become a victim of its own success; it became such an integral part of modern business practice that it may no longer have seemed worthy of comment. Today, it has evolved into the Balanced Scorecard, which provides a more sophisticated framework for essentially the same process.

Advantages and Disadvantages

Using Management by Objectives with your team offers several benefits.

First, MBO ensures that team members are clear about their work and how it benefits the whole organization. It's easy to see why this type of managing makes sense: when the individual parts of an organization work well together, the whole operates smoothly and efficiently. By focusing on what you're trying to achieve, you can quickly distinguish between tasks that you must complete, and those that may not be worth your time.

Implemented on a team level, MBO can be seen in many of the key techniques needed for effective team management, including team briefing, goal setting, performance appraisal, delegation, and feedback.

On an individual level, we all want to see our work as purposeful and meaningful, and MBO makes a clear link between individual effort and the organization's mission – this is great for our sense of purpose!

One disadvantage of MBO is that it can be challenging and lengthy to implement. When applied on an organizational level, MBO needs the organization's full commitment, and it also needs an underlying system for tracking goals and performance.

Because you must transmit goals from level to level with agreement, goal transmission can be slow. This means that full implementation of MBO can be time-consuming, 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.

The steps involved in MBO are as follows

Step 1: Set or Review Organizational Objectives

MBO starts with clearly defined strategic organizational objectives, expressed in concise, easily-understood Mission and Vision Statements.

These statements should contain specific goals. Vague goals such as "improving customer satisfaction" may mean little to team members; and they're also difficult to measure. A better objective is to "reduce customer complaints by 90 percent." This objective is exciting because it's challenging, and it's much easier to measure.

Step 2: Cascade Objectives Down to Employees

To support the mission, the organization needs to set clear goals and objectives for every business unit, department, team, and employee. (These goals are cascaded down from level to level.)

To make MBO goal- and objective-setting more effective, use the SMART acronym to set attainable, clear goals. SMART goals are:

• Specific.
• Measurable.
• Agreed.
• Realistic.
• Time related.

Step 3: Encourage Participation in Goal Setting

Team members need to understand how their personal goals and values fit with the organization's objectives. This will be most successful when you share and discuss goals and objectives at each level, so that everyone understands why things are being done.

 Rather than blindly following orders, managers, supervisors, and employees in an MBO system know what they need to do and why they need to do it. By pushing decision making and responsibility down through the organization, people can solve problems intelligently and independently, and this increases motivation and effectiveness.

Step 4: Monitor Progress

To be effective, you must monitor your team members' progress toward achieving goals. The monitoring system you create needs to be timely, so that you can deal with issues before they threaten the achievement of important goals. With the cascade effect, no goal is set in isolation; and missing targets in one area will affect targets everywhere.

On the other hand, it's essential to ensure that poorly-designed goals are not driving perverse behavior. For instance, a call center goal of finishing all calls within seven minutes might encourage team members to handle each call briskly, and not spend unnecessary time chatting.

However, it might be that customers' calls become more complex, but call center operators terminate their calls after 6 minutes 59 seconds to meet their target. Clearly, this will upset customers, who then have to call back. In this situation, the monitoring process should pick up the shift in the goal environment and change the goal.

Step 5: Evaluate and Reward Performance

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

Give constructive, thorough feedback to all employees on their goals and on the organization's goals. Remember the participative principle: when you present organization-wide results, you have another opportunity to link specific individual and group achievements to corporate performance. Ultimately, this is what MBO is all about and it explains how, when done right, it can spur organization-wide performance and productivity. Just make sure that any performance monitoring system accounts for environmental and market conditions.

Step 6: Repeat the Cycle

Once somebody have been through the first five steps, the cycle will begin again with another review of his organization's objectives and goals.

When reviewing these objectives and goals and creating new ones, ask for feedback from employees on what went well and what could be improved, consider environmental factors, and take into account your team's past performance.