The 1970s saw the rise of ‘management by objectives’ (MBO), i.e. management using key performance indicators. While this approach was invaluable in establishing a data-driven style of management, nowadays more and more companies are coming up against the limits of the system. MBO was a perfect fit for the industrial age, with plannable and rule-based processes that needed to be monitored. Key performance indicators (KPIs) have also been used very successfully to manage employees – either as part of the corporate culture or in the form of variable compensation systems. American-style companies in particular have expanded KPI management to many areas of their business – and achieved demonstrably good results.
However, a high degree of stability of the entire system was required, as current data was always compared with data from the past. If the baseline changed, a new reference line had to be established.
And this is exactly what makes it increasingly difficult to apply in our current work context. How can I measure an effect without a stable basis for comparison in a system that is constantly adapting? Because this is the reality for many companies these days, the VUCA world (short for volatility, uncertainty, complexity, ambiguity) of modern-day markets. In practice, this means that annual plans have to be revised during the year and target agreements with employees have to give way to other priorities after only 3-6 months.
KPI-based management loses importance when companies have to react quickly and systems are constantly changing
The established system is increasingly being pushed to its limits when it comes to planning and employee goals because…
Of course, a company’s KPIs will remain an important instrument for management to record and evaluate results in the future. It is not yet possible to predict exactly how much effort will be put into annual or even 5-year plans or whether companies will instead adopt a process of continuous, monthly or quarterly planning in the future.
At least as a management instrument in the form of annual employee targets, KPIs are on their way out, because corporate KPIs always reflect what is measurable and available.
That means they can only ever reflect the past. In January of a given year, for example, the sales of the last 12 months – looking back. This past is already completed at the time of measurement and can no longer be changed.
What possibilities do companies have to lead via objectives in a VUCA world?
The newer OKRs (objectives and key results) are a useful tool for companies to take a more forward-facing approach. This approach focuses on future objectives for teams to work towards.
OKRs define ‘a goal ahead’, instead of looking in the rear-view mirror!
The basis for OKRs is the vision or strategic direction of the company in the future. A company’s long-term objectives should, in addition to having a solid strategic component, be as motivating as possible for employees. This promotes employees’ own (intrinsic) motivation to actively work towards the company’s objectives. Future objectives that achieve this are not financial indicators, but rather qualitative or innovative goals.
OKRs are based on the business objectives for the future – where are we headed?
Examples of qualitative objectives at the management level:
Future objectives can be far off in the future – in 3, 5, maybe even 10 years. In order to achieve them, various intermediate objectives need to be formulated. Concrete measures and actions are the only way for a company to actually achieve the objective it has set itself – in a few years’ time.
OKRs use concrete intermediate objectives (key results) to work towards a visionary, motivating corporate goal
The ‘intermediate objective’ for the final objective of ‘offering several sales channels’ could be to identify an alternative sales channel for a product area, e.g. via a suitable online platform. Another way to start implementing this objective could be to conduct a customer survey to find out which sales channels existing customers would like for certain products. Evaluating these sales channels and then gaining concrete practical experience with 1-2 trial runs is described in the intermediate objectives (key results) used in the OKR method as examples.
Key results are therefore always entered using a quantitative value. 3 questions come up again and again in this context:
OKRs are always team objectives, which have ideally been chosen by the team itself with regard to a set company objective
OKRs are processed by a team in a concrete cycle of 3-4 months.
It is important for OKRs to focus on the company’s strategic objectives rather than on day-to-day operations.
The OKR methodology includes an entire process to be guided by a designated OKR master.
OKR process workflow
OKRs are managed in a formalised process – an OKR Master knows the methodology and supports the teams in applying it
A change in leadership is also necessary for this to succeed. Hence, no employee should be personally punished for not achieving an objective. The recommended leadership in the OKR method assumes that everyone involved has done their best and focuses on what needs to be done to achieve even better attainment of OKRs.
AND it is not recommended to create a connection between OKRs and compensation, because then the intrinsic approach and the necessary error management culture and transparency will quickly get lost.
What is IMPORTANT, however, is that the teams accept the selected OKRs as useful for achieving the overall objective and that they seem realistic and can be achieved with their own resources within the selected time frame (=one cycle).
How are OKRs and KPIs connected?
Of course, key performance indicators (KPIs) are still important tools for any company. They are useful to management as an overview and measurement of all relevant data in the company.
The successful implementation of OKRs brings the company one step closer to its vision with each cycle and this is reflected in the KPIs!
If measures are consistently being taken to improve a company’s customer focus, this is sure to improve the turnover KPI and the retention of existing customers in the long term. The effect of OKRs will therefore also be reflected in the traditional KPIs in the long term.
Returning to OKR implementation – the method can be applied quarterly (not calendar-based, but rather in 4 x 3 monthly cycles) or alternatively in 3 cycles per year (3 x 4 monthly cycles) to drive strategic changes in the company. Since the number of OKRs per team is limited to a maximum of 4 and a large number of teams should be involved, this takes place alongside the day-to-day operations. This also means that individual employees must have some time to spare in addition to their regular work schedule to work on the OKRs.
An OKR master is in charge of the process, and without this ‘caretaker and driver’, an OKR process will rarely succeed. Weekly meetings are used to discuss progress and the next actions.
The results for the entire cycle are subsequently summarised in the final meeting.
It is exciting that an OKR team can bring together participants from different business functions and areas to work together on a single issue. Complex and cross-departmental goals can thus be better implemented and – as a fringe benefit – a sense of community in a company is fostered beyond one’s immediate colleagues. This is an effective antidote to silo thinking.
The self-organisation and self-motivation of the teams are important success factors for achieving OKR objectives – from a management perspective, everything should be done to maintain these two factors. A healthy error management culture can help to achieve this.
For this reason, pure ‘top-down defined’ OKRs, i.e. OKRs specified by management, should be avoided. Even if the target vision of the company is set by senior management, there are often several ways to reach the target objective. A combination of ‘bottom-up’ suggestions from the teams and ‘top-down’ suggestions often produces a motivating mix.
In summary, OKRs can:
At PLUCH Interim Management, we consider OKRs very useful as a target definition for teams and the implementation of a strategic corporate vision in today’s complex times. We’re happy to support you with the implementation and assist your company with the successful introduction.
Here you can find more information regarding our qualifications in this area.