Organizational Sabotage - The Malpractice of Management By Objective
07/11/2011 12:00:00 AM EDT
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Innovation, quality and productivity suffer from the abuse of MBOs
Objectives are essential to a business. But the malpractice of management by objective (MBO) can have devastating unintended consequences, write Kelly Allan and Kenneth Craddock in this week’s Deming Files.
Dr. Peter F. Drucker was a proponent of Management By Objective (MBO). Dr. W. Edwards Deming characterized MBO, as typically practiced, as a very harmful way to manage.
Were these two great thought leaders in conflict about MBO? As it turns out, the answer is: not really.
In fact Drucker and Deming were very much in alignment with regard to the importance of having a meaningful objective/aim of an organization, and both stressed the importance of long-term planning/objectives. Further, neither believed that numerical objectives alone (especially short-term ones) were useful in building sustainable organizations.
This is an important topic because the way MBO is typically practiced, today, is far removed from the original theory and intentions that Drucker articulated. Regrettably, as typically practiced, MBO is much closer to the model that both Drucker and Deming warned against.
The history of the development of MBO provides useful clues about how MBO started out as a means to support responsible management and then devolved into a “straightjacket” that does harm, to quote Dr. Drucker.
MBO theory seems to have originated in the 1950s at General Electric with VP Harold Smiddy, the founder of GE’s Crotonville training center. History has it that Drucker had seen MBO at GE, enlarged upon the theory, and wrote extensively about the value of MBO as a way to focus long-term thinking and planning. Drucker also wrote about the value of MBO as a means by which managers and their direct reports could communicate about what needed to be done and how. An Objective was a means to assure they were striving through their work to achieve the outcomes that were aligned with the strategy of the organization.
During the time that MBO was catching on in corporations, Dr. Drucker was a professor at the New York University School of Business. Across the hall from his office was that of another NYU professor, Dr. W. Edwards Deming. The two had a cordial, collegial relationship.
As Dr. Deming recounted the story, one day he approached Dr. Drucker and told Drucker that he (Deming) had been seeing MBO implemented with short-term numerical goals, not as a strategic management tool – as Drucker had intended it to be. Drucker thanked Deming and then investigated the actual practice of MBO in organizations. He determined that MBO too often was not being used properly. In fact, it was being used frequently in ways exactly opposite of what Drucker had intended.
Drucker set out in future writings to further clarify MBO – and to stop the spread of MBO malpractice.
“Objectives are the fundamental strategy of a business,” Drucker wrote. “Objectives must be derived from what our business is, what it will be, and what it should be.”
“Management by objectives is a prerequisite for functioning communication.” Clarity through mutual discussions between managers and direct reports is a key to achieving objectives. Discussions of methods are inherent in the discussion of objectives. “Objectives must never become the basis of control in which there is domination of one person by another.” Information about objectives should be a means for self-awareness, “not a tool of control from above.”
In other words, Drucker intended for the relationship between the manager and direct report to be a collaborative one in which manager and direct report discuss opportunities and challenges in relation to the strategy of the organization. Instead, and even to this day, MBO is typically used to give managers and in turn their direct reports quotas to meet. A further abuse of MBO is that how they meet those quotas does not really matter. “Just meet them,” is the contract between manager and worker. As a result of “just meet them” some of the most devastating unintended consequences occur. You must meet your numbers – by any means necessary.
As Dr. Brian Joiner noted, there are only three ways to get better numbers: manipulate the numbers, manipulate the system that gives you the numbers, or improve the process and system which causes the numbers to be created. Only the last method is sustainable, managerial and positive.
Deming pointed out that there are many downsides to short-term manipulation via MBO (aka MBR [Results] or MBQ [Quotas]). For example, the relationship between manager and direct report becomes a transaction, a contract – to be negotiated and gamed.
Unfortunately, the practice of MBO has regularly become a hammer to force departments and individuals to achieve short-term goals. In MBO as typically practiced it is very difficult to achieve a long-term improvement in the process or system. Taking time, effort, and resources to improve the process is more likely to be punished than appreciated.
An unanticipated consequence of the abuse of MBO has been that innovation, quality and productivity suffer. People will work to the quotas and that is it. Worse has been the sabotage of other departments and other people in one’s pursuit of meeting the objectives. Equally destructive is the belief that if a manager is responsible only for giving MBO quotas to direct reports, the manager has more time to handle more direct reports. In other words, the manager needs not mentor nor manage the direct reports – only monitor them. Drucker and Deming would say that controlling people through quotas that are enforced by threats/punishments and incentives/rewards is not managing, but manipulating.
Drucker warned against the use of incentives with objectives, “To pay a research laboratory for results, for instance, in the form of a royalty on the sales of new products and processes is almost certain to misdirect the research laboratory.”
Drucker was concerned that the abuse of MBO caused higher turnover of employees and he saw cynicism increase as dangerous fires were set throughout the organization in the pursuit of meeting immediate objectives. He foresaw and abhorred that assigned objectives would be used as a cudgel in performance reviews to rate and rank people, and to determine pay, bonuses, promotions, and recognition.
Some organizations still violate MBO by using it as a contract containing short-term objectives and quotas. Yet the leaders wonder why relationships with their own employees become arm’s-length ones.
Both Drucker and Deming saw the dangers inherent in MBO for lighting the fires of manipulating the numbers, manipulating the system, disruption, too immediate a focus, and poor productivity. Close reading of both Deming and Drucker provide leaders and managers with the proper and effective use of objectives and approaches for managing them.
Editor’s Note: The columns published in THE DEMING FILES have been written under the Editorial Guidelines set by The W. Edwards Deming Institute. The Institute views these columns as opportunities to enhance, extend, and illustrate Dr. Deming’s theories. The authors have knowledge of Dr. Deming’s body of work, and the content of each column is the expression of each author’s interpretation of the subject matter.
Copyright 2011 Kenneth Craddock and Kelly L. Allan.
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Contributor:
Ken Craddock & Kelly Allan |
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Agree that MbO by default induces a phenomenon of local optima, which is destructive for any organisation. Its only those hard-core practioners of MbO who practice MbO they way it should be, but, those are very few in any organisation and thus, making it difficult to change the deteriorating status of MbO practice.
rsnair
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There are many more problems with Drucker's management ideas than just MBO being misused. I do not believe there is any right way of using MBOs. I believe that the idea of Drucker's MBOs might have come from Harold Geneen, the CEO of ITT in the middle part of the last century that turned a sleepy telecommunications company into a financial behemoth, one of the top ten on the Fortune 500 list. He did it by developing strict financial targets and doing whatever was necessary to meet those. When profits came in higher the stock rose and he would then buy companies using his inflated stock and use his financial "magic" on the acquired company. He was able to do this for several years, but like all such financial schemes the company and the stock in time imploded. But before that happened he was acclaimed as a financial and management wizard and business schools rushed to teach his methods.
Robert McNamara used a form of MBO at Ford, with the result that Ford became an acronym for Fix Or Repair Daily. In my opinion Drucker inspired managers made the Japanese conquest of American industries in the 1970s and 1980s that much easier. Other target driven companies are Enron, WordCom and Madoff's hedge fund.
Deming went easy on Drucker as they were colleagues at NYU. But if we are to be absolutely honest for the sake of future managers Drucker's main ideas can very easily lead to the ruin of a company. Yes, he did say a few good things, and had many pithy comments. But do a careful reading of what he called his main contribution, the book, Managing for Results. Anyone with even cursory understanding of Deming will realize that book is a recipe for decline or even disaster. Sorry, but we need to be more rigorous about management.
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Two issues are being linked here and need separating. Number 1 is targets. Many people report that Dr Deming said there should be no targets. He was criticising arbitray targets, the 10% reduction or the 5% increase, and especially the comparison of actual and budget targets. These are not real, they are abstractions, the fodder of MBA students. The real world has real targets; cash in the bank, dates such as the Olympic games opening, Dr Deming was not pretending those can be ignored.
Arbitrary targets always cause damage if they are linked to individual or collective judgement of performance.
This is the number 2 issue; that performance related pay (if you achieve this, you will get money) will always cause long term damage. That there is no independent research to validate the contribution of performance related pay schemes with long term benefit to the organisation. Howeve, in spite of all the evidence to the contrary (bankers, CEOs, teachers etc etc) opinion formers still see PRP as a legitimate, indeed necessary, method of compensation. Our whole society suffers as people distort their work to deliver meaningless, even damaging, results.
My 40 years experience tells me that leaders must generate, share and engage their people in achieving real targets, and never link their achievement to the payment system. Motivation must arise out of leadership, and variable rewards, if needed at all, should take the form of collective gainsharing.
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The article has highlighted the fallacy of MBO by clearly stating how MBO is used to set the short term objectives convineantly forsaking the long term stability of the Organization. MBO is misused to set the short term objectives and too in quantifiable manner made people to satisfy easy results by mis using the system which has definetly harmed the Organization in the long fun. But MBO as tool cannot be faulted as the fault lies with wrong implementation due to wrong understanding of objectives.
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There should be *no* "individual" nor "group" objectives - only process objectives! Ah, but *that* requires defining, documenting, and continuously improving those processes - difficult work indeed. So, instead, management takes the "path of least resistance" and sets individual objectives, departmental objectives, divisional objectives - which, among the ills described in the article, also results in sub-optimizing the system. Later, the annual "performance review" violates the principles of systems and of variation. {sigh...}
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I think one of the reasons MBO was not properly applied in the past is that we limited ourselves to individual objectives. We had situations in which all individual objectives were met but the customer was dissatisfied. Nowadays we tend to use more group objectives based on the overall process KPIs which make more sense from the business point of view.
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Hi Allbiges
One way was mentioned in the article
“Management by objectives is a prerequisite for functioning communication.” Clarity through mutual discussions between managers and direct reports is a key to achieving objectives. Discussions of methods are inherent in the discussion of objectives. “Objectives must never become the basis of control in which there is domination of one person by another.” Information about objectives should be a means for self-awareness, “not a tool of control from above.”
or to shorten to the "right way" is with mutual discussions between managers and direct reports as a means for self-awareness.
I really liked this article, its good food for thought and reminds us to really think though the method and objectives.
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Another result of ineffectively applied MBO is the tendency to encourage a silo mentality...as long as MY goals are met, everything is OK.
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This article gives a good overview of one of the ways that MBO can go wrong - what are the key principles or rules to ensure that objectives are used in the 'right' way, to get the focus in the organsation without the dysfuntionality?
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