Why There's No Right Way to Do MBO



Kelly Allan
03/16/2012

It’s one of the most widely employed management tools out there, but is Management by Objectives (targets) destroying our companies? Yes, argues Kelly Allan in the latest Deming Files Column. Here’s why MBOs can make people deliver "meaningless, even damaging, results."

We received many reader comments on one of our recent columns "Organizational Sabotage – The Malpractice of Management by Objective". I thought it might be useful to use the readers’ comments as the structure of this column. I’ve tried to link them together into a cohesive flow. I hope I succeeded.

Let’s start with a question one reader asked: Is there was a right way to do MBO?

I offer two answers:

Is there a right way to do MBO? - Answer #1:

Dr. Peter F. Drucker - who is credited with developing the concept of Management-By-Objective (MBO) - thought MBO could provide leaders with a method to accomplish long-range planning and strategy, by answering questions such as "What does this organization want to achieve? What are our objectives?"

In a pure sense, MBO as a concept fits well with what Ken Craddock recently described in a Deming Files column as the essential nature of hoshin-kanri planning process, which is to look out 5-10 years as a part of the development of strategy. (Read the article here: Beyond Management by Objective: A Look at Hoshin Kanri - Part I)

Key differences, however, are that hoshin-kanri has a robust means for organization-wide communications (down and up); and "reality check" assessments of the long-range objectives built into it. People throughout the organization determine if the proposed near-term efforts match up with capabilities and resources required to achieve them.

Are objectives used strategically or too focussed on profit?

There is another factor which causes most MBO efforts to fail, and that is a focus on profit as the key metric. Like Dr. W. Edwards Deming, Drucker knew the making of money is a by-product of strategy, not an objective in itself. Yes, making of money in a for-profit organization is essential. But it is not a sustaining objective. This is not a mere philosophical point. Drucker pointed out that organizations with a clear aim that is not all about money tend to be more successful and for longer –and do less harm—than those for which making money is the stated or unstated aim.

If one truly follows Drucker’s intentions by keeping MBO at a long-term, high level, mission-related endeavor, then, yes, MBO could be done right –and contribute to strategy. As another reader commented, "MBO as a tool cannot be faulted as the fault lies with wrong implementation due to wrong understanding of objectives." Alas, it is the rare leader who understands that and practices it. Thus, although we cannot technically fault MBO, I’ve seldom seen an implementation in which there wasn’t a wrong understanding of MBO –thus nullifying the value of MBO.

Is there a right way to do MBO? -Answer #2:

In practice, there is no right way to do MBO. Why? The reason is simple. Almost from the very beginning (and for decades) MBO has been easily and widely abused. I believe it will continue to be so because the default understanding of MBO is what a number of readers pointed out: MBO has been reduced to numerical quotas, dashboards, targets, goals, objectives –usually short-term, and usually financial.

This is the exact opposite of what Dr. Drucker expected.

In fact, MBO creates a culture in which individuals strive for short-term, one-off unrepeatable results instead of for repeatable, reliable, and predictably improvable results year after year. In such a culture managers are responsible for cajoling and extrinsically motivating their direct reports into getting results because the managers are also held accountable for short-term results. At some point managers and workers cannot achieve the arbitrarily set objectives without cheating, or destroying other parts of the system. Cooperation across departments and optimization of the entire organization is no longer an option because it’s every man and department for himself.

People who misread Drucker on the topic of MBO tend to commit a great many management sins which skew and thwart Drucker’s intentions. Such misreading has dire consequences, and for the most part, Drucker has been misread by professors, who in turn, "mis-educate" business leaders into the malpractice of MBO. Ignorance may appear to be bliss, but it is costly.

Now let’s turn to the comment by another reader of the initial PEX Network column. He speculated that if MBO was applied to systems and processes it would be acceptable –avoiding the malpractice of giving individuals short-term objectives to meet. The reader also pointed out that this requires "defining, documenting, and continuously improving those processes - difficult work indeed." I would agree that it is difficult work, and therefore argue the answer is once again "no" to the question whether there is a right way to do MBO. Why? Because as Deming taught, giving objectives to a process does not contribute to improving it, and worse still, tells you nothing about the capability of the process—nor how to increase the capability. Further, giving objectives to a process violates Deming’s points about understanding variation both common cause and special cause.

Dr. Deming also talked about certain "facts of life." If the fact of life is serious: "If the process cannot operate at this target level, we cannot stay in business," Then, "objectives" may need to be set, but this is NOT MBO. Such a situation may have been what the reader had in mind. Those situations are special situations. My organization has worked on many corporate turnarounds through the years, and even in those special life/death situations one has to be cautious because it is easy to fall into the trap of justifying objectives/targets with fact-of-life rationalizations.

Objectives are often called targets. Changing the name from objectives to targets doesn’t decrease the damage, and as one reader commented, "Our whole society suffers as people distort their work to deliver meaningless, even damaging, results."

Does hitting your targets do more harm than good?

A commonly held misconception is that the problem is with individual objectives, and that it is more true to Drucker’s view of MBO if we move to group objectives or KPIs (Key Process Indicators). Although some improvements may result from shifting to group objectives, huge improvements in innovation and productivity are usually overlooked as a result.

Worse, big opportunities are even obscured or discouraged by the group objectives. The way objectives skew behavior, create silo thinking, cause manipulation of processes, and create a platform for failure can be seen in the column Steve Dightman and I wrote Under Pressure: Deepwater Horizon and Why Systems Fail (Part I) The disastrous unintended consequences apply to groups just as they do to individuals. The only difference is that groups instead of individuals are rewarded and punished; there are still winners and losers because of the system, not because of individual or group actions. In fact, more problems with team work result from group objectives. Steve Dightman and I provide a long list of such unintended consequences in Under Pressure: Deepwater Horizon and Why Systems Fail (Part II).

As another reader commented, it is important that we understand the theory behind the practice; that we need to "really think through the method and objectives." To that end I would discourage group MBO practices just as I would discourage MBO practices being applied to the outcomes of individuals.

MBO as typically practiced violates both Drucker and Deming. In my next column, "3 Deming-Based Alternatives to MBO," I will suggest simple and effective alternatives.

A big thank you to all the readers who commented on the "Organizational Sabotage" column. I hope this column did justice to your points.

For further reading on this topic:

Organizational Sabotage – The Malpractice of Management by Objective

Beyond Management by Objective: A Look at Hoshin Kanri (Part I)

Beyond Management by Objective: A Look at Hoshin Kanri (Part 2)

Copyright 2012 by Kelly L. Allan

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.