OKR: Organizational Change Required!
You may know the situation when there is some brand new buzzword coming just around the corner. A couple of months or years later, everybody in your company says that the term is burned. Meaning managers and employees don’t want to hear about something because it didn’t work out as expected for the first time.
I think the term Objectives and Key Results, better known as OKR [1], is a term that is at high risk of getting burned at many (large) companies out there. I come to this conclusion because, currently, in the context of the digital transformation programmes of large companies I know, I constantly hear the term OKR. Meaning, much buzz is going on. People read something on the internet, saw some YouTube videos, or just heard something about it at the last conference or somewhere else. It results in smattering combined with false expectations and hordes of consultants establishing “best” practices. But the prevailing organizational culture, structures, and processes do often not fit those practices. Usually, the organization as a whole and its leaders are not willing to perform the necessary organizational change. From my experience, that’s always the starting point when good things, like OKR, getting burned. So let’s take a look at why many companies need a massive organizational change to do real OKR.
Management-by-Objectives: The Legacy of Peter Drucker
Most large companies heavily rely on efficiency-oriented thinking because this is what made and makes them successful in their core business. Companies can achieve efficiency when working in a domain where they can forecast the expected output or outcome. Following the Cynefin Framework, such domains are called either simple or complicated [2]. In a domain like that, you can decompose large, complicated problems into small and less complicated chunks. This decomposition allows you to plan because you can distinguish when to work on which chunk. And only when you can plan, you can avoid wasting resources. Meaning, avoiding waste while producing output is the definition of being efficient. In this context, I say, most companies have the following organizational belief. [3]
We operate in a complicated domain.
Consequently, companies establish structures and processes aligned to that belief. For example, they create strict hierarchical structures because they assume that they can perform top-down planning. Meaning, according to their organizational belief, large, complicated problems can be decomposed at the top level and then handed over to the underlying hierarchy levels. In line with that, the predominant leadership approach is what the Full Range of Leadership Model calls Transactional Leadership. [4,5] This approach relies on Management-by-Exception, in short MBE.
MBE is a method of control, which is in line with top-down thinking. With MBE, managers intervene in employees' work only when they and their underlying teams deviate from a prescribed standard. Thus, managers leave employees free until they work within the completely top-down defined scope and plan. The Full Range of Leadership Model calls this approach passive Management-by-Exception.
However, most companies have established a more proactive and somehow participative approach called Management-by-Objectives, in short MBO. Peter Drucker invented it in the 1950s. Management-by-Objectives tries to empower employees by letting them participate in the goal-setting process. By doing so, MBO makes heavy use of positive and negative incentives.
The Full Range of Leadership Model calls such incentives Contingent Rewards, and it names the pro-active tracking of employees' progress as active Management-by-Exception. Both are elements of Transactional Leadership, as well. Positive incentives can be rewards, bonuses, and promotions. Negative incentives can be not to get the bonus, penalties, or even dismissals. In short, MBO uses extrinsic motivators to generate a commitment to the negotiated goals.
You see, MBO is a control-oriented process based on transactions between a manager and an employee: “If you do this, you get that.” It follows the belief that managers can anticipate what is required when. In that case, within complicated domains, this Transactional Leadership approach is indeed a useful leadership style because complicated domains allow the process of planning.
Another thing to mention is that MBO is often implemented by making use of SMART goals. [6] SMART goals have the intention to be achievable. Only then a manager and an employee can make meaningful negotiations regarding reaching goals and getting rewards. Again, to formulate achievable goals, one must be able to plan because otherwise, it’s not possible to say what’s achievable and what's not. Thus, achievable goals aim to attain the best possible results from available resources, which is the exact definition of being efficient.
Taylorism: Efficiency for Complicated Times
Concentrating on efficiency is what traditional management theory taught us for many years. And this is for a reason because it used to work out. The illustration of Taylor’s Bathtub below [7] shows that in times of Taylorism from 1900 until the 1970s, it was the winning strategy because unsaturated global markets were prevailing at this time.
In such a market situation, a focus on efficiency was the best fit because companies often did not operate in complex environments. Instead, they faced complicated challenges, most of the time. Thus, in contrast to the critical factors of trust, innovativeness, and speed caused by market density and globalization nowadays, the significant factor in the early 20th century was to produce goods and services cheaper. One can say, back then, success was about the primacy of efficiency.
The following is essential: Because most companies are still focusing on efficiency, they established an MBO approach. They also aligned their understanding of organizational structure and leadership to that. There are strict hierarchies with top-down mechanisms. In line with that, the prevailing leadership style is Transactional Leadership with Contingent Rewards and active MBE. However, in today’s VUCA world of volatility, uncertainty, complexity, and ambiguity, it often requires a different approach. Because we are not able to plan within specific environments, a focus on effectiveness often makes more sense. But for many companies, it is difficult to perform that organizational change because they have all their established structures and processes in place.
OKR for Higher Output
I am coming back to OKR. In contrast to MBO, OKR is a target system approach that is highly focusing on effectiveness. OKR is entirely different from what most companies are currently doing!
Andy Grove — also called the father of OKR — developed OKR at Intel in the 1970s and 1980s [8]. According to the focus on effectiveness, the title of his best-selling book is High Output Management, published in 1983. You see, the center of his book is on maximizing output, not reducing costs for producing goods and services cheaper.
OKR has become more popular as John Doerr brought the concept to Google in 1999. [9] Doerr used to work as a sales manager under Andy Grove at Intel, which influenced him significantly. In his book Measure What Matters, published in 2017, Doerr explains very much the situation you see at Taylor’s Bathtub: A change towards globalized and dynamic markets with the demand for innovation and effectiveness starting in the late 1970s and early 1980s. Consequently, OKR focuses on effectiveness instead of efficiency. It is doing so by fostering intrinsic motivation instead of using extrinsic rewards. Again: this stands in direct contrast to what many companies are doing today. BOOM!
To be clear: I think using OKR is a great way to operationalize a company’s strategy. It is a great tool to bring fast strategic changes and strategic turnaround from top to floor level. And because of its focus on effectiveness, taking a look at Taylor’s Bathtub again, OKR is very well suited for the challenges of today’s dense markets with high dynamics in a globalized world. BOOM!
Three Essential Questions: What? Why? How?
From the outside, establishing OKRs seems to be simple. Technically spoken, every OKR consists of one objective and ideally three to five key results. An objective is an inspiring statement to set the overall direction. Meaning, objectives answer the questions of “WHAT shall I do?” and “WHY shall I do it?”. However, and different from an MBO approach, a good OKR objective is not measurable. It’s because non-measurable objectives have the potential of being more inspiring by focusing on intrinsic motivation. Remember, the M in SMART stands for measurable, and the A stands for achievable. Meaning, SMART goals are very different from OKR objectives.
However, OKR accompanies the inspiring objectives with measurable sub-goals called key results. They answer the question of “HOW can I reach my objective?” In that way, key results make progress transparent in reaching an objective. But the term measurable in the context of OKR is different to understand than within the context of MBO and SMART goals. And this is where the value of trust kicks in because ORK is not following Transactional Leadership and top-down control thinking.
Trust, Self-Assessment, and Transparency
The original process around written OKRs requires employees to perform a self-assessment. Meaning, managers must trust their employees that they are honest with themselves. To motivate self-assessments, OKR complements everything with unyielding transparency. More specifically, the original OKR process enables you to see all agreed OKRs of any people working in your organization. It includes the OKRs of your CEO, other C-level executives, your direct manager, people below you, and even people you may have never heard of before — and vice versa. You can also see how these people assess themselves — and vice versa. So how comfortable do you feel when everyone can see your objectives, key results, and assessment results?
The fact that nothing is concealed aims at generating trust because it helps and forces leaders and employees to be authentic. It is a clear act of signaling that helps fight asymmetric information, also known as information failure. [10] Information failure occurs when one party of an economic transaction possesses more information than the other. It leads to sub-optimal results, also called second-best results. [11] A culture of merciless transparency stands in direct contrast to asymmetric information. Thus, this act of transparency helps to maximize the overall outcome. Or to say, to be more effective.
You see, leaders and managers must trust their employees and vice versa. Instead of a top-down control approach like MBO, OKR relies on mutual trust and transparency. Now, ask yourself how much organizational change does it require to move from MBO to real OKR?
A short question: How much trust demonstrates an organization where every manager's decision that generates costs needs to be verified by the next level manager? Making it short: not much. Like this, you may find many observable artifacts that make clear that the need for control profoundly characterizes your company's culture today. Keep in mind, a need for control always means the absence of (mutual) trust.
It’s as always: It looks simple, but it is far from being easy to implement. Once you are using OKR for the first time, you will experience that already the writing of high-quality objectives and key results is challenging. It requires much experience. But OKR is more than just writing down some objectives. And, with the example of the value of trust, it is why it also requires the right cultural values, mindset, leadership, and processes in place. Only then OKR can take effect. Thus, the organizational change, especially the cultural change, makes the implementation of OKR so damn hard because it requires a culture of trust instead of control.
Reach for the Stars: Are You Allowed to Fail?
At Google, they implemented a range from 0.0 to 1.0. It describes the degree of how much you achieved any of your key results. The rule of thumb for so-called stretch goals is that 0.7 is a good value. Stretch goal means that you have to over-perform to reach 1.0 for a given key result. Again, this is quite different from what we know from achievable SMART goals. But the essential thing is as follows. For OKR, you need a fail-safe environment because you may never achieve 1.0 per key result. But you can learn a lot when only getting a 0.3 or 0.5. Thus, OKR requires a fail-safe environment where a 0.3 is seen as an opportunity for learning.
On the contrary, when a company’s culture only regards 1.0 as a success, it’s quite apparent that it’s not good not to reach 100% of one’s goals. So how does it feel only to reach 0.7 or even 0.3 of your goal given your current organizational culture? Will you get your promotion, bonus, or salary increase? You see, that’s why OKR is not bound to extrinsic rewards of any kind.
Thus, using OKR also requires a different way of motivating people. A command and control style does not work because you can only control in a traditional way when negative and positive incentives are available as tools. Consequently, the idea of Transactional Leadership does not work anymore because it heavily relies on Contingent Rewards. With OKR, leaders must inspire and intrinsically motivate employees following the concept of Transformational Leadership.
For example, if leaders miss the inspirational part, people start to think that reaching 0.7 is enough. Meaning, 0.7 becomes the new 1.0. Such developments are a clear signal that there is a non-inspiring culture of being good. But OKR is about being great. Therefore, culture and leadership must ensure that people reach for the stars, meaning creating a culture of excellence on all levels, not by control — but via trust.
From Top-Down to Bottom-Up and Sideways
With cooperation, we can do more with less.
Yves Morieux [12]
As we just discussed the value of trust, we now come to the point of how the creation of OKRs takes place. John Doerr calls it bottom-up and sideways, and it aims at fostering cooperation instead of self-interest. Bottom-up means that employees and teams pull the objectives of a manager and then creating their objectives.
More so: employees are asked to challenge the above objectives with their objectives. Meaning, employees are free to define objectives for themselves and how they think they can contribute to the company's success even more. In this way, objectives guarantee alignment, autonomy, and motivation, which are all crucial factors for self-organization. [13] Additionally, employees and teams will encounter the need to organize their dependencies. Otherwise, they cannot reach their objectives. It encourages them to cooperate with others and align their objectives accordingly. You see, this is why it’s called sideways.
But It Worked Out for Google!
Yes, OKR worked out for Google, and it worked out for Intel and many other companies on this planet. However, let’s take a closer look at Google. John Doerr became interested in Google in the 1990s as a venture capitalist. He gave a presentation about OKR to Google employees back in 1999. Because as a venture capitalist, he had a clear interest in maximizing the value of Google, and he knew that OKR is the right tool for that. During the presentation, Larry Page and Sergey Brin, the founders of Google, found the idea of OKR inspiring.
Consequently, both fostered the implementation of the OKR process. Meaning they always provided full management support from the top level. Additionally, at this time, Google was still a small company with around 30 employees. Therefore, establishing OKR must have been way more manageable than installing OKR in a large and long-existing enterprise. Google had the chance to grow with OKR, and it is now part of their identity. Let’s say Google integrated OKR into their DNA. Thus, Google has all the ingredients for successfully running an OKR process: aligned leadership, aligned culture, and aligned structure.
You see, an OKR implementation may look straightforward in a PowerPoint presentation. But also, for OKR counts what is right for many other things: crap in, crap out. Thus, to avoid the “crap in” part, it requires a proper culture and real leadership to ensure the quality and effectiveness of OKR — or in other words, the outcome. Without that, companies most likely end up with one of the following results:
- The term OKR gets burned, and MBO gets reintroduced or
- There is a target system called OKR, but in reality, it’s an MBO process.
In short, if the right culture and leadership are not given, the probability is high that the defined OKRs rely mostly on crap. Consequently, the whole OKR process would either be abandoned or degenerated into a vast business theater. [14]
Start Small and Incorporate OKR into Your DNA
Sure, you can use the implementation of OKR to challenge your organization and try to drive cultural change. However, I recommend building small and loosely coupled entities besides existing structures to avoid the previously listed negative outcomes. In such entities, companies may be able to incorporate the power of OKR into their DNA from the start. Richard Buckminster Fuller put it as follows:
You never change things by fighting the existing reality. To change something, build a new model that makes the existing model obsolete.
Richard Buckminster Fuller [15]
While these entities are getting established, make sure that effective leadership is in place. As the following illustration shows, leadership is a basis when performing organizational change and continuous organizational development.
One can see that leadership is influenced by the existing culture and structures as well. Thus, the introduction of OKR can be seen as a chicken-and-egg problem because OKR affects culture, structures, and leadership — and vice versa. Consequently, I propose to continuously review the following subjects of change for increasing the likelihood of implementing OKR successfully.
- Authentic Transformational Leadership
Companies must abandon a leadership style of command and control. Instead, they must enable their leaders to make use of inspirational Theory Y-oriented leadership. [16] A company’s day-to-day leadership approach must reflect a positive concept of man, valuing trust and transparency, focusing on intrinsic motivation, and inspiring exceptional results. - Less Hierarchy
Less hierarchy supports the sideways dimension. Meaning, cooperation is intrinsically motivated because it is not practical to escalate issues to the next level. A single manager is simply limited in the amount of how many topics she can handle simultaneously. The more people are below a single manager, the longer the response times by this manager will become. It discourages people from escalating issues. Instead, they must find other ways to solve their problems. The way to go is direct communication and cooperation with people and teams on the same level. - Culture of Trust
Self-assessment can only work when people feel that they are trusted and not being controlled. Only then can people be true to themselves. Trust also enables a fail-safe environment because other people believe you are doing the right thing, even when you score a 0.3 or 0.7. If that’s not given, stretch goals will not take effect because nobody would risk scoring below 1.0. Accordingly, people formulate their goals so they can always reach 1.0 without generating a great outcome. - Culture of Transparency
People understand why openly showing one’s OKRs is beneficial for all. However, during a transformation towards OKR, there might be individual goals besides OKR. In this case, OKR must always have the top priority. Otherwise, the effect of OKR and, therefore, the transformation is highly endangered. If there are individual, non-transparent goals, they must be in line with the given OKRs. Consequently, this makes intransparent goals below OKRs obsolete, but it might be necessary to reduce change resistance during the transformation process. - Culture of Excellence
People should not just want to be good; they must strive to be great. Stretch goals are about being great! Meaning, leaders must lead by example and demonstrate excellence in everything they are doing. In that way, they create a culture of excellence.
Cultural Change?
I was talking about ‘cultural change’ a lot. So let’s consider the following very popular quote.
Culture eats strategy for breakfast.
Peter Drucker
According to the quote, culture seems to be a strong influencing factor when it comes to change. Thus, for many companies, it is the point of attack for every change initiative. But keep the following quote in mind.
Culture follows structure.
Craig Larman, Larman’s Laws of Organizational Behavior
As a result, we get the following.
Structure > Culture > Strategy
From a systems theory perspective, it’s not even possible to just change the culture in the desired direction. This would be the Trap of Directing People as described in my Article Don’t Step into the Three Traps of the Newtonian Mindset.
Changing structures and processes, called System in the above image about cultural change, is the most powerful, if not the only thing an organization can do when it comes to change. Only with the right structures in place, an organization enables Authentic Transformational Leadership, less hierarchy, and a culture of trust, transparency, and excellence.
Therefore, one can see that establishing real OKR requires drastic and holistic organizational change. And it might be wise to create something new instead of changing the existing structures so that OKR works out. Keep in mind; also Google was small when they introduced OKR.
However, the introduction of OKR to existing organizations is mostly a mere symptom treatment. And this is exactly the reason why OKR implementation must fail, because the basic problems are not treated consistently. That means consistent work on the system. Once the basic problems in the system have been solved, the question remains as to whether OKR is then still necessary at all.
All in all, there is a high risk that OKR stays ineffective or may even harm your organization when it’s just introduced as the new practice that is expected to solve all problems. Then, the next thing that happens is that people call the term OKR as being burned.
Don’t let this happen. Remember, OKR can be a great tool — given the right structural boundaries.
Footnotes
[1] Learn more at Objectives and Key Results at Wikipedia.
[2] Learn more about the differences between simple, complicated, complex, and chaotic domains at the Cynefin Framework at Wikipedia.
[3] Learn more about the difference between complicated and complex by reading my article Don’t Step into the Three Traps of the Newtonian Mindset.
[4] Learn more about the Full Range of Leadership Model at Wikipedia.
[5] Learn more about Transactional Leadership at Wikipedia.
[6] Learn more about SMART Goals at Wikipedia.
[7] Read the book “Denkwerkzeuge der Höchstleister“ by Gerhard Wohland and Matthias Wiemeyer to learn more about Taylor’s Bathtub.
[8] Learn more about Andrew S. Grove at Wikipedia.
[9] Learn more about John Doerr at Wikipedia.
[10] Read more about signaling and information asymmetry at Wikipedia. You may also take a look at agency problem and moral hazard.
[11] Read more about the Theory of Second Best at Wikipedia.
[12] Watch the inspiring video of Yves Morieux How Too Many Rules at Work Keep You from Getting Things Done. TED, 2015.
[13] Take a look at the Spotify Engineering Culture to understand the interplay between autonomy and alignment.
[14] Watch Lars Vollmer on YouTube to learn more about the term business theater.
[15] Taken from the book A Fuller View: Buckminster Fuller’s Vision of Hope and Abundance for All by L. Steven Sieden.
[16] Learn more about McGregor’s Theory X and Theory Y at Wikipedia.
Book Recommendations
The Principles of Scientific Management
Frederick W. Taylor
The Practice of Management
Peter F. Drucker
The Effective Executive: The Definitive Guide to Getting the Right Things Done
Peter F. Drucker
High Output Management
Andrew S. Grove
Measure what Matters
John Doerr
The Human Side of Enterprise
Douglas M. McGregor (†)
Leadership: Theory and Practice
Peter G. Northouse
Transformational Leadership
Bernhard M. Bass, Ronald E. Riggio
Large-Scale Scrum: More with Less
Craig Larman
Good to Great: Why Some Companies Make the Leap…And Others Don’t
Jim Collins
Self-Determination Theory: Basic Psychological Needs in Motivation, Development, and Wellness
Richard M. Ryan, Edward L. Deci
Why We Do What We Do: Understanding Self-Motivation
Edward L. Deci
Flow: The Psychology of Optimal Experience
Mihaly Csikszentmihalyi
Drive: The Surprising Truth About What Motivates Us
Daniel H. Pink
Denkwerkzeuge der Höchstleister: Warum dynamikrobuste Unternehmen Marktdruck erzeugen
Gerhard Wohland, Matthias Wiemeyer
Zurück an die Arbeit — Back To Business: Wie aus Business-Theatern wieder echte Unternehmen werden
Lars Vollmer
Six Simple Rules
Yves Morieux
A Fuller View: Buckminster Fuller’s Vision of Hope and Abundance for All
L. Steven Sieden
Crossing the Chasm: Marketing and Selling Disruptive Products to Mainstream Customers
Geoffrey A. Moore
