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A brief history of OKRs

Francisco Homem de Mello

satellites

OKRs are goals: old pals from the business world, renamed and tailored to the needs of modern professionals and companies.

It all started with the fathers of management, Taylor and Fayol, who began to face management as a science. They pioneered measuring the times and motions of production line jobs, correlating that to productivity (basically output per unit of input), and then formulating hypotheses about how to improve these results. That’s how these guys found out interesting things like the ideal resting time for workers of a given factory, where equipment should be placed around the worker for optimum reach and even better lighting schemes over the production line that minimized the amount of mistakes and waste. In 1916 Fayol was already proposing the use of goals in the management planning process, according to William LaFollette, in his The Historial Antecedents of Management by Objectives, saying that “… in 1916 Henri Fayol identified five functions ofmanagement: planning, organizing, conmand, coordination, and control. Fayol considered the planning function to consist of visualizing the desired end (i.e., the objective or goal), the line of action to be followed, the stages to be followed in sequence, and the methods that would be used. Unfortunately Fayol’s work was unknown in America for some years.”

Mace and goal setting

Around 1935, a guy named Cecil Alec Mace conducted the first experiments that would prove that goals improve the performance of workers performing a job.

Mace was born on July 22, 1894 in Norwich, Great Britain. Mace’s early passion was theology, and he actually went to Cambridge to enter the holy orders, but ended taking up the Moral Sciences. While at Cambridge, Mace took many psychology courses (with mentors and tutors like G.E. Moore, C.S. Meyers, and G.F. Stout), and delved into experimental psychology, a field that would define his career.

In 1935, Mace conducted the first experimental study of goal-setting and in the following years discovered many of the basic principles that are taught today. His findings are absolutely aligned with further discoveries, from Garry Latham and Edwin Locke: first, performance is dependent on the existence of goals. Second, goals can be assigned to individuals, and unless they are too hard to achieve (unreallistic), will be accepted by said indivuals. Third, goals can be assigned for a variety of outcomes: for any performance criterium that can be measured, a goal can be set. Fourth, a tough, specific goal will lead to greater increments in performance than a nonspecific, “do your best” instruction. Fifth, goals increase performance less through intensifying effort than through prolonging effort. And last, despite a worker’s internal motivation, without external goal assignment, workers will perform bellow their abilities.

Mace also found out that in order for goals to be effective, individuals need to have constant feedback about their performance in comparison to the goal at hand, and eventual discrepancies.

Since a lot is spoken these days about what motivates individuals at work (the subject of extremely popular books such as Drive, by Daniel Pink, and Payoff, by Dan Ariely), it is very interesting to note that Mace was already reaching very similar conclusions around that time. According to Mace,

“Traditional doctrine has been oversimple. The mistake of the worldly wise, who like to say that “the only effective incentive is the pay-packet”, is not so much that they overlook other sources of motivation as that they fail to observe the complexity of this motive itself. We all love money, but we love it most for what it enables us to do. To some it may mean chiefly beer and circuses, to others it means greater security, or a better chance for one’s children, or greater opportunity for promoting a project for reforming the world. The pay-packet theory is not a bad one to start from, but it is apt to stifle thought precisely at the point where thought should begin.”

After Mace’s came many studies about the effectiveness of goal-setting in task performance. The subject would be later developed definitively by Locke and Latham, who’d go on to write the bible on the subject.

Peter Drucker, George Odiorne and MBO

In the 1950s, Peter Drucker, who is believed to be the greatest management guru of all time, articulated, in one of his books, that goals could be a great way to measure the performance of managers, a new breed of workers that was popping up left and right on the US economy.

Drucker concluded that managers should set goals around productivity improvements and other measurable outcomes, check performance against those goals from time to time and get on a process of continuous improvement.

He called it “management by objectives and Self-Control”, or “MBO”, a concept introduced in The Practice of Management (Nobody knows who first used the term “MBOs”, but it’s widely said that it was Drucker. Drucker, on the other hand, actually claims he first heard the term from General Motors’s Alfred Sloan).

At the time, one of the most prominent companies to adopt the methodology was HP. Other practitioners included General Mills, DuPont, and General Electric.

Drucker viewed MBO as a management philosophy. According to him, in The Practice of Management, “… What the business enterprise needs is a principle of management that will give full scope to individual strength and responsibility, and at the same time give common direction of vision and effort, establish team work and harmonize the goals of the individual with the common weal. The only principle that can do this is management by objectives and self-control.”

Contrary to what’s currently widely believed, MBO wasn’t meant to be top-down nor about controlling people in a mechanistic way. Again according to Drucker, and the emphasis here is mine, “[MBO] requires each manager to develop and set the objectives of his unit himself. Higher management must, of course, reserve the power to approve or disapprove these objectives. But their development is part of a manager’s responsibility; indeed, it is his first responsibility. It means, too, that every manager should responsibly participate in the development of the objectives of the higher unit of which his is a part. To “give him a sense of participation” (to use a pet phrase of the “human relations” jargon) is not enough,” and “The greatest advantage of management by objectives is perhaps that it makes it possible for a manager to control his own performance. Self-control means stronger motivation: a desire to do the best rather than just enough to get by. It means higher performance goals and broader vision. Even if management by objectives were not necessary to give the enterprise the unity of direction and effort of a management team, it would be necessary to make possible management by self-control.

Drucker’s work didn’t delve into the specifics of how to apply MBO to an organization. That work was done, in part, by his student pupils, like George Odiorne, who went on to write books about the subject and consult with many large companies in the USA.

Hoshin Kanri, or Policy Deployment, in Japan

Around the 50s, in post-war Japan, W. Edwards Demming and the Japanese manufacturers were developing ways to increase the quality of Japanese products by enhancing their manufacturing processes. Demming had been sent to Japan by the US Government to help rebuild the country’s economy, which had been devastated by World War II. That’s where methodologies like Six Sigma, TQC – Total Quality Control, and the “Toyota Way” were born.

In Japan, something similar to MBO was developed. It was called Hoshin Kanri, or “policy deployment,” a methodology that was part of larger Total Quality Management, and through its process the goals, or hoshins, were unfolded annually throughout the organization. By the way, we believe that the Hoshin Kanri literature is critical for any company that wants to become an excellent OKR practitioner.

Since the introduction of MBOs and the TQC, practically every modern company is managed using some form of goals. Some companies set annual goals; others do it twice a year. Some tie pay-for-performance bonuses to the achievement of goals; others run some sort of performance review based on goals attainment. But most of the Fortune 500 use goals and have them as a key part of their compensation management stack.

Andy Grove and Intel: iMBOs

The term “OKRs” was coined, as far as is known, by Andy Grove, the western name of András István Gróf, an hungarian immigrant. Grove was the CEO of Intel for more than 10 years, wrote best-selling business books like High Output Management and Only The Paranoid Survive, and later teached strategy for high-technology companies at Stanford.

At Intel, goal-management was called “iMBO,” or “Intel Management by Objectives” (referring to the term MBO, from Drucker.) Everybody in the office staff took part in it, establishing annual and quarterly Objectives (which resembled SMART goals) and time-bound milestones to achieve those Objectives, which Grove dubbed Key Results. The methodology was taught in an onboarding course though which all those employees went called Intel’s Organization, Philosophy, and Economics.

Grove didn’t bring any transformational insight into the MBO framework, but instead suggested that its employees describe their goals (which were basically SMART goals) in conjunction with what they called Key Results, which were steps or action plans that guided the collaborator towards the goal.

In Grove’s view, key results were primarily milestones that would lead someone to achieve their objectives: a goal to “Dominate the mid-range microcomputer component business” would be followed by a key result to “win new designs for the 8085.” Even though Grove stressed that key results should be measurable, his examples all closely resemble efforts, or deliverables, as part of an action plan, and don’t look like actual results.

Grove’s other contribution to OKRs was his belief that Objectives and Key Results should be defined in a two-way process: from top to bottom, in the case of Strategic Objectives that should be deployed to different executives and business units, but also from the bottom up, from the individual contributor herself, so as to bring commitment and empowerment to the process. It was far from a novel concept, but one that had been partially lost in big American companies, which pushed goals “down the line” throughout the organization, from the Board to the CEO, from the CEO to the VPs, and so on. Grove encouraged Intel employees to define their goals according to the goals of the company, and then calibrate them with their managers.

Last but not least, Grove insisted that OKRs were aggressive, meaning difficult to achieve, and what he called “stretch goals.”

John Doerr, Google and OKRs

In the late 1990s, OKRs spread to other Silicon Valley companies through the hands of Jon Doerr, a partner at Kleiner Perkins (now KPCB), one of the world’s most respected venture capital firms. Doerr had worked at Intel indirectly under Grove, and used iMBOs. He later spread the methodology to some of his portfolio companies at Kleiner Perkins, the most important of which was a startup founded by two Stanford PhD students who had created an excellent web search engine. The startup was Google.

At Google, OKRs took many different forms and gained worldwide fame. Larry Page, cofounder of Google, claims that “OKRs… helped lead [Google] to 10x growth, many times over. They’ve helped make [Google’s] crazily bold mission of ‘organizing the world’s information’ perhaps even achievable… [OKRs] kept me and the rest of the company on time and on track when it mattered the most.”

Google operates under a very loosely standardized flavour of OKRs. Aside from salespeople, who have goals that are set in a more top-down fashion and according to budget, most other teams, like product and engineering, are free to use OKRs or not, and use OKRs with varying degrees of homogeneity and effectiveness. In common between all of these flavours, OKRs are treated as more of an HR performance management tool than a management philosophy. They are graded at the end of every performance management cycle in a five-point rating scale (0.0, 0.3, 0.5, 0.7, and 1.0). Laszlo Bock’s take on how OKRs should be planned at Google offers a glimpse at why Google users OKRs so loosely:

Having goals improves performance. Spending hours cascading goals up and down the organization, however, does not. It takes way too much time and it’s too hard to make sure all the goals line up. We have a market-based approach, where over time our goals converge, because the top OKRs are known and everyone else’s OKRs are visible. Teams that are grossly out of alignment stand out, and the few major initiatives that touch everyone are easy enough to manage directly.

OKRs have been widely adopted in the Silicon Valley, a phenomenon that can be attributed to Google’s fame and success as a company. But there is very little consensus on how OKRs should actually be implemented, or even on what a proper OKR should look like. That’s the part of the history of OKRs we’d like to change.