MBO vs OKR: What’s the Difference and How To Implement OKRs in Your SaaS?
MBO vs OKR: Which is the better method for managing your employees and business objectives?
MBOs and OKRs have been hailed by some of the biggest tech companies. Both of these frameworks are commonly used to monitor, manage, and assess results.
Let’s help you find the differences so you can choose the most relevant one to maximize customer retention and boost your SaaS growth.
- Management by Objectives (MBO) is a goal-oriented management approach used to set clear objectives for a specific period and track progress toward them.
- Objectives and Key Results (OKRs) is a collaborative goal-setting framework that individuals and teams use to set ambitious goals with quantifiable key results.
- MBOs are qualitative, risk-averse, confidential, individual-focus, and review annually.
- On the other hand, OKRs are quantitative, ambitious, public, team-oriented, and reviewed quarterly.
- OKR is more transparent and collaborative than MBO, and it helps businesses improve and grow.
- Setting the team vision and mission is the first thing you should do to motivate your employees.
- Monitor and review progress regularly throughout each OKR cycle to ensure the best results.
- Keep feedback loops to perfect your OKR framework.
- Record your quantitative results at the end of every OKR cycle and report them to the relevant stakeholders.
What is Management by Objectives (MBO)?
Management by Objectives (MBO) is a goal management framework used to establish clearly defined goals for a given time frame and track the progress toward meeting them.
For instance, a product manager can set a particular target after consulting with one or more subordinates. Companies’ management usually offers incentives such as bonuses to their managers and employees once revenue targets are reached.
According to Andy Grove’s “Measure What Matters” book, the MBO technique was created by Peter Drucker in the 1950s. This approach was designed to be more human-friendly because people are more likely to achieve their goals when they are involved in setting them. Since then, MBOs have been used by several well-known companies, including Intel and Hewlett-Packard.
The goals are typically spread out over a period of one year and are aligned with the company’s overall strategic goals. MBO objectives tend to be SMART – specific, measurable, achievable, realistic, and time-bound.
Management by Objectives (MBO) example
Here are some examples of MBO goals that companies can use to guide their business teams.
- Increase the customer satisfaction score (CSAT) to 90%.
- Reach an average expansion monthly recurring revenue of $30,000.
- Raise the user retention rate to 95%.
What are Objectives and Key Results (OKRs)?
Objectives and Key Results (OKRs) are a method for employees and teams to establish ambitious goals with quantifiable results.
The OKR framework was designed by John Doerr and Andy Grove in the 1970s. Evolving from MBOs, OKRs provide more transparency by defining how the business would achieve success. It also sets a standard that the entire organization and its employees can adopt.
At first, the top management fixes the overall company goals that teams need to align with. But teams have the discretion to choose their own methods to overcome their challenges.
The purpose of the OKR framework is to align teams with common objectives and measure their progress toward those. So OKRs not only help teams improve their performance but also motivate them to actively pursue their goals.
Objectives and Key Results (OKRs) example
You must always have specific and clear objectives and define them by key results.
To prevent teams from getting overwhelmed by goals, we recommend no more than four key results per team. But if you can’t reduce the number of key results, you should check if you can break a goal into smaller pieces.
So let’s look at two hypothetical situations where your company defines success using OKRs.
Reduce our customer churn rate.
- Use churn surveys to get feedback from at least X churning customers.
- Improve customer engagement score by Y% for key product features.
- Exceed NPS score of greater than Z.
Increase our customer satisfaction score.
- Collect user feedback from at least X of our most high-performing customers.
- Get a minimum of Z responses to a CSAT survey.
- Exceed CSAT score of greater than Y.
MBO vs OKRs: What are the key differences?
The main similarity between MBO and OKR is that they are both goal-setting frameworks that set clear, specific goals. However, they don’t have much more in common.
This is how they differ.
Qualitative vs quantitative approaches
MBOs are typically quantitative. But OKRs strike a balance between quantitative and qualitative approaches. While MBOs only outline the final quantitative result, OKRs use key results to combine quantitative markers of success with qualitative ones. It’s dangerous to rely solely on numbers, such as the Ford Pinto recall of 1971, caused by faulty design.
Risk-averse vs ambitious goal setting
MBOs tend to be more practical and risk-averse than OKRs. MBOs are related to personal performance and hence compensation, so employees are unwilling to take risks. On the other hand, OKRs are not related to compensation and allow scope for failure. This is what makes OKRs special. They challenge teams to innovate and expand the company’s abilities, which creates more growth opportunities.
Annual vs quarterly performance reviews
MBOs are usually scheduled annually, whereas OKRs are typically scheduled quarterly (annually or monthly at times). How do the quarterly schedules help? They prioritize each goal and ensure it is executed within the right time frame. With annual MBO schedules, the goals may decrease in importance or even get lost entirely over twelve months, which only disrupts the focus within the company.
Confidential vs public goals
MBOs are confidential. They are set out for individual employees and agreed upon privately with their supervisors. The managers do not share any goals with the remaining team members. They maintain this confidentiality because MBOs are tied to compensation. Because OKRs are team-focused, they are shared around the company and result in better solutions.
Individual performance vs team-based performance
When it comes to performance management, MBOs focus on individuals, whereas OKRs are assigned to teams. So, OKRs encourage collaboration and motivate teams to work hard toward shared goals.
Why are OKRs better than MBOs?
The differences might have given you an idea about why OKRs are better than MBOs. Let’s check two specific reasons.
OKRs help companies improve and grow
The MBO approach might be a good option for certain companies. But the OKR technique has made the process of goal setting more engaging since teams can align their goals better with the company’s strategic objectives.
While MBO focuses more on personal growth, OKR supports improvement, encourages innovation, and helps your business grow into a successful one.
In addition, OKRs hold all individuals and teams accountable for business growth by tracking both the company’s and its employees’ progress.
OKRs are more collaborative and transparent
OKRs allow your teams to be more collaborative by emphasizing team performance. They also set transparent goals for each team and therefore keep the goals from overlapping.
How to use OKRs to measure performance in SaaS?
To choose the right OKRs for measuring performance and implement them successfully, you should go through these five recommended steps.
Establish the vision and mission of the team
You should not pick the OKRs while keeping your employees in the dark. Setting a team’s vision and mission comes first in motivating its members.
This will help them understand what they need to do and how they should achieve success for your business. It will be easier for them to see the relationship between the OKRs and your goals.
Your teams should also understand how OKRs work. So let them ask questions to clear any confusions or issues that may arise.
Ask your managers to share granular details with their teams on topics such as progress reviews, individual and team deliverables, and contingent plans. Teams are more likely to embrace a new technique if they feel supported by their superiors.
Choose the right Objectives and Key Results
To choose the right objectives and key results, you first have to decide how valuable they are to your business. This would lead you to select the right metrics and KPIs.
Remember that the key results should be able to answer the ‘so what?’ question.
- You want to increase your retention rate by 25%, so what? Check whether other metrics like customer lifetime value are more relevant to your objective and whether you need to collect user feedback.
- You plan to launch a new blog, so what? Would it bring value to your company? Would customers be interested enough in its content?
- Your product team has come up with a new feature idea, so what? Does this feature proactively meet your target audience’s needs? How many of them would be willing to spend their money on it?
- You want to boost your current MRR via account expansion. Now that sounds like a worthy goal.
After you have established suitable action plans for meeting the OKRs, go ahead with the OKRs.
Regularly track and review the progress
Now you may think that it is enough to measure progress only at the start and end of each OKR cycle. But it is not.
Tracking and reviewing progress should be done regularly. You should not only monitor your company’s progress toward the goals as a whole but also check whether your teams and their individual employees are performing at the right pace.
The ideal period between two reviews should be a week. But if you want, you can hold bi-weekly meetings with team leaders on a one-on-one basis. There, you can check their progress as well as help them with anything they may need.
Moreover, there are OKR software tools for SaaS companies that have been specifically developed to monitor the performance of every key result with regard to its corresponding goal. Small SaaS companies can use a simple tool such as Google Sheet.
Establish feedback loops
You cannot hope to achieve excellence with the OKR framework unless you have feedback loops in place.
It takes time for teams and the company as a whole to become familiar with the framework. It might be even more challenging if you don’t even have the right metrics, to begin with.
For example, you could end up underestimating the time taken by a team to finish a task or overestimating your users’ perception of certain product features.
Nonetheless, a few OKR cycles will be enough to help you select more realistic metrics and timelines. Once you know how specific tactics can bring you the desired results like high net revenue retention or low churn rates, feed these metrics into a grading scale for future reference.
Collect quantifiable results and make reports
After you are done setting the OKRs and have gotten the quantitative results, report them to the concerned stakeholders. There are many ways you can measure your OKRs.
When measuring results, you can take a binary approach – either the objective is met or it isn’t. Alternatively, you can score based on a scale of 1-10 and consider scores higher than, say, 7 as successful.
Plus, you can make changes by using customer feedback data to make decisions and revise your definition of success and failure over time, or by measuring performance using grades from managers or checklists.
The image below is part of the Product Marketing Alliance’s OKRs report. These two SaaS metrics – Q3 goal and daily active users – were chosen only for their 3rd and 4th quarter goals. There are measurable goals and key results for each of these quarters.
Throughout history, both MBOs and OKRs have been used by large corporations, but OKRs are more collaborative and transparent and also help you grow your business.
The 5 recommended steps for using the OKR technique successfully are:
- Set the team’s mission and vision.
- Choose the right objectives and key results.
- Track and review progress toward goals regularly.
- Establish feedback loops.
- Collect and report quantifiable results.
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