Companies seeking to be cutting edge or wanting to navigate a volatile market environment adapt methods to transform their business or parts of it.
When setting up a start-up, Eric Ries preaches it should be in a lean way, and recent innovative products have used a creativity technique dating back to the 1950s known as “Design Thinking.” When developing software, most organizations adopt a SCRUM or DevOps mindset while adhering to the “Agile Manifesto.” Organizations adopt Nexus, SAFe, and LeSS methodologies when scaling, and some also apply Holacracy or reinvent themselves using Frederic Laloux-Style.
Research has shown that most of these methods are successful when used correctly and efficiently and benefit specific business areas. However, many organizations struggle to align their strategy and goals.
Let us first take a brief look back in history. For decades organizations used a management method known as management by objectives, or MBOs, and some still use it. Peter Drucker coined this method in his 1954 book The Practice of Management. He set forth some basic principles when using MBOs, such as objectives should be laid out with employees’ help and be challenging but achievable. Employees receive daily feedback, and the focus is on (financial) rewards rather than punishment. Personal growth and development are emphasized, rather than negativity, for failing to reach objectives. That sounds good so far.
Companies that use MBO-style performance management review their fulfillment on an annual cadence. Following the MBO process, objectives are set together with employees at the beginning of the year and holistically evaluated at year’s end. The goals set in this process tend to be personal, broad, and strategic – they are less focused, less tactical.
And you can say the same about the Balanced Scorecard that Kaplan and Norton introduced in the late 80s. OKRs are a fast cadence process and operate under the premise that goals need to be reviewed more regularly. They are frequently set, tracked, and re-evaluated; thus, they are not written in stone. Compared to MBOs’ long-term cadence, OKRs allow frequent reviews and provide the flexibility to change directions. You can make informed decisions based on metrics very quickly rather than wait an entire year to address them. Typical characteristics of a cascade (or waterfall) are top-down, one-way, irreversible flow, with no feedback cycle. That is everything an agile, innovative organization in 2021 does not want to be.
The cascading model is a leftover of a command and control mindset from the 80s in which decisions flow from the top and cannot be amended. A top-down goal-setting process can easily take up to 4-6 months. This type of goal setting is not only a massive waste of resources, but it also leaves employees and teams without clear goals or even old goals, creating waste when teams are working towards them for almost half the year. To master the OKR implementation process, the teams should be set in a parallel process in which they define OKRs linked to the organization’s objectives and validated by managers in a bottom-up and top-down approach at the same time.
An essential prerequisite for companies, employees, and teams to make faster progress is to have clear goals. These goals are the guardrails for everyone involved as they describe very well WHAT needs to be achieved so that the respective team or person can decide on HOW to achieve it. They also function as protective barriers because, with a precisely defined goal, everything that doesn’t contribute to the end goal is deemed out of scope.
In the book with the same title, John Doerr explains that Objectives exactly represent WHAT you want to achieve. An often-cited analogy is a lighthouse representing the clear goals set for an organization, team, or person. The goals are like the light shining from the lighthouse, a navigational guide during all weather conditions. It provides stability and direction. Just as it can guide the organization through storms, it still glows when all is well, consistently leading the way forward to the projected goal.
Another important mind shift that comes with the OKR concept is the so-called “stretch goal” principle. When setting stretch goals, you will achieve more than you expected to be possible at first. Stretch goals are ambitious, taking you out of your comfort zone and allowing you to achieve things that may seem too ambitious at first. They also give you the framework in which to operate. Nevertheless, when compiling your OKRs, be careful not to just set stretch goals that cannot be reached, as repeatedly missing them can be demotivating.
Another centerpiece of OKRs is that they do not cascade as MBOs because OKRs understand that strategy and tactics have different natural paces since the latter tend to change much faster. Whereas there is usually a so-called strategical cycle on a company level of 12+ months, the tactical cadence is mainly 3 months or longer.
Each company adopting OKRs should find its cadence that fits its needs depending on the industry and surrounding operating parameters. When adopting shorter cycles, it could be beneficial to make sure you have a streamlined process for developing the OKRs in place; otherwise, you would spend too much time setting goals. When your business deals with uncertainty or your market changes too quickly, longer OKR cycles will not help. For example, Spotify used a strategic cycle of six months while its teams set OKRs every six weeks. When teams use OKRs to measure value, the quarterly cadence makes sense since time is required to develop respective initiatives and measure their impacts, learn and iterate.
When a team needs something from another team, person, or leader within the company, due to the OKRs, it can be addressed with their shared priorities. Even delaying initiatives after informed discussions and negotiations can be powerful, as doing it for the right goals will foster the OKR process.
OKR is a powerful system that steers your whole organization in the same direction and lets them collectively commit to the same objectives. It forces leaders to make hard decisions in favor of the proper focus that is company-wide and personal.
The three alignment mechanisms as described above foster affinity and transparency in the organization. Connecting teams under the umbrella of a joint objective allows everyone to become responsible for supporting each other and accomplishing goals. The important objectives connect everyone in the organization vertically, horizontally, and diagonally. The top-down alignment brings more meaning to the respective work, while bottom-up OKRs cultivate engagement and foster innovation.
The clear direction provided through OKRs provides the freedom to choose HOW to achieve the OKRs. In this way, the OKR mechanism makes the inherited success criteria visible to the whole company, creating mutual obligations. Sharing goals and progress increase the feeling of responsibility to complete them.
The stretch goal paradigm's functionality is simply the motivation that comes with OKRs to excel by doing more than we had thought possible. Stretch goals are ambitious goals that you define, and they are goals that you know you can’t reach yet, but if you stretch to reach them, you can get further than expected.
Using so-called moonshots and roofshot goals are the mainsprings. Moonshots are stretch goals. They are goals just beyond the threshold of what seems possible. Success means achieving 60-70%. Roofshots are ambitious but achievable goals, and success means achieving around 90% to 100%. The philosophy behind OKRs is that if the company continually reaches 100% of all goals, they are too easy, and there is no atmosphere created where accelerating is the norm. Momentum and flow are more relevant than micromanagement and 100% completion rates.
With OKRs, you can start aligning and transforming your organization in a low-key way. No big bang roll-out is needed in the first step, as you can carve out the respective departments from your organizational structure to start with OKRs. It`s essential, though, to have enough departments, teams, or people involved from different levels as the OKRs need to unfold the ability to horizontally and vertically align the involved parties. Start with identifying your tempos and cadences. We recommend working with experienced OKR coaches to guide you through the process and its pitfalls.