MBO versus S.M.A.R.T. vs KPI? What’s Your Goal Setting Protocol of Choice?

Nov 13, 2015
12 Min Read
mbo versus s.m.a.r.t. vs kpi - what’s your goal setting protocol of choice

mbo versus s.m.a.r.t. vs kpi - what’s your goal setting protocol of choiceIn this this two-part post, we’ll highlight three of the most common goal-setting methodologies present in organizations today and will discuss the pros and cons of each.

Management by Objectives (MBO)

If you’ve worked in an American organization in the last several decades, you probably have experience with the MBO approach to goal setting.

While the American corporation was in its formative stages, journalist Peter Drucker was invited to take a close peek inside General Motors. Drucker recognized that corporate environments tend to operate in silos in which employees get stuck in an “activity trap” – they’re so focused on what they’re doing that they forget why they’re doing it. These silos can’t be effective unless hierarchies are integrated from the top down. Leaders and their employees must decide on and commit to a common challenge that then cascades through the organization.

In The Practice of Management, which was based on Drucker’s leadership observations at GE, he first described his Management by Objectives (MBO) theory. In MBO, employees participate in setting goals and are then evaluated on the fulfillment of those goals. Managers focus on what employees are achieving rather than exactly how they are achieving it.

In the MBO model, every level of management participates in an organizational goal setting process so that the plan can be implemented with maximum buy-in. Early on, managers agree on the system by which performance will be evaluated and rewarded. Next, managers identify goals in every area for which they are responsible and share these goals with their teams. Once teams understand their targets, each manager works with individual employees to transfer knowledge of the bigger picture and set goals that are aligned with organizational and team objectives. The manager then steps into the role of monitor, checking progress often and assessing if and how well goals have been achieved.

In their 2014 book 100+ Management Models: How to Understand and Apply the World’s Most Powerful Business Tools, Fons Trompenaars and Piet Hein Coebergh said that an important aspect of the MBO approach is that when employees are involved with goal setting, they are more likely to fulfill their responsibilities. In the MBO system, employees are more self-directed than boss-directed – a shift from the industrial age of work in which employees simply did what their managers told them without asking questions or providing input on the best course of action.

Although Drucker was undoubtedly a genius, he did not discover the panacea for all things ailing corporate management. The MBO approach has well-documented advantages and disadvantages. A chief advantage, of course, is its egalitarianism. Several research studies, including the recent Gallup State of the American Manager Report, have indicated that employees who have a say in their goals and the best way to achieve results are more engaged in their jobs. MBO also forces management layers to align on a common vision and actively communicate that vision from top to bottom. Promotion and compensation decisions can be made more objectively and micromanagement is less of a problem. And best of all, the model can be used in any organization regardless of type or size.

Over the years, though, drawbacks to the approach have emerged. MBO requires a systematic, rigorous process that not all organizations have the discipline to undertake. Secondly, the emphasis on process sometimes overshadows meaningful actions and outcomes. Goals may be overly idealistic, failing to take into real account hurdles (like financial resources) that teams or individuals may face. MBO may also lead to competition instead of collaboration as teams focus narrowly on their objectives and put them above the greater good of the organization. This can result in actions that achieve results by whatever means necessary, and quality and the integrity of reporting can be compromised.

S.M.A.R.T. Goals

Nineteen sixties American psychologists Edwin Locke and Gary Latham conducted several studies related to the effects of goal setting on motivation. The 1968 paper Toward a Theory of Task Motivation and Incentives illustrated that clear goals and appropriate feedback motivate employees and lead to performance improvement. And, the more difficult and specific a goal is, the harder people will work to achieve it.

In a follow-up 1981 paper, Locke reviewed the scientific literature about goal setting, including lab and field studies, which had taken place since 1969. He found that in 90 percent of the studies, specific and challenging goals led to higher performance than easy goals, "do your best" goals, or no goals. Goal setting is most likely to improve task performance when:

  • The goal is specific and sufficiently challenging
  • People have the ability to achieve the goal
  • Feedback is provided to show progress in relation to the goal
  • Rewards such as money are given for goal attainment
  • The manager is supportive
  • Assigned goals are accepted by the individual

According to Locke, these types of goals affect performance by directing attention, mobilizing effort, increasing persistence, and motivating strategy development.

Drawing on Drucker and Locke’s work, in a 1981 issue of Management Review, George Doran claimed S.M.A.R.T. was the best way to write management's goals and objectives. Ideally speaking, each corporate, department, and section objective should be:

  • Specific: targeting a particular area for improvement. Specific answers the what, why, who, where, and which. In other words, what do you want to accomplish? What are the reasons or benefits for accomplishing this goal? Who is involved? What is the location? Which requirements and constraints are factors?
  • Measurable: quantifying progress. Measurable answers the how much, how many, and how will you know when the goal has been accomplished?
  • Assignable: specifying who will do it. Assignable answers how the goal can be accomplished on the current team, and how different members can be involved.
  • Realistic: stating what results can realistically be achieved given available resources and other constraints. Realistic answers whether this is the right time for the goal, whether accomplishing it is a worthwhile endeavor in the current socio-economic climate, and if it matches the needs of the organization.
  • Time-related: specifying when the result(s) can be achieved. Time-related answers what will you do today? What will you do in six weeks? What will you do in six months?

Doran’s S.M.A.R.T. goals fit right into Drucker’s MBO universe because they made the goal setting process less vague and the goals themselves easier to understand, write, and complete. Over the decades, many have come up with alternate versions of Doran’s original acronym. We, for example, say the A stands for “attainable,” meaning: Is the goal something that you can achieve in a series of steps? The chart below illustrates some examples of S.M.A.R.T. goals with the A as “attainable” and the R as “relevant.”

You are probably familiar with the study of S.M.A.R.T. goals allegedly done at Yale, in which only three percent of the graduating class wrote specific goals for their futures. The story has it that 20 years later, that three percent was earning 10 times the income of the 97 percent that had no clear goals. When this particular study was found to be an urban legend initiated by a S.M.A.R.T. goal supporter, psychologists at Dominican University in California decided to do their own experiment. Their small study found that people are 42 percent more likely to achieve their goals if they write them out, and there’s a 78 percent increase in achievement when the goals are shared with someone else.

By themselves, though, S.M.A.R.T. goals have limitations. Like prior approaches, S.M.A.R.T. goals emphasize goal setting and tend to gloss over goal pursuit. We’ve all been in companies in which goals are well-documented and shared, but only addressed again when it’s time for the semi-annual performance review. While they are a good option when holding people accountable to algorithmic tasks, S.M.A.R.T. goals can also stifle creative thinking in knowledge workers. The S.M.A.R.T. approach encourages employees to set attainable goals rather than challenging ones, which can restrict innovation because attainable goals aren’t correlated with hyper success. Instead, S.M.A.R.T. goals may keep employees performing rote tasks, achieving the minimum, and in a sense “gaming the system.”

Stay tuned for next month, when we’ll look at Key Performance Indicators (KPIs), as well as the modern business hurdles none of the current approaches seem to be able to solve.