In the past several years, we’ve seen what’s been called a revolution in performance management. Some companies have thrown out the traditional annual performance appraisal, removed rating systems and abandoned the forced ranking that plagued giant companies, like Microsoft (and led to what was deemed by Vanity Fair “Microsoft’s lost decade“). The reaction has led companies to scramble to install better systems, with noble objectives if not improved results. Implementing “continuous feedback” and new mobile technologies provide some degree of improvement in the primary performance management goal of elevating performance.
But, we can also reach for something higher. By implementing an effective goal system, HR teams can lift the organization, the people in it and even the HR profession. Recent research by McKinsey & Company determined that crafting an effective goal system was among the most critical components of an effective performance management system.
McKinsey found it’s necessary to “transparently link employees’ goals to business priorities and maintain a strong element of flexibility.” The old MBO (management by objectives) method still in place in some organizations doesn’t fit the bill. It suffers from several defects, in general, and for performance management effectiveness, specifically, it doesn’t provide the flexibility necessary in light of this new research. MBOs are typically set annually, then reviewed at the end of the year. In today’s agile organization, as one notable HR leader put it, “the world isn’t really on an annual cycle anymore for anything.”
The newer practice of setting OKRs, or Objectives and Key Results, suits the modern era of disruptive change and measuring results. It’s not a coincidence that Google, the practice’s biggest proponent, started among a sea of search companies and used OKR methods to dominate a significant segment of the internet. In fact, from the moment they received their initial funding, Google used OKRs as its “organizing principle” in the words of Sergey Brin.
There are several elements that elevate OKRs and distinguish it from MBOs. OKRs encourage teams to stretch aspirationally, setting goals that might seem just out of their grasp. Instead of sandbagging, which is pervasive in MBO goalsetting, the objectives in OKRs can be “moonshots” that lead to breakthroughs in performance. Setting challenging goals leads to better results, without leaving performance on the table. Larry Page says that, at Google, “OKRs have helped lead us to 10x growth, many times over.”
Additionally, the measures in key results provide the tracking and transparency necessary to monitor progress-and adjust for the inevitable times when things don’t stay on track or on plan. Adjusting plans, typically on a quarterly cadence, is another aspect that sets OKRs apart and allows organizations to rapidly adapt in a continually disrupted world.
Returning to McKinsey’s recommendation to transparently link employees’ goals to business priorities, with OKRs, the top priorities of the organization are set at the top for all to see. At Google, the CEO publishes his own OKRs with those of the organization, visible to everyone. Everyone follows in publishing their own goals, so transparency and connection run seamlessly throughout the organization.
Radical transparency and moonshot goals are not for every organization. But even adopting a modified version of the OKR system can improve performance management dramatically for any organization. That’s because the practices embodied in OKRs are founded on decades of research in effective goal setting, which has found that making goals specific, challenging (download), public and regularly updating them form the basis of an effective goal system. No wonder, then, that in addition to tech companies big and small using OKRs as a standard practice, OKRs are used by established leaders in diverse industries such as Accenture, Deloitte, Anheuser-Busch and Samsung, as well as at disrupters like Amazon, Uber and Netflix.
As for the company that suffered a “lost decade”? They came around, too. Microsoft not only threw out its stack ranking system, it adopted OKRsl. Bill Gates had discovered them outside of Microsoft through the Bill and Melinda Gates Foundation in the early 2000s, where they were helping save millions of lives.
How can better goal setting elevate the HR profession? By implementing a system closely tied to executing the strategic priorities of an organization, an HR leader becomes an essential strategic partner to the executive team. That’s a win all around-a better and more effective organization, employees engaged and achieving great things-with HR leading the way.