Organizational Sabotage - The Malpractice of Management By Objective

Innovation, quality and productivity suffer from the abuse of MBOs

Objectives are essential to a business. But the malpractice of management by objective (MBO) can have devastating unintended consequences, write Kelly Allan and Kenneth Craddock in this week’s Deming Files.

Dr. Peter F. Drucker was a proponent of Management By Objective (MBO). Dr. W. Edwards Deming characterized MBO, as typically practiced, as a very harmful way to manage.

Were these two great thought leaders in conflict about MBO? As it turns out, the answer is: not really.

In fact Drucker and Deming were very much in alignment with regard to the importance of having a meaningful objective/aim of an organization, and both stressed the importance of long-term planning/objectives. Further, neither believed that numerical objectives alone (especially short-term ones) were useful in building sustainable organizations.

This is an important topic because the way MBO is typically practiced, today, is far removed from the original theory and intentions that Drucker articulated. Regrettably, as typically practiced, MBO is much closer to the model that both Drucker and Deming warned against.

The history of the development of MBO provides useful clues about how MBO started out as a means to support responsible management and then devolved into a "straightjacket" that does harm, to quote Dr. Drucker.

MBO theory seems to have originated in the 1950s at General Electric with VP Harold Smiddy, the founder of GE’s Crotonville training center. History has it that Drucker had seen MBO at GE, enlarged upon the theory, and wrote extensively about the value of MBO as a way to focus long-term thinking and planning. Drucker also wrote about the value of MBO as a means by which managers and their direct reports could communicate about what needed to be done and how. An Objective was a means to assure they were striving through their work to achieve the outcomes that were aligned with the strategy of the organization.

During the time that MBO was catching on in corporations, Dr. Drucker was a professor at the New York University School of Business. Across the hall from his office was that of another NYU professor, Dr. W. Edwards Deming. The two had a cordial, collegial relationship.

As Dr. Deming recounted the story, one day he approached Dr. Drucker and told Drucker that he (Deming) had been seeing MBO implemented with short-term numerical goals, not as a strategic management tool – as Drucker had intended it to be. Drucker thanked Deming and then investigated the actual practice of MBO in organizations. He determined that MBO too often was not being used properly. In fact, it was being used frequently in ways exactly opposite of what Drucker had intended.

Drucker set out in future writings to further clarify MBO – and to stop the spread of MBO malpractice.

"Objectives are the fundamental strategy of a business," Drucker wrote. "Objectives must be derived from what our business is, what it will be, and what it should be."

"Management by objectives is a prerequisite for functioning communication." Clarity through mutual discussions between managers and direct reports is a key to achieving objectives. Discussions of methods are inherent in the discussion of objectives. "Objectives must never become the basis of control in which there is domination of one person by another." Information about objectives should be a means for self-awareness, "not a tool of control from above."

In other words, Drucker intended for the relationship between the manager and direct report to be a collaborative one in which manager and direct report discuss opportunities and challenges in relation to the strategy of the organization. Instead, and even to this day, MBO is typically used to give managers and in turn their direct reports quotas to meet. A further abuse of MBO is that how they meet those quotas does not really matter. "Just meet them," is the contract between manager and worker. As a result of "just meet them" some of the most devastating unintended consequences occur. You must meet your numbers – by any means necessary.

As Dr. Brian Joiner noted, there are only three ways to get better numbers: manipulate the numbers, manipulate the system that gives you the numbers, or improve the process and system which causes the numbers to be created. Only the last method is sustainable, managerial and positive.

Deming pointed out that there are many downsides to short-term manipulation via MBO (aka MBR [Results] or MBQ [Quotas]). For example, the relationship between manager and direct report becomes a transaction, a contract – to be negotiated and gamed.

Unfortunately, the practice of MBO has regularly become a hammer to force departments and individuals to achieve short-term goals. In MBO as typically practiced it is very difficult to achieve a long-term improvement in the process or system. Taking time, effort, and resources to improve the process is more likely to be punished than appreciated.

An unanticipated consequence of the abuse of MBO has been that innovation, quality and productivity suffer. People will work to the quotas and that is it. Worse has been the sabotage of other departments and other people in one’s pursuit of meeting the objectives. Equally destructive is the belief that if a manager is responsible only for giving MBO quotas to direct reports, the manager has more time to handle more direct reports. In other words, the manager needs not mentor nor manage the direct reports – only monitor them. Drucker and Deming would say that controlling people through quotas that are enforced by threats/punishments and incentives/rewards is not managing, but manipulating.

[inlinead]

Drucker warned against the use of incentives with objectives, "To pay a research laboratory for results, for instance, in the form of a royalty on the sales of new products and processes is almost certain to misdirect the research laboratory."

Drucker was concerned that the abuse of MBO caused higher turnover of employees and he saw cynicism increase as dangerous fires were set throughout the organization in the pursuit of meeting immediate objectives. He foresaw and abhorred that assigned objectives would be used as a cudgel in performance reviews to rate and rank people, and to determine pay, bonuses, promotions, and recognition.

Some organizations still violate MBO by using it as a contract containing short-term objectives and quotas. Yet the leaders wonder why relationships with their own employees become arm’s-length ones.

Both Drucker and Deming saw the dangers inherent in MBO for lighting the fires of manipulating the numbers, manipulating the system, disruption, too immediate a focus, and poor productivity. Close reading of both Deming and Drucker provide leaders and managers with the proper and effective use of objectives and approaches for managing them.

Editor’s Note: The columns published in THE DEMING FILES have been written under the Editorial Guidelines set by The W. Edwards Deming Institute. The Institute views these columns as opportunities to enhance, extend, and illustrate Dr. Deming’s theories. The authors have knowledge of Dr. Deming’s body of work, and the content of each column is the expression of each author’s interpretation of the subject matter.

Copyright 2011 Kenneth Craddock and Kelly L. Allan.