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The MBO Quandry

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By Ed Powers, COO at Cateway
 

I had an interesting debate recently with a colleague at a successful consulting firm. Their practice focuses on making management more accountable through “pay for performance,” which means if managers hit goals, they get a bigger bonus. His firm has prospered, yet the words of late quality guru W. Edwards Deming dogged me.

Let me be clear: I’m a huge proponent of accountability. Without it, nothing gets done. Yet, the most popular methods CEO’s choose today are ineffective, and often produce unintended and harmful consequences.

Management by Objective (MBO) has been widely used for years. The CEO requires the VP of sales to “grow sales by 10%,” manufacturing VP to “reduce costs by 5%,” and VP of finance to “reduce overdue accounts receivable by 7%.” Using MBO, the CEO concentrates on what, not how—the manager determines the latter. To provide incentive, the CEO promises fat bonuses for meeting goals. Management 101. Carrot and stick.

What happens next is predictable. The finance VP gets tough, demanding prompt payment and putting delinquent accounts up for collection. The VP of sales shouts as chronically late-paying but important customers get upset and cancel orders. The manufacturing VP based his production forecast on the higher sales goal and gets stuck with too much inventory at year-end. The VP of finance achieves her goal and gets her bonus, but at great expense. Tempers boil. Teamwork collapses. Sales are down and costs are up. Did the CEO get what he wanted?

Deming railed at MBO in his seminal work, Out of the Crisis. “The idea of a merit rating is alluring. The sound of the words captivates the imagination: pay for what you get; get what you pay for; motivate people to do their best, for their own good. The effect is exactly the opposite of what the words promise. Everyone propels himself forward, or tries to, for his own good, on his own life preserver. The organization is the loser.”

I pointed out to my colleague the tendency for MBO to sub-optimize, and like many proponents of MBO, he said their approach encourages senior leaders to haggle during annual planning, and settle on goals everyone supports. Since their pay depends on meeting goals, they’re motivated to work together and get it right.

But Deming challenged the notion of setting goals at all. “If you have a stable system, then there is no use to specify a goal. You will get whatever the system will deliver… If you have not a stable system, then again there is no point in setting a goal. There is no way to know what the system will produce.”

Hold on a minute. If there are no goals, how can accountability exist? Deming said, “The job of management is not supervision, but leadership. Management must work on sources of improvement, the intent of quality of product and of service, and on the translation of the intent into design and actual product.”

After all these years, Deming’s words still resonate. According to Fortune magazine, 70% of CEO’s who fail do so because of lack of execution and not strategy. Despite increasingly elaborate MBO, merit rankings, and pay-for-performance schemes, the biggest reason organizations fail is they don’t execute the changes that get better results.

So what does it take to execute? First, managers should understand the impact and analyze the causes of a problem. Next, developing a plan for the solution and its deployment gives employees a clear roadmap. Finally, creating a discipline of focus, follow-up, and follow-through gets the job done. The magic ingredient is leadership—the ability to instill in people a desire and urgency for change. Holding managers accountable for good execution, instead of achieving arbitrary results, puts the emphasis in the right place.

Deming refers to systems. It’s not about Manufacturing, R&D, or Sales, but how they harmonize to generate value and financial returns. Abolishing MBO mitigates sub-optimization, breaking down barriers between departments. Looking at the organization as a system, and thinking about how to make it successful as a whole, is the key to high performance.

And that’s something for which the CEO should be accountable.

1 comment

  • Comment Link SS Elliott Wednesday, 23 November 2011 17:51 posted by SS Elliott

    Agreed! MBO should be about overall business objectives, not about individual or department objectives.

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