Objectives and key results
OBJECTIVES AND KEY RESULTS (OKR)
OKRs are a management tool to focus the company on executing the most important elements of the strategy of the company. I will discuss this later but I purposely chose the words “most important” because implementing an OKR system is meant to emphasize just that, the most important elements of the strategy. There is an old adage that you will get improvement in what you measure, so it is critical to measure the right things. Processes and systems are critical to companies that are growing and scaling up. In fact, they are important to all companies, but especially important to smaller ones that have very little time, money and resources to waste on noncritical activities. Systems like OKRs might be called Standard Operating Procedures (SOPs) and are critical manifestations of the culture of the company. OKRs can put discipline and focus into the company like no other system if managed correctly. I like to think of OKRs as a key element of the execution engine of the company. If the system can be implemented in a way that is deeply imbedded in the SOPs of the company and there is a common language around system that everyone shares, it can be a very powerful tool for leaders to accomplish goals and assess performance of their team as the company grows.
IT ALL STARTS WITH THE STRATEGY
Most companies these days have a mission and vision statement. These are aspirational goals usually driven by the CEO and her management team. Bob Burgelman wrote a book “Strategy is Destiny” focusing in on the concept that strategy is really messaging to everyone in the organization on where the company is headed, why it is going there, and what they want to achieve over time. It is Important to realize that execution without strategy is aimless, but strategy without execution is simply dreaming. Thus, the first element of implementing an execution system is to ensure the strategy is solid and well-communicated, and that the vision is shared by everyone in the company. In addition, to make it real and believable by the employees, the company needs to have an outline of how to achieve that strategy.
To define your strategy, I suggest a set of relatively simple objective statements that flow from your vision and mission statements. They should be written and publicized throughout the company. If your mission is to be the leader in your market segment, your strategic objectives may, for example, be the following:
- Achieve overall Product leadership in our category;
- Attract the best and brightest in our field; and
- Be, and be perceived as, the market leader.
The next level of implementation is to quantify these strategic goals. For instance, for the Achieve Product Leadership objective, how will we know when we achieve this? Perhaps there are performance elements or third parties that rate your product. If you were in the wine business, it might be producing wine with a 100-point rating. These goals can still be aspirational and they need to be set very high because of that fact. Over time, showing the progress you are making toward these aspirational strategic goals will be a great motivator. When setting these goals, I tend to ask the question where do we want to be in five years as a test of whether they are aggressive and aspirational enough.
THE ANNUAL PROCESS
Now getting down to the more year by year, quarter by quarter, and day to day implementation of OKRs. First, in the company’s annual planning process, key goals for the year should be determined and set out that follow from the aspirational goals discussed above. For instance, for our Product Leadership goal, our goal for 2022 may be ’Improve our product performance by 50% in speed and power. “ Or for a SaaS company, we may want to measure user satisfaction, or security or technical elements of the product.
For these goals, it should be goals that you believe can be achieved over a one-year period. For instance. Achieving product leadership may take 5 years and several product iterations to outpace the competition and truly become the leader. So that is not effective as a measurement tool in the short term. There is a need for shorter term goals and tactics or key results to achieve that interim or annual goal.
Now under each objective you can write key results. Again, at this point you are thinking on an annual basis. For our product leadership goal these tactics might be something akin to the following:
- Release a new UI by March;
- Meet and exceed new security standards by July; and
- Introduce a native mobile application by November
The reason to analyze and develop the specific goals you are going to work toward on an annual basis is because this is the foundation of your resource plan. In order to complete and release a new UI will take a certain level of resources and investment. The company will need to commit those resources to the group executing this goal. If the company is unable to commit the complete set of resources, alternatives must be found or there may be a negotiation on the completion date or other type of compromise. This goal setting should be an interactive process between the manager and the team. In the end, however, these goals should be tough and a stretch for the team but not so difficult that everyone thinks they are impossible. This of course is the art involved in this system or any goal setting system. OKR’s is about execution and Great Managers execute. I use the word “manager” broadly here to describe anyone in a management role including the CEO. I do not use “leader” when talking about this kind of a system. During my tenure at Intel, I grew my reputation and rose in the company not because of my leadership skills but because my teams executed.
I want to impress on you that there is a reason that everywhere in this presentation I have only used the Rule of Three. I have presented three objectives, and three tactics to go with those objectives. In the subsequent steps I will continue to use the Rule of Three. I said early on that this process is about getting the most important things done. It is about focus. I strongly believe that if you follow the rule of three you will be focused. I understand that sometimes expanding to four or in certain circumstances even 5 objectives may seem compelling. However, especially at the front end of implementing this process, I would not exceed four objectives or four tactics for each of those objectives. Of course, you can write more. Of course, there are more things you are going to do during your work day than just work on those three key things. However, to implement this system effectively you have to decide what is important and what is less important. For me this was always the hardest and most difficult part of using this system. What do I really need (not want) to focus on? What do I really need my team to focus on? These simple questions are hard because you will risk not getting some things done. I can tell you from experience that the quickest path to failure is trying to do too many things at one time. Focus is the key to winning.
Just a quick Andy Grove anecdote. When Andy would write his objectives and present them to the executive staff, they might look like this:
- Introduce the PentiumX processor by October
a. Design completed by March
b. Factory capacity in place by August
c. Ad campaign launched in Sept
- Start Intel Ventures
- Improve Employee Commitment by 10 points
At that time Intel had a $5B Flash Memory business. It would never be on Andy’s list. Employees complained about this all the time directly to him. They felt left out. Frankly they did not like it. His argument was that he had to focus on the things where he was driving change and he expected the Memory Division leaders to drive that business forward. The reason for mentioning this point is that at times some elements of the company may not receive much attention from the CEO. That does not mean she doesn’t value those segments. But it does set an expectation that you as the leader of that group will need to act like its chief executive and drive it, even if the light of the CEO is not shining directly on you.
QUARTER BY QUARTER
Now you may argue that a year is a long time and, in our business, things happen faster than that. Objectives written at the beginning of the year may not be what we need to do at the end of the year. There are many forces that affect a company. The market may change, new opportunities may arise, competition moves may require a quick response. I would agree with you that this is extremely important and this leads us to the next step in the process.
The next step is really where this system becomes effective and useful on a day-to-day basis. You now have your objectives for the year and you have thought through the key tactics to achieve those goals. So let’s say we are in the days leading up to the beginning of the year. We have an annual plan and a budget to go along with it. But now the rubber hits the road. What are we going to get done in Q1? I mean what are we measurably going to get done in Q1?
This is where the discipline and objectivity in writing the goals for the bjectives and the tactics or key results come into play. I want to explain here that the goal for the objective is very important.
For instance, our Objective for Q1 may be to increase our 60-day pipeline to $3m or more. We should be able to measure this without ambiguity. If we want to strictly interpret this, we either do it or not. Now we can write our tactics which might include the following:
- Hold 27 meetings with hospital administrators
- Issue 15 proposals
- Move into negotiation with 10 hospitals.
How do we assess our performance if we complete every one of these tactics flawlessly and we increase our pipeline to $2.5m? Did we do a terrible job?
How do we assess our performance if we do half of the tactics and increase the pipeline to $3.5m? Did we do a great job?
The answer is we cannot tell from the information I have written here. However, the manager and employee in a one-on-one setting should have agreed on the OKR’s going into the quarter. They should have jointly assessed how aggressive the target was and whether the key results represented a rational plan to achieve the objective. Knowing those details should allow the manager and the employee to determine the true performance.
In writing the objectives it is critical to make them objectively measurable. I favor using a range of results that is going to be satisfactory and is in line with the annual goal. In the goal above it might be that $2.5-$3.5 would have been acceptable. Below you can see a note from Imprint Energy, a company I work with. The CEO, Christine Ho, sent this message at the beginning of the year to her team as they were writing their first set of OKR’s. I could not have written a better summary so here it is.
I also favor communication and sharing everyone’s goals among the relevant team. The CEO and executive staff should be transparent in sharing and scoring their goals. The same for each division in the company. Upfront communication is important because different team members are dependent on each other to get their jobs done so they will want to see complimentary key results. For instance, sales will want to ensure that product development is aligned with their plan to sell a new product.
Many techniques have been used in attempts to balance realism with aggressive goals. Andy Grove was happy with a 75% score on your objectives which encouraged managers to be more aggressive in goal setting. Your goals were supposed to be so hard it was near impossible to get 100%. In his mind there was nothing worse than Sand Bagging or setting easy to achieve goals. He thought that brought down the performance of the entire team and in fact the entire company.
Other approaches give a range of scores. The range could go from near sand bagging to incredibly difficult depending on the Objective. In our example above achieving $2.5m in pipeline may have achieved a score of ½ while a result of $3.5m may have achieved a score of 2. Frankly I favor this type of system of scoring. While it is still open to negotiation and discussion, it is easier to understand.
TYING TO YOUR BONUS SYSTEM AND YOUR PERFORMANCE REVIEW
I very much like tying OKR’s to an annual cash or equity bonus system. I also like tying it directly to your performance review. While it might not be the only element you want to consider in a person’s job performance, achieving the most important results for the company is a critical element.
I also believe in assessing the results at the end of the year looking back in totality. You will have your OKR scores for each quarter and for the full year and while they tell a big part of the employee’s story, they do not tell it all.
Managers should apply some level of flexibility to increase or decrease the score based on all the facts available. However, I do not believe in a ton of flexibility. If there are wild changes at the end, then the objectives and the quarterly process did not work and changes need to be made to the system and implementation to adapt to the business needs.
OKRs are an effective management tool that help managers organize and prioritize work to be done and objectives to be met. Perhaps most importantly, when goals and tactics are well-written and shared openly, the company will be even better focused on effectively executing its strategic priorities as you allow cross-individual and cross-team interlocking of goals and tactics.