Management by Objectives: A Proven Leadership Formula

Management by objectives is a useful framework for aligning long term business strategy with the day-to-day tasks of your employees. This post gives a brief history of how management by objectives rose in popularity, modern critiques of its usefulness, and the five steps you can take to implement a version of MBO in your organization today.

The Original Silicon Valley Success Story

Bill Hewlett and Dave Packard were the original Silicon Valley success story. As they worked in a rented garage in Palo Alto in 1938, Bill and Dave built their first successful product: the HP200A low-distortion audio oscillator, a new design that was over half the price and of much better quality than others on the market.

In the following decades, HP grew to become one the largest and most influential businesses in America. They not only led the industry with their semiconductor technology, computers, and printers, but with innovative leadership and management decisions as well.

In 1942, HP rolled out a health insurance plan for all of their employees. In the same year, they designed one of the first open plan offices. Employees with at least six months of service received stock in the company in 1957, and employee flextime was introduced in 1973.

A New Way to do Things

For a long time, HP was ahead of the curve in introducing new ideas and management techniques. So it was no surprise that they led once again in the 1960’s to adopt the latest management theory known as “Management by Objectives.”

Management by Objectives (MBO) was first introduced by management guru Peter Drucker in his 1954 book The Practice of Management, and it wasn’t long before the model quickly grew in popularity. Other industry leaders, such as Intel and Xerox, soon followed HP in adopting the model as their own management philosophy.

In praise of MBO, Dave Packard once said, “No operating policy has contributed more to Hewlett-Packard’s success…MBO…is the antithesis of management by control.”

In a nutshell, Management by Objectives is a management model that aims to improve the performance of an organization through defining and measuring objectives. It works by aligning leadership’s strategic goals for the business with the individual goals of each employee.

Read More: Setting Goals with Your Healthcare Team

An Imperfect Solution

As successful as MBO was in its heyday, the relatively simple model doesn’t receive the same praise today that it once did. Critics charge that MBO is too rigid and time-consuming to maintain in today’s fast paced business environment. Others contribute that MBO puts too much focus on outcomes and not enough on the processes needed to get there.

MBO certainly isn’t a perfect management solution for every organization. It would be foolish to expect a model that worked so well in the 1960’s to be as applicable today as it was then. Yet despite its detractors, the reality is that many companies still successfully rely on this management technique, or a version of it, to cascade high-level corporate objectives into tangible goals for hundreds, or even thousands, of employees.

Although imperfect, MBO is still a useful framework for thinking about how we manage our teams effectively to meet our objectives. It’s a useful model for thinking through how we translate our business objectives into clear direction for our employees.

In the remainder of this post, I want to explain MBO in 5 simple steps, and give relevant examples for how it might look if implemented in a dental office today.

Read More: Why Goal Setting Fails: A Better Way to Achieve What We Want

The 5 Steps of MBO

Step 1: Determine the overall objectives for the business

Start with your mission statement. Does it accurately describe your business when you answer these questions? Why are you in business? Describe your ideal patient – who are they? What do you do for them? This initial exercise will get you started in the MBO process.

From your mission statement, you should be able to create at least 3-5 overall business objectives.

For example, a dentist in Springfield New Jersey might have a mission statement that reads: “To deliver outstanding dental care with the highest quality of service to the residents of Springfield, NJ.”

Using this mission statement, the following are examples of overarching objectives that might be set for the year to achieve and clearly focus on delivering outstanding care.

Overall Business Objectives:

1. Acceptance rate of patient treatment plans within 50 – 65%
2. Hygiene team’s perio treatment percentage of production within 40-60%
3. Collection percentage at 98% of net charges
   

Step 2: Communicate the organization’s objectives to the employees

Every team member should be able to clearly articulate the overall business objectives for the year. To make sure that the objectives are communicated clearly, it helps to use the SMART (Specific, Measurable, Acceptable, Realistic, Time-bound) goal setting framework.

The examples of objectives written above are almost SMART. The only thing missing is a due date. By clarifying these objectives with a date, your team will have a better sense of how to prioritize their work.

Revised Business Objectives:

1. Acceptance rate of patient treatment plans within 50 – 65% by the end of September
2. Hygiene team’s perio treatment percentage of production within 40-60% by the end of June
3. Collection percentage at 98% of net charges by April of this year

Read More: How A Financial Policy Can Improve Patient Collections

Step 3: Work with your employees to translate those high-level business objectives into personal performance goals

This is the most important step in the MBO model. At this point, you want to allow your employees to brainstorm their own performance goals that align with the overall business objectives.

It’s important that this be a collaborative process. In order for an employee to take ownership of a performance goal, they need to come up with it on their own. A mistake here would be to delegate targets you want them to meet.

Continuing the example above, if I worked as an office manager at this dental practice, I might propose the following personal performance goals that align with the overall business objectives:

1. Develop 4 effective patient communication documents, in collaboration with the doctor, that will help her easily explain the benefits of extended treatment and that will provide the patient with the next steps they need to take by next month.
2. Prepare a dashboard report each month that shows how we measure up against our annual goals.
3. Train team members at each weekly meeting about insurance benefits, so they can better educate patients on their dental benefits, which will result in patients having a better understanding of their financial responsibility and how they need to work with their insurance carrier.
4. Implement a 5% courtesy reduction on complete treatment fees when they pay in full upfront, at least 48 hours prior to the time of the treatment by the end of January.

Step 4: Measure and monitor progress

SMART goals are measurable. Everybody in the organization should now be aligned to supporting the overall business objectives with their own measurable targets.

With the ability to accurately monitor progress, management can provide training and resources for when an employee needs help, and positive feedback for strong performance.

Read More: Positive Feedback: The Power of Recognition in the Workplace

Step 5: Evaluate and reward progress

This isn’t a set-it and forget it management technique. Leadership must be involved and invested in the success of their team’s goals, because ultimately it’s their success that drives the overall business objectives.

Give feedback often. Quickly review key lead metrics during your morning huddle or weekly staff meetings. These are all ways that you can be proactive in managing the progress of your objectives and achieve higher results.

Leading Positive Change With or Without MBO

Management by Objectives is far from perfect. Even as it grew in popularity, Peter Drucker himself downplayed its significance by saying, “MBO is just another tool. It is not the great cure for management inefficiency … Management by objectives works if you know the objectives: 90% of the time you don’t.”

Like all tools, the effectiveness of MBO is subject to the nature of the task at hand and the competency of the person using it. We cannot expect a simple 5-step model to change a dysfunctional and under-performing business overnight, but we can use it as a proven framework for making incremental improvement.

If you’re as excited as we are for leading positive change in your organization this year, then we encourage you to think about how you’re leading and managing your team.

Is your team clear on your business objectives? Do they feel engaged and responsible for producing change? Do you have a system for monitoring progress and providing helpful feedback?