David's Blog

Why Management by Objectives Fails (and so may OKR)

Mary Parker Follett (1868-1933)

With the annual Drucker Forum now taking place in Vienna it’s timely to reflect on Management by Objectives (MBO), the most enduring and popular of the ideas that Peter Drucker championed. MBO was not original to Drucker. He probably owed the idea to Mary Parker Follett and her concept of the law of the situation, expressed thirty years before him: “My solution is to depersonalize the giving of orders, to unite all concerned in a study of the situation, to discover the law of the situation and obey that…. One person should not give orders to another person, but both should agree to take their orders from the situation.” (The Giving of Orders, 1926).

In Chapter 11 of his 1954 book, The Practice of Management, titled “Management By Objectives and Self-control”, Drucker wrote, “A decision should always be made at the lowest possible level and as close to the scene of action as possible. Moreover, a decision should always be made at a level ensuring that all activities and objectives affected are fully considered. The first rule tells us how far down a decision should be made. The second how far down it can be made…”

Unfortunately, the tension between the two rules and the “self-control” aspect of MBO was soon lost in translation from a German cultural context (shared by both Drucker and Follett) to an American one. Here it morphed into a six-step, top-down process:

  1. Define organizational goals
  2. Define employee objectives
  3. Continuous monitoring performance and progress
  4. Performance evaluation
  5. Providing feedback
  6. Performance appraisal

In many organizations these performance goals are numerical and still linked to the budgeting process. Performance appraisal is based an employee’s ability to reach targets set at the beginning of the fiscal year…. The result in many organizations is an annual ordeal preparing budgets that are linked to individual compensation. The corporate head office tries to push the numbers as high as possible, arguing for ‘stretch’ goals, while operating managers try to get them as low as possible, theoretically to maximize their income but often just to make organizational life bearable. The resulting bad-tempered, adversarial process and the accompanying zero-sum game-playing perpetuates top-down, command-and-control management cultures. It wastes a prodigious amount of time and prolongs destructive competition within the organization, damaging trust and cooperation. It is the opposite of the “win-win” process proposed by Drucker that would, he hoped,  “harmonize the goals of the individual with the common weal.”

The European Context and the Giving of Orders

Why did this happen? To help answer this question it’s useful to examine the difficulties in translation of another Continental theory of management, that of mission command, first developed by the German General Staff in the 19th Century.

Mission Command

Helmut von Moltke the Elder (1819-1888) was the legendary chief of the German General Staff from 1857 to 1888.

Helmuth von Moltke the Elder

The Staff had been born in crisis in the aftermath of Prussia’s defeat by Napoleon, and it grew up during a time when Prussia’s principal industry and export was war. The German General Staff reached the peak of its powers during Moltke the Elder’s era, as Germany became a united nation.

Moltke believed that strategy was a system of ad hoc expedients and that no plan could survive beyond the first contact with the enemy. This meant that commanders in the field had to have the maximum freedom of action and that the strategy should outline what was to be achieved without specifying how it was to be done. Moltke became an outspoken advocate of what came to be called “mission command”. Cascading sets of orders specified a superior’s intent, while leaving a clear space in which subordinates were expected to exercise their discretion. The emphasis was on taking those actions the situation demanded, and the best judge of that was the person on the spot. Sins of omission were seen as far more serious than sins of commission. This meant that the subordinates had to be highly competent and trusted; maximum freedom required great self-discipline, starting with selection and inculcated through rigorous training.

Auftragstaktik, “mission tactics”, as the Germans called it, wasn’t just tactics but a complete command philosophy of “leading by task”. The idea was to set boundaries, to bracket the options and to create spaces where everyone from the highest general to the lowliest enlisted man had discretion to act in the interest of achieving the overall mission. No commander should issue an order that went into more detail than the scale at which he could appreciate the situation. A commander should never tell a subordinate exactly what to do, for that would remove the subordinate’s discretion at precisely those scales where only the subordinate could take effective action. The same caution applied to the subordinate’s subordinate, and so on down the line. If subordinates did not have the leeway to make decisions and take action on their own, each at their own unique scale, then they – and their organization – could not learn.

The Prussian Army was hierarchical, but it was a hierarchy of constraints, not command-and-control. It embraced radically different theories of the nature of war, character and leadership, senior-subordinate relationships, training and education and so on.

Translation Problems

American military observers in Europe in the 19th Century seem to have had as much trouble grasping Auftragstaktik as their modern management counterparts have had in understanding the Drucker/Follett concept of Management By Objectives. In both cases the practitioners tended to look for tools and techniques, trying to strip the methodology from the philosophy and ignore the deep philosophical differences and assumptions about human nature. The American Army had no trouble translating the field manuals, often replicating them word for word, but reproducing the behavior was another matter.

Mission command, like MBO is not just a set of tools and techniques that can be learned and “applied”. If humans and their organizations were computers that could be programmed, then such a cut-and-paste approach might work, at least in principle. But they aren’t and it doesn’t. One has to adopt the whole philosophy and take the time to develop the individual habits and institutional disciplines that allow it to work effectively.

Auftragstaktik and Befehlstaktik

The German General Staff contrasted Auftragstaktik (leading by task) with Befehlstaktik (leading by orders), which tends to be the default mode for armed forces and large-scale organizations everywhere. The U.S. Army, in its efforts to inculcate mission command, put together a table to contrast the outcomes produced by the two. It is reproduced (with a minor correction) below:

When one looks at this table, all you have to do is substitute “MBO in Theory” for “Mission Command” and “MBO in Practice” for “Detailed Command” to have descriptions that match my reading of Drucker intention for MBO versus my experience of MBO in the Anglo-American workplace. Drucker emphasized the need for everyone to understand the mission of the organization and stressed the importance of self-discipline and management by self-control. But in practice this advice was swamped by his injunction to “set clear objectives” and the caution often wrongly attributed to him that “if it can’t be measured it can’t be managed”. The result in most of the corporations that I have been involved with has been numerical objectives, set top-down, cascaded throughout the organization and policed by myriad Key Performance Indicators (KPIs).  Instead of producing the outcomes in the left hand column, which was what most top management said was their intention, the result has been the right-hand column, which is still a pretty good description of the current situation in large organizations everywhere.

Mission command is still the gold standard for armed forces around the world. It has proved successful mainly in special forces, where the numbers are small and the selection rigorous. As soon as one starts dealing with large numbers and conscripts it becomes problematic. The German Army was probably the most successful at it during the two world wars, assisted by geographical and cultural features, some of which are unique to Germany and those conflicts. (See Martin van Creveld’s book Fighting Power: U.S and German Fighting Performance 1939-1945)

One reads that in the digital world many enterprises are replacing MBO with an Intel variation, popularized by their legendary CEO, Andy Grove, as Objectives and Key Results (OKR). Grove’s intent with OKRs sounds a lot like that of mission command: to avoid command-and-control hierarchies and allow every individual from top to bottom of the organizations to set their own ambitious goals. The objectives are quarterly, not annual and are not connected to compensation. Yet OKR seems to be aimed at problems that can be well-specified, with the steps to solve them laid out in advance and measured. In other words, they are designed to deal with complicated, “tame” challenges rather than complex “wicked” ones encountered in battle. Thus OKR may fail in the same way as MBO and for the same reasons: Anglo-American practitioners will try to strip the methodology from the philosophy and ignore the importance of context and the role of emergent strategy in organizational success.

Instrumental Rationality and Drucker’s Philosophy

Why do apparently well-intentioned, competent managers keep on aiming for one outcome and keep on getting its polar opposite? It cannot be about tools and techniques themselves; it must have something to do with philosophy, especially the instrumental rationality that still underpins so much of Anglo-American management practice and thought.

Wikipedia defines instrumental rationality as “a specific form of rationality focusing on the most efficient or cost-effective means to achieve a specific end, but not in itself reflecting on the value of that end”. It became a feature of American management early in the 20th Century as part of the Efficiency Movement in which Frederick Taylor played such a key role. It is the epitome of the “can-do” problem-solving mentality that takes problems as givens and enthusiastically sets out to solve them. It works well on stable, engineering-type, technical problems, where the problem can be clearly specified and decomposed into its constituent parts. It doesn’t work with complex, “wicked” problems, where the problems aren’t given but require framing, where the situation is constantly changing and there is no time to wait for optimal solutions. In short, it doesn’t work in battle and it doesn’t work in much of corporate life.

Drucker’s philosophy was eclectic; he always embraced tensions rather than choosing one side or another of apparent dichotomies. At its roots his outlook was European, heavily influenced by his “Humboldtian” educationand early exposure to the holistic Gestalt movement. His constant emphasis on the need for integration and synthesis, rather than mere analysis, can be traced back to here. But when he came to America and started to write about management, he presented himself as a rationalist. There seem to have been several reasons of this. The dominant view at that time was that management at the top was an art, not tractable to logic and the laws of probability. One of Drucker’s first proclamations was that the age of intuitive management was over and that an active, rational practice of management was not only possible but increasingly demanded by the circumstances.

Another reason, perhaps, for Drucker’s presentation of himself as a rationalist was that in the 1940s many executives regarded him, in his own words, as a “dangerous and subversive radical”.  With rivalry with the Soviet Union growing, it was not a time to be talking about “autonomous plant communities”. There was also a rationalist temper to the times. The Allied victory in World War II showed just how important science and technology were: the launch of Sputnik and the subsequent space race only added to this mood. There was a movement to rationalize management along scientific lines that would culminate in the reform of the leading American business schools in the late 1950s.

Drucker might have represented himself as a rationalist, but he knew that there were limits to rationality. It could be used on its own to deal with the objective world of the natural sciences but was inadequate to handle the all the challenges of the human condition. His profoundly Christian values, stemming from his early discovery of the writings of existentialist thinker Soren Kierkegaard, made ethics an integral part of management

Thus the philosophy that underpins Management by Objectives is an holist one that always combines ends and means in a relationship of “both…and” not “either/or”. This is an organic, ecological relationship rather than a mechanical, economic one and it is no coincidence that late in his career Peter Drucker would describe himself as a “social ecologist”. This is surely why both management by objectives (MBO) and mission command get into trouble when they are used as tools in organizations where people are treated merely as objects – means to another’s ends – rather than also as subjects, that is, as ends in themselves. This thought was most forcefully expressed by Mary Parker Follett, as she struck an emancipatory note, “(P)urpose is involved in the process, not prior to process… the whole philosophy of cause-and-effect must be rewritten….Loyalty is awakened… by the very process which creates the group…Our task is not to ‘find’ causes to awaken our loyalty, but to live our lives fully and loyalty issues…Loyalty to a collective will which we have not created is slavery.” (The New State, 1923)

You’re Gonna Need a Bigger Boat!

Sheriff Brody (Roy Scheider) sees the shark for the first time

Steven Spielberg’s 1975 movie, Jaws, tells the story of a seaside town whose shores are terrorized by a killer shark. After several fatal attacks, the town sheriff, played by Roy Scheider, sets out to hunt the monster in a dilapidated fishing boat, together with the local salt and a nerdy marine biologist. On his first close encounter with the terrifying beast a stunned Scheider retreats back into the cabin, muttering to the old salt, “You’re gonna need a bigger boat.”

I now use a clip from that movie to open my EMBA classes. I tell the participants that they are going to need a larger conceptual framework, a “bigger boat” to handle the colossal challenges that they and their people will face in the future. For there is a sense of a sea change in the complexity of the problems we are facing today, a feeling they have outgrown the ability of our concepts, methods and tools to handle them.

The Defects of (Anglo-American) Management Theory

In The Witch Doctors: Making Sense of the Management Gurus (2011) John Micklethwait (editor-in-chief of Bloomberg News) and Adrian Wooldridge (Bagehot columnist for The Economist) identified four defects in management theory:

  1. That it was constitutionally incapable of self-criticism
  2. Its terminology confuses rather than educates
  3. It rarely rises above common sense
  4. It is faddish and bedeviled by contradictions

They described the root cause of the problem as an “intellectual confusion at the heart of management theory; it has become … a battleground between two radically opposed philosophies. Management theorists usually belong to one of two rival schools… and management practice has oscillated wildly between these two positions.” They went on to name the two schools as scientific management on the one hand and humanistic management on the other, concluding that, “This, in essence, is the debate between “hard” and “soft” management.”

Hard Management’s Dominance Challenged

Today the hegemony of the hard style is being challenged as never before by a changing context, which includes climate change, growing concerns about sustainability and a digital revolution in information and communications technology. Many have experienced firsthand how the management methods used to control growth and scale in the industrial era can be at odds with those needed to nurture the creativity and innovation required in the digital one.

“Soft” management methods and approaches like agile and design thinking are now all the rage. Consultants recommend managers adopt “new principles” and move from “command-and-control” to “communicate-and-collaborate”.  Scientific management, they say, is “dead”.

It would be a mistake, however, for managers to try and follow any simplistic “from…to” advice. For the “battleground” metaphor used by Micklethwait and Woolridge is an apt one, and this battle will not end anytime soon.

We Are The Battleground

It’s time to recognize that the “intellectual confusion” in management between the hard and the soft is not a “bug” in the theory, but a feature of the human condition. It’s time to accept that our fundamentally divided nature is the essence of our humanity and that it is the practical weaving together of seemingly irreconcilable opposites that is the very warp and woof of our existence. It is also the secret of our success.

The tensions spiral through our lives as individuals, families, communities, organizations and societies and throughout our history as a species. They have grown in complexity as our languages, cultures and institutions have grown more complex. Like the twin arms of a double helix, the dualities coil through philosophy in general and the history of management thought. Here they are familiar: exploitation and exploration, intended and emergent, calculation and judgement, individual and team, performance and learning, detachment and immersion, mechanical and organic, hierarchy and network, rational and emotional, plan and story, plumbing and poetry….

Both…And Not Either/Or

I think a “bigger boat”, a more comprehensive management framework, has to address this root dilemma, not statically by trying to replace the “hard” with the “soft”, but dynamically by embracing and containing the scientific within the humanistic. It’s a both…and predicament, not an either/or choice. This will require a new appreciation of context, especially the roles that space, time, scale and technology play in our ability to relate to each other and thrive together.

We know, for example, that when people are working together in groups less than 150 in size, management can be informal, face-to-face and “humanistic”.  Place the same people and thousands of others like them inside a giant, dangerous technology like an integrated steel mill and that is a recipe for disaster: a much more formal, “scientific” approach will be required. But large, complex organizations need not become oppressive prisons. There are examples of integrated steel mills, like the Canadian firm Dofasco, whose culture is a weave of the hard and the soft. They may never be as agile as a music-sharing service like Spotify but they aren’t competing with them and compared with other integrated steel mills they are light years ahead.

Understanding Relationships: Figure-and-Ground

The challenge for managers is how to frame the relationship between the hard and the soft in their own situations. It’s all very well to talk of “balance” and “weave” but those are outcomes. How does one produce them?  Here it’s helpful to think of a relationship that alternates between figure and ground. When the one is in the foreground the other is always behind it and their positions can flex to-and-fro, depending on the circumstances.

This is how to understand the concept of hierarchy-on-demand popularized by Gore & Associates, makers of Gore-Tex. They are a global $4 Billion business organized in clusters of facilities, each of which has about 150 people. This allows a unique humanistic approach to management, but it cannot handle everything. When teams reach an impasse managers invoke hierarchy-on-demand, bringing into the foreground a formal structure to make either/or decisions. Once that situation has passed, however, managers and hierarchy fade into the ground. Think of a fishing net that normally lies flat but can be lifted at a node at any time to form a temporary hierarchy and then let go to sink back into a network.

Every manager, then, must be alert to these fine-grained, constantly changing relationships between the hard and the soft and govern their behaviour accordingly. Hierarchy, calculation, command, and constraint all have a role to play in management, but they must be contained within an egalitarian philosophy that values above all else judgement, care and the cultivation of people.

Safely confined in a “bigger boat”, scientific management can be an excellent servant: unconstrained and on its own, it makes for an oppressive, even tyrannical master.

This article is one in the “shape the debate” series relating to the 13th Global Peter Drucker Forum, under the theme “The Human Imperative” on November 10 + 17 (digital) and 18 + 19 (in person), 2021.

Democracy, Capitalism and Donald Trump: An Ecological Perspective Part I: Midnight Reckoning

Back in November 2016 I wrote a blog in the immediate aftermath of Donald Trump’s election. As a Canadian I thought the Americans had had an awful choice to make but was just as surprised as many others were, when the man I wanted to lose beat the woman I wanted to lose.

An ecological lens suggests that it’s helpful to look at abstract systems like democracy and capitalism as dynamic ecological processes, rather than as static structures. That is, both capitalism and democracy are configurations of complex adaptive social, economic and political systems that have their own internal dynamics, analogous to those of complex adaptive ecologies, like forests and estuaries.

From this perspective successful social enterprises, both political and commercial are conceived in passion, born in communities of trust, grow through the application of reason and mature in power. Here they tend to get stuck in systemic traps, structures and routines that conserve their habits and protect their success but render them inward-looking and insensitive to the small-scale changes that presage trouble.  In economic organizations the result is decline and possibly disruption by smaller, faster enterprises wielding new technology. In political bodies the result is gridlock which, if it persists, can lead to political disruption and insurrection.

In their two perceptive books, The Broken Branch (2009) and It’s Even Worse Than It Looks (2011), political scientists, Thomas Mann and Norman Orenstein gave us a broad overview of how the gridlock emerged in the American Congress. Most importantly, they outlined the changes that led to the polarization of its members and the emergence of a quasi-parliamentary system, built upon opposition, in a constitutional republic where the separation of powers demands negotiation and compromise to get anything done.

Continue reading…

Jonathan Sacks (1948-2020): Jewish Wisdom and Our Binocular Minds

The Binocular Mind

“And twofold always… May God us keep 

From single vision and Newton’s sleep!”

(William Blake, Double Vision)

Rabbi Lord Jonathan Sacks

I read with great sadness of Rabbi Lord Sacks’ sudden, untimely passing on November 7. His writings have been a source of inspiration and really helpful ideas to me. I discovered them only a few years ago, while continuing to work on my ecological perspective on management. Sacks’ thoughts on the moral and social ecologies that underpin the ability of human beings to cooperate and work together have been especially useful. They apply at the organizational level but have been even more helpful in extending the ecological framework “up” a few systems levels from there to that of society and the state – the level that Sacks was most interested in.

Sack’s writing reaffirmed for me the dual nature of human beings in society and the benefit of a binocular mind, like that suggested by an ecological/evolutionary perspective. (The New Ecology of Leadership (2012).

Continue reading…

Milton Friedman’s Philosophy: Invaluable at First but Deadly Afterward

Milton Friedman (1912-2006)

2020 marks the 50th  anniversary of Chicago economist Milton Friedman’s famous (or infamous, depending on your point-of-view) claim that the only social purpose of business is to increase profits. This doctrine proved immensely popular among corporate managers but has been increasingly challenged as being harmful to society. McGill management professor, Henry Mintzberg was an early critic and has been a consistent advocate of a broader approach to social purpose.

Victorian political commentator Walter Bagehot (1826-1877) once wrote “The whole history of civilization is strewn with creeds and institutions which were invaluable at first, and deadly afterwards.” That describes Milton Friedman’s work – very helpful in the beginning but a hindrance subsequently.

I graduated from Chicago’s MBA program in 1972, imbued with the idea that management was all about the allocation of resources, as assessed by the Capital Asset Pricing Model (CAPM). I had majored in finance, studying with Gene Fama his newly-developed Efficient Market Hypothesis that was shaking up the world of finance. I was ready to change the world of management….

I soon found that practicing managers weren’t using theory to tell them what to do – they were using it to rationalize what they already wanted to do. Back then it was clear to young managers like me that the great post-war boom in economic activity was slackening and that the large corporations had accumulated a great deal of fat and were guided by a fuzzy sense of purpose that supported a relaxed ‘country-club’ approach by managers. We young Turks wanted to change that and make corporations more efficient. Fama and Friedman’s perspectives and theories proved invaluable in cutting through tired old stories with a powerful counter-narrative. The era of conglomerates, leveraged buyouts and private equity was launched on this new logic.

At first this new approach seemed very successful. Conglomerates thrived and their founders like “Tex” Thornton of Litton Industries, Hal Geneen of ITT and Jim Slater of Slater Walker (in the UK) became business folk heroes. The exploits of LBO firms like Kohlberg Kravis and Roberts (KKR), fueled by junk bonds, were celebrated in the press and their billionaire principals regarded as geniuses. But it didn’t last: monolithic concepts taken to their (il)logical conclusions never do. One has to take time, change and people into account: nothing lasts unless it is incessantly renewed.

It seems that enterprises (and both democracy and capitalism can be thought of as giant enterprises) are conceived in passion, born in communities of trust, grow through the application of reason and mature in power.  The young become old and success is followed by excess. Gradually control of the corporation was taken over by elites, who used concepts like Friedman’s to rationalize their actions. Ideas once used to challenge outdated attitudes were now used to justify the new, emergent status quo. In recent times in Anglo-American business the result has been the steady liquidation of productive enterprises, the creation of oligopolies and the emergence of a bloated financial sector. Value extraction has replaced value creation.

Deadly indeed, but we know the enemy and it’s not Milton Friedman: it’s us.