Why Intel Created OKRs: The Problem with MBOs

Last week I had an eye-opening mentorship session with Deli Matsuo on the topic of performance management: despite my efforts to gain a better understanding of the topic, I missed a key part which Deli was able to spot immediately.

When OKR (Objectives and Key Results) was created by Intel, what other management models were commonly adopted? In the end, if the existing solution to a problem works, why would you create a new one?

The Incumbent: MBOs

“Management by Objectives” (MBO) was the most common: you establish goals, you attach metrics, and you reward the achievement of those metrics. Originated from sales-based organizations, MBO gained traction at HP and was popularized by Peter Drucker in 1954. It worked great for all activities that have high predictability: if you have a factory and a few underperforming people, the more measurement there is, the more you can understand and take action.

So, what was Intel’s problem with MBO?

If you adopt MBO to reward a new AI project in a bank, where the risk of failure is high, how many people will want to participate in a project which will cause them to lose their annual bonus?

Adopting MBO universally in an organization means people will only put themselves on targets they can achieve, and this will kill innovation.

The Structural Solution: OKRs

Intel needed a ‘structural solution’ to make the company able to run risk. Andy Grove’s answer was to build a management system where you detach goals from compensation.

That’s the main driver for innovation: the smartest people will shoot for exceptional outcomes. This is why all tech companies in the Valley adopt OKRs: because they want to push people to be more ambitious in goal-setting.

Large organizations like Google adopt both models:

• MBO for sales departments, where each additional sale has a direct impact on the bottom line at the end of the year.
• OKR for product people. Can we tie a product owner’s compensation to “how many user stories he added to the product backlog per week”? No. Is there a metric you can create that really reflects their contribution to the company bottom line? Or is there a danger that the metric could be misleading and you will promote a bad product owner, and the good one will leave your organization?

This is the real essence of OKR: a management model that allows a company to run risk, pushing people to create exceptional outcomes by making them feel safe about performance rewards.

Thanks again to Deli Matsuo (and to Endeavor, Endeavor Italy, and Giacomo Lazzarini for setting this up).