It uses a formula based off RPMs, engine temperature, engine load, and various other parameters to calculate the breakdown and contamination of the oil. It relies on you to reset it when the oil is changed.
GM did a LOT of research (meaning, lots of money) on this with oil analysis to program the OLM and it works surprisingly well. Knowing what I know now about how much GM went through and how accurate it can be, I would not have an issue going until the OLM said the oil is bad. I reset it every time I change the oil.