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okr vs kpi, okr, kpi

OKR vs KPI

No matter what phase of business, every business needs to set goals and objectives. The two most common measurement tools related to business objectives and goals, are OKRs and KPIs. The two concepts that these acronyms stand for are closely related but not the same. Each have their own strengths, so take the time to understand OKR vs KPI.

OKR stands for “Objectives and Key Results,” and KPI stands for “Key Performance Indicators.” OKRs are a goal-setting framework that organizations use to define objectives, which they track with results. The framework is meant to help organizations set long-term goals.

Investopedia defines KPIs as “a set of quantifiable measurements used to gauge a company’s overall long-term performance.” KPIs measure a company’s success against a set of targets, objectives, or industry peers.

More about OKRs

OKRs combine business goals with a set of measurable ways (results) to achieve them. OKRs are used to meet a quarterly team goal, or even a long-term career goal. The concept has been in use since the 1970s. It is generally attributed to Andrew Grove who developed it while working at Intel. While also working at Intel in the 70s, John Doerr attended lectures by Grove on the concept. Doerr later introduced OKRs to Google.

When working with OKRs, objectives are any goal you want to achieve, which is then measured by key results. One usually has several key results for each goal.

Company OKRs usually consist of three to five high-level objectives, each connected to three to five key measurable results.

  1. The objective is the “what” or the goal you want to achieve.
  2. The Key results are “how” you intend to achieve your goal.

Experts advise companies not to establish more than five OKRs at a time and for teams, the number should not be more than three. When the objectives have been established, the related key results are tracked individually.

More about KPIs

The origin of KPIs is not clear, but some historians trace it back to third-century China and its emperors who tested the performance of official family members. KPIs can be used to track the success of company projects, programs, marketing campaigns, a department initiative, etc.

KPIs also reveal whether teams are making optimal use of time and resources, such as budgets and staff.

In as much as KPIs are used to track the success of individuals, teams, and organizations in achieving their goals, the metrics for each KPI should be unique to each goal. For example, the same KPI can’t be used to monitor the success of a social media campaign and a new onboarding project.

KPIs help companies see whether they are on track to achieve a certain company goal or goals. Many organizations use project management software to track their KPIs, which provides real-time progress updates.

Creating OKRs

Any OKR has two aspects: an objective, and the key result or results to achieve the objective.

The objective is some or other high-level goal or aspiration you want to achieve. To set an OKR, start with a verb, for instance:

  • Increase sales volume
  • Increase staff retention
  • Reduce customer churn

The key result aspect of an OKR specifies how you intend to achieve your objectives. This process breaks the aspirational objective down into more tangible, measurable, and reachable results, in other words, how you intend to achieve your objective.

So, if your objective is to increase sales volume, key results could be:

  1. 50% increase in qualified leads
  2. Employ two top salespeople
  3. Start a product-specific marketing campaign

More examples of Objectives and Key Results

OKRs can be used by different departments within an organization. To better understand OKRs, let’s look at how they can be leveraged by different departments.

Sales

Objective: Generate more leads.

  • Key result 1: Increase the number of new leads per month from 500 to 700
  • Key result 2: Increase social media spending from $8,000 to $16,000 per month
  • Key result 3: Optimize all website content for SEO to ensure top ranking on Google.
Human Resources

Objective: Improve employee engagement

  • Key result 1: Purchase new software and provide training
  • Key result 2: Schedule individual meetings with team members
  • Key result 3: Implement a rewards program to recognize top performers and other achievements
Customer service

Objective: Improve customer retention

  • Key result 1: Implement weekly customer service training sessions
  • Key result 2: Implement a 24/7 help center
  • Key result 3: Employ three additional customer service personnel
  • Key result 4: Improve query response times

Creating KPIs

An effective KPI has the following qualities:

  • Specific
  • Measurable
  • Achievable
  • Relevant
  • Time-bound
  • Regular evaluation and re-evaluation

KPIs are typically established through these steps:

  1. Being clear on the end goal, which should be simple and straightforward.
  2. Asking key performance questions (KPQs) that will indicate whether an objective has been met. For instance: how will we know that we have achieved the objective?
  3. Gathering all the necessary information and supporting data to inform your KPIs so they are relevant and applicable for your industry.
  4. Applying realistic and applicable metrics.
  5. Not using the same KPIs as competitors. Appropriate KPIs are uniquely applicable to each business.
  6. Determining how and how often to measure progress on each KPI.
  7. Breaking each KPI down in short- and long-term goals.

Examples of key performance indicators

Financial key performance indicators:
  1. Net profit margin
  2. Operating cash flow (OCF)
  3. Working capital
  4. Current accounts receivable
  5. Current accounts payable
  6. Vendor expenses
  7. Debt to equity ratio
  8. Return on equity
Sales key performance indicators:
  1. Daily, weekly, monthly, quarterly, and annual sales
  2. Monthly new customers
  3. Monthly new prospects
  4. Customer lifetime value
  5. Customer retention rates
  6. Shopping cart abandonment rate
  7. Customer churn rate
  8. Average order value
Marketing key performance indicators:
  1. Qualified leads per month
  2. Marketing qualified leads (MQL)
  3. Sales qualified leads (SQL)
  4. Cost per acquisition (CPA) & cost per conversion (CPC)
  5. Website traffic from organic search
  6. Conversion rate for call-to-action content
  7.  Keywords in top 10 SERP
  8. Google PageRank

Benefits of OKRs

The benefits of the OKR goal-setting methodology are clear from the success of the companies that use them, including Google, Amazon, Netflix, and Adobe. It is a powerful way to set the goals of any organization.

  • Provides focus

OKRs create focus. Since companies and teams are limited in the number of OKRs they can set – never more than seven, but preferably less – they force the team to focus. In addition, each objective should have no more than five key results. These requirements forces teams to make choices.

OKRs help teams agree on the main focus for the quarter and guide the work of team members. The world’s most successful organizations set quarterly OKRs.

  • Alignment

Keeping the company’s goals in mind, teams should always align their OKRs with company goals. This means that each team member understands how their role and work contribute to overall company success. This alignment moves the company forward, with research showing that highly-aligned employees contribute greatly to company success.

  • Help to achieve company goals

Because OKRs are used to translate company vision into team-specific objectives, aiming for specific, measurable key results, OKRS enable teams to gradually achieve company goals.  

Benefits of KPIs

  • Give a clear picture of company performance

KPIs are an excellent tool for goal-setting and subsequently tracking and measuring a company’s performance on a range of metrics. They help determine a company’s strategic, financial, and operational achievements.

  • Form a sound basis for decision-making

When teams work with clearly formulated KPIs, they work with facts and figures, which helps with evidence-based decision-making and goes a long way toward minimizing bias.

  • Significant indicator

KPIs are the foundation of a company’s success and the lack thereof can signal its failure. KPIs are the difference between succeeding or failing to create a competitive advantage.

OKR vs KPI – a comparison

OKRs and KPIs are both methods of performance management, but they are not the same. OKRs are a goal-setting framework and KPIs track goal performance.

Companies often use OKRs for bolder, more aggressive goals and KPIs for more quantifiable goals. KPIs measure what is happening, OKRs are measurable ways to achieve company goals.

KPIs represent numbers that track the operational success of a business. OKRs are mission-based objectives combined with key results on how to achieve them.

KPIs are typically measured on an ongoing basis, while OKRs are typically set on a quarterly basis.

What are the shortcomings of KPIs?

KPIs can fail when teams focus on too many aspects to track and measure. KPIs that are not closely related to a team’s day-to-day work also tend to fail. Also, if teams chose the wrong metric or don’t do regular and effective measurements, the KPIs become pointless. All too often, companies implement KPIs as a simple reporting exercise without any real purpose behind the exercise. When KPIs become just a box to be checked, they are an enormous waste of time.

Can you have both KPIs and OKRs?

Yes, since they have different purposes, you can have both. KPIs measure the current success of a business, while OKRs are milestones for future success.

You don’t have to choose between OKRs and KPIs. Your intentions will show which one you should choose. If you want to measure the success of a current or past initiative, then KPIs will be the correct tool.

If you want to achieve big, ambitious goals, then OKRs will help you to do that. OKRs are a way to break down ambitious goals into actionable, attainable components.

It’s not necessary to choose one or the other. Businesses can implement both to ensure optimal business success.

Final thoughts

Hopefully now you better understand OKR vs KPI. No matter which framework you choose, ultimately the only way to improve business operations is to track and review performance. Companies that don’t set objectives and take the time to track and review them, are like a boat without a rudder in a vast ocean. On the other hand, both KPIs and OKRs help organizations meet and exceed their objectives and help them to achieve success.