In our discussions with many OKR enthusiasts and prospects, one of the most frequently asked questions is regarding the use of OKRs vs KPIs.
Typically, the follow up questions are:
- How are OKR and KPIs different?
- How are the two similar?
- Do we need OKRs if we already have KPIs?
KPI.org defines KPIs as follows — “Key Performance Indicators (KPIs) are the critical (key) indicators of progress toward an intended result.” This is one term that has been wildly popular in the last 2-3 decades.
At the most basic level, KPIs measure an aspect of the business. Let’s look at each term in the phrase and see how they make sense.
- Key: provides a means of achieving or understanding something
- Performance: defines a particular action, deed, or proceeding
- Indicator: designates the state or level of something
You can measure revenue, revenue per employee, revenue per sales rep, and so on. All of these are measurements or indicators of how a business is doing. There are literally thousands of such measurements that can indicate how a business is doing. Among those thousands, you select the “few” that are key indicators for your business and for the appropriate business functions. These essentially are your key performance indicators. Put simply, a KPI serves to perform a health check on the productivity, effectiveness, and efficiency of staff, employees and individual teams.
Metrics vs. KPIs
How is a KPI different from a regular business metric? The difference can be best understood by using an analogy.
In the night sky, there are all kinds of stars. Among them are guiding stars– these can help direct you, and help you orient yourself and the direction you’re headed in. Similarly, if you look at a business, there are all kinds of metrics. In every department there are lots of metrics available. Out of those metrics, there are a few key metrics, or KPIs. These can help tell you if a business is doing well or not.
While there are hundreds of metrics you can track, just like there are billions of stars in the sky, there are only a handful of KPIs– or, guiding stars. KPIs are differentiated because they give you a good idea of how the business is performing, and how you can improve the business.
KPIs & Key Results
A key part of understanding OKRs vs KPIs is understanding how OKRs work in relationship to KPIs, and you can leverage them both. Understanding this relationship is vital to getting the most out of your key metrics as well as your OKR program.
So now we know the distinction between metrics and KPIs; but when does a KPI become an OKR?
Once you have identified the KPI you want to track, you must first baseline it, and find the value that your business, department, or team is currently performing at. Then, based on your baseline value, you’ll set a target. For example, if your KPI is Revenue, and you’re currently performing at $3M, you’ll want to set an ambitious, but not unattainable, target. In this example, you might set the target for $5M.
Then, you must add a timeframe within which you’d like to achieve this target. OKRs are usually set up on a quarterly or annual basis. Finally, assign a department, team, or individual who owns this target and is responsible for tracking progress and completing check-ins for this target.
Once a KPI has all these features, it has become a well-structured key result to add to an objective.
OKRs vs KPIs
OKRs may be a relatively new goal-setting framework, but every business has a plan and a budget for every year. These plans and corresponding budgets are typically based on projections of KPIs, based on what you did in the past and what you target to or expect to achieve this year. This is where OKRs come into play.
Let’s take a look at a travel analogy to better understand how OKRs and KPIs work together. Imagine you are driving to some place. If your goal is your destination, your OKR is the vehicle, and your KPI is the dashboard. Your OKR is what gets your car to the final destination, whereas your KPI tells you how your car is doing as it makes its way toward the goal. One can use OKRs and KPIs to achieve the same objective– but they perform different functions.
OKRs provide a simple and powerful approach to set business targets, measure progress and achieve greater success. Extending the travel analogy, you can use the dashboard to check on the KPIs such as fuel level, engine oil level, vehicle speed, etc.
But there are other things that you care about, which are not in any dashboards. For example, one of the key results of getting to your destination is to get there safe and sound. So, if you sleep on the wheel, you are not going to get to your destination. Ensuring that you don’t sleep, and drive carefully is a key result of getting to your destination, that is not necessarily measured using a KPI.
Take a look at this diagram, which illustrates the relationship between OKRs and KPIs, and the difference between OKRs vs KPIs.
OKRs consist of Objectives and Key Results. Key Results in turn can be associated with a KPI. The keyword in this relationship is “can be”. Key Results need not be necessarily associated with a KPI.
Take a look at this example:
This illustration is pretty self explanatory. You want to grow revenue and in the current quarter, you want to achieve three key results that will put you on that path. Out of the 3 key results, the first one, “Hiring a VP of Sales for Europe” is not really tracked using a KPI. The other two are associated with a KPI, and will potentially have some starting and target values associated with them. For example, the key result may say that “Increase web leads (KPI) from 22 per day to 45 per day”.
As you can see, OKRs encompass KPIs and help you achieve the outcomes you want for your business. Those outcomes can optionally be defined, measured, and tracked using KPIs.
Final thoughts
That is the answer to the OKRs vs KPIs debate. So, OKRs do not replace KPIs, instead, they encompass KPIs.
Paying attention to the quality of your OKRs and ensuring that you hit on the most important priorities for your organization when getting started with OKRs should be of the utmost importance for you and your team. Staying focused on what matters most will help you achieve more with your OKRs.
However, setting the right, high-quality objectives can be an intimidating task to undertake. Ensuring you’re capturing the highest priorities of your company and translating them into quality objectives is a skill that needs to be developed. Looking at OKR examples and reading up on the best ways to write your quality OKRs can help you develop this skill.
Using high-quality SaaS-based OKR software can increase the enthusiasm of teams and help them stay productive and execute with focus and alignment. Team members can spend quality time on deciding stretch targets, develop innovative ways to achieve them, and implement a great “Conversations, Feedback and Review framework” to improve employee engagement and focus on execution. Track KPIs and achieve OKRs with precision and focus with Profit.co’s OKR software.