Updated: 2 days ago
When it comes to the management of an organisation or a business, there are two very distinct features that need to be kept in mind when it comes down to the details. One is about maintaining a healthy business, the other is about growth.
Two very important performance tools that are used to monitor and evaluate the efficiency and effectiveness of business tasks are called KPIs and OKRs.
KPIs or Key Performance Indicators are often compared to OKRs or Objective and Key Results. While these two have overlapping qualities, they are very different things.
The difference in a nutshell:
OKR is about creating change: As a business, you need to set audacious goals. This creates focus for your teams and encourages them to strive for the incredible. The OKR framework encourages risk-taking and allows for failure. It creates focus on key measures which align teams both vertically with the leadership team and horizontally between teams.
KPI is about business health: As businesses scale, the need to focus on core operational health becomes increasingly important. They tell us that the business is running within a sustainable range. Rather than focus, they identify measures we must be aware of. Focus is only required where the measure is heading away from its desired state.
OKR is about outcomes through change!
Objective and Key Results is a strategic management framework. It connects teams to the vision and takes a valuable slice out of the Business Strategy. If your strategy is any good, this means you need to change. Possibly through better services, products or experiences.
This positive change can be captured by the objective of what we want. To actually measure and verify that we achieved this objective, we need measurable key results. So whatever our metric is doing today, we'll want to see that move. This is where OKRs are different from KPIs. They create focus on moving a metric, not just maintaining it. Here, we're going from an existing state to the new state for our OKR:
Here's an example, a marketing team may have the following OKR to create improvements in their current performance. Pro tip: Write your Key Results like this. It creates clarity on the current score and how far the needle actually needs to move.
Objective: Become the top ticketing product for small HR tech businesses
Key Result 1: Increase HR tech small business segment social re-shares from 10% of posts to 60%
Key Result 2: Increase Marketing Qualified Leads from 100 MoM to 1,000 with no negative impact to sales conversion rate
Key Result 3: Increase social response speed from 1 day down to 2 hours
This example shows how we need to stretch to achieve and showcases how to create leading indicators. These leading indicators will tell us we're heading down the right path and making progress. If we're off track, it gives us the platform to pivot what we're doing in order to achieve the outcome. This contrasts with KPIs which while generally not leading, they reflect hard data that we might need to track. We would hope that by achieving the OKR above, our lagging indicators like sales will improve.
OKRs need to be ambitious because easily achieving objectives means that the goal was not aggressive enough. The Key Results are therefore a stretch. We score the success of each Key Result on a scale of 0 to 1. We create this stretch by considering success as a score of 0.7 across each Key Result. Any higher than that, you're sandbagging. Any lower, and you probably didn't try hard enough.
This framework is especially popular with the largest companies on earth like Google and Amazon. They are often big-picture goals and have a designed target that requires a push from employees to put the company forward. OKRs are therefore all about change.
A tip we have is not to build OKRs in a state of a vacuum without visibility on the integral parts of a business. The best way to build these is by using a pyramid structure, wherein the foundation starts at the employee level and works its way up and setting achievements for each level. OKRs are best utilised for growth goals that are over the top, and not for organisations looking for slow and steady growth.
All About KPIs
Key performance indicators are a tool utilised to evaluate the health of an organisation, program, project, action, or individual. These indicators normally link to strategic objectives, show where to redirect focus, and create a comparison to other points in time.
These can be found in almost any industry, which is used to evaluate progress and successfully reach goals. Provided you are not a small company, KPIs should be done by department or by industry for larger conglomerates. Some examples of KPI tests for different industries and divisions would be how the retail industry can utilise revenue per square foot, sales per employee, and same-store sales. These can be used to show how well the division is performing, and can, therefore, draw trends and conclusions based on data.
KPIs must be measurable, with quantitative values that make it easier to provide context and make performance better by comparing these with other variables. Qualitative KPIs are not advisable because of how they make data interpretations subjective, so make sure they are always measurable using numbers and values.
We are happy as long as the measure is within a certain healthy range. It's normal for minor adjustments to be made in order to maintain a healthy KPI.
If things have really gone south, sometimes we need to turn a KPI into an OKR. The usual rules apply here. We want good quality OKRs which consists of leading metrics. Where the KPI is a leading indicator, we can include it as is within our OKR. If it's a lagging indicator, then you'll need to have a think about what metrics are a good predictor of change for this KPI.
When it comes to creating KPIs, make sure everything is defined and determined clearly. Vagueness does not help, so create a context for each KPI by tying it to an objective and compare it to targets set by your industry. Remember that the keyword from the term “KPI” is “key”, so track the necessary data that gives the biggest impact and has value to the company.
The clear difference between the two methods is the urgency of growth. While KPIs give a company a clear cut view on health and what makes their performance top-tier, OKRs are for targeting dynamic and dramatic growth. Both tools should be utilised if you plan to grow your business to the next level, but consider the uses of each and if they apply to the goals set by you.
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