Brett Knowles, pm2 Consulting
Brett is a long-time thought leader in the Strategy Execution space for high-tech organizations, beginning in the late 80’s while teaching at Harvard and being involved in the initial Balanced Scorecard research and books. His client work has been published in Harvard Business Review, Forbes, Fortune and countless other business publications.
Pub: February 26 2021
Upd: March 25 2022
Performance metrics seem to have a lock on three-letter acronyms describing different processes and project formats. OKR vs KPI are both acronyms related to setting (and achieving!) goals. At first glance, they might seem similar: they’re performance metrics used to define actions. However, when you start to dig deeper, you’ll find that they’re actually quite different. Read on to learn more.
Table of Contents:
- What is a KPI?
- What is an OKR?
- The Core Difference Between OKRs and KPIs
- KPI Examples
- OKR Examples
- The Importance of Measuring Performance
- How we Handle OKRs and KPIs within Hirebook
What is a KPI?
KPIs, (the KPI acronym stands for Key Performance Indicators), measure the success of a variety of initiatives, such as projects, programs, or organizational or individual performance. As a general rule, they are quantifiable metrics that link directly to strategic initiatives. When thinking about KPIs, a good word of reference would be ‘Measure’.
What is an OKR?
OKRs, (OKR stands for Objectives and Key Results), have been popular with tech companies since their inception, and are now more broadly used across various industries. OKR metrics define company objectives along with the key results that are needed to measure the achievement. A good reference word for OKRs would be ‘Achieve’.
It is important to note that rule number one of OKRs is that... there is no rule number one! OKRs are the first truly crowd-sourced methodology. There is no one rugged prairie agency or thought leader that has created and commands what can and cannot be done around OKRs in business.
There are many “best practices” that are great on average, but very seldom can be applied in every single instance. For example, a best practice is to look both ways before crossing the street, but this is not necessary if you're on a one-way street.
There are also many “common practices”, that are frequently used in any industry or favorite of anyone author or consultant. This is a bit like driving over the speed limit, although it's a common practice that does not mean it's something that you should do.
Never have “best practices”, “common practices”, and “rules” made up by various well-intentioned individuals, been abused more than around the concepts of OKRs and KPIs. Much has been written about the distinction between the two.
The Core Difference Between OKRs vs KPIs
I think that once you clear away all the rhetoric, the only definitive fact is that key results are specifically related to objectives. That’s it. The core principle. See, results are intended to indicate what you would see more or less of as you work with that specific objective.
Both KPIs and OKRs need to be customized to fit the organization that they are serving. However, one way to tell the difference is by asking whether or not your metric is a measurement or an outcome. So what's the difference between KPIs and OKRs? KPIs measure, while OKRs drive goals.
A Key Result will only exist in an organization if it has an associated Objective. There are no “free-floating” key results in an organization.
On the other hand, a KPI is not necessarily specifically associated with an objective. There could be many ”free-floating” KPIs in an organization.
I was reading an article the other day and the author was attempting to define results and KPI in relation to a car journey. Unfortunately, I think this article causes more confusion than clarity.
Visualize yourself in your car; you are surrounded with data… the dashboard tells you all sorts of things: speed, direction, temperature, fuel level, etc., you may even have a GPS that is mapping your drive. Without contact, these are all KPIs. Now to change any one of these into a Key Result, all we have to do is associate it with an Objective.
For example, if your objective was to drive your car in the most environmentally friendly and economic way, KPIs like fuel economy, mix between battery and fuel, even elevation, can become Key Results associated with that objective.
Yes, on the other hand, your objective was to get to the hospital quickly in an emergency, those same KPIs remain as KPIs and you would escalate other KPIs as indicators of your new goal. The KPIs you might choose for this objective would be things like speed.
KPIs exist across all industries - a quick search can show you how they apply to everything from retail, to HR, to technology. In fact, you’re probably using them now at your own company. Here are some examples of what they can measure:
- Retail Industry: revenue per square foot, same-store sales, sales per employee
- HR Department: Attrition rate, employee performance, average recruiting time
- Sales Department: customer lifetime value, sales revenue, calls made
- Technology Industry: monthly recurring revenue, customer retention or churn, ticket resolution time
- Healthcare Industry: patient wait time, average treatment charge, number of educational programs
- Project Management: cycle time, budget variance, planned value
OKRs support agile project planning because they can be reworked on a quarterly basis and can easily be adjusted to support changing needs. They’re similar to KPIs in that they are metric-based, but they represent aggressive goal-based metrics, instead of just measurements. Here are some examples:
- “Successfully implement the weekly newsletter”
- Finalize the content strategy, key messages, and topic structure for the next 6 months
- Grow subscriber base at least 5% per week, getting to 50000 readers
- Increase the CTR% to above industry average 3.5%
- “Increase recurring revenues”
- Reach monthly recurring revenue ($ MRR) of $250000
- Increase the share of monthly subscriptions vs one-time contracts sold to 85%
- Increase average subscription size to at least $295 per month
- Increase annual renewals to 75%
- “Achieve record revenues while increasing profitability”
- Hit quarterly revenue of over $100000
- Start sales in 2 new countries and achieve first quarter revenues totaling over $100000
- Increase gross profit % margin from 23% to 54%
- “Refactor our old user management module”
- Survey 5 external API users regarding issues with our authentication
- Discuss the user management code usage with 5 engineers having used it in production
- Rewrite and launch a new version of our user management module
- Rewrite the API user authentication for the new version
The Importance of Measuring Performance
Now that you’ve taken a closer look at both measuring methodologies, you may be more inclined towards trying one better than the other, although we strongly recommend you’d give both a chance since they both provide benefits for day-to-day tasks and longer-term objectives.
The crucial part is to measure at the end of a determined period of time what was accomplished after setting your objectives and tasks. The only way to improve and to verify if something is working out for your team and/or company is to measure success rate and improve performance. If you don't, you're basically playing a game of hit and miss, just praying that what you’re doing works, and you’re missing out on a great opportunity to learn and develop growth.
How we Handle OKRs and KPIs within Hirebook
- As in the above examples, when there are important performance indicators (KPIs) that are not associated with any specific Objective but are of great value when:
a. Problem Solving - in many cases OKRs help the organization see specific performance issues, but do not provide sufficient detail to accurately diagnose or recommend improvements. A common solution to this in many organizations is to burden the OKR system with too many key results. By using KPIs you reduce this OKR reporting burden.
b. Considering activities associated with organization success but not necessarily deep or strategic. In many cases, we see indicators of performance, such as employee absenteeism, that are not associated with any objective but provide useful insights into leadership.
c. Provide additional detail within the scope of existing KRs - in many cases, the key results focus on the key aspects of an activity, and having visibility to the additional KPIs provides leadership with more transparent information to make agile business decisions.
- When the associated process requires more timely reporting than afforded by KRs, for example, many key results are reported on a monthly or quarterly basis, but in some instances, we may want to know how that process is occurring on a daily or weekly basis.
In our observation, almost every OKR meeting results in some specific follow-up activities that need to be accomplished before the next OKR meeting. Frequently these action items have a much more rapid cadence than that of the OKR system. The daily/weekly cadence of KPIs allows the organization to track those more detailed activities in between OKR meetings.
Whether or not you decide to use OKRs or KPIs depends entirely on your organization’s culture and vocabulary around performance. If your executive team has a clearly defined mission and a strong vision, OKRs can help to align your employees in the same direction and focus their energy on achieving big results. If your organization is more focused on stability rather than growth, then KPIs might be a better fit to ensure that you’re hitting all of the metrics you have set up.
You might even find that some overlap is helpful - KPIs can be used as OKR measurements! Regardless of how you choose to use them, make sure that you are crystal clear in what you are measuring and why you are measuring it to ensure you receive the maximum results.