To understand OKR vs KPI, you should first understand the two different methods of evaluating a company's success - OKRs and KPIs. The 1990s saw the development of the OKR framework, which comprises a goal - an 'objective' and specific measurements - 'key results' that monitor objective fulfillment. KPIs, on the other hand, are a collection of performance measurements for businesses that show how well a company is doing.
What are Objectives and Key Results (OKRs)?
The first step to evaluating OKR vs KPI is understanding what an OKR is. An Objective is 'the what,' and 'the how' are the Key Results.
An objective is a clear statement of what the team hopes to accomplish over a specific period, for example - by the conclusion of the following fiscal year. Objectives should be ambitious and represent the greatest objectives for the team.
Every selected objective must have three to five key results, which are quantitative measures to show if an objective has been attained to track progress.
Key results are frequently scored on a scale of 0 to 1, where 1 implies considerable success and a score of 0 represents failure.
The core team should work together when creating company-wide or individual department OKRs.
This is an example of OKR that teams might create annually.
- Objective: Boost sales figures
Key Result 1: A 25% rise in web conversion rates
Key Result 2: A $500 hike in the average subscription price.
Key Result 3: Average days of sale reduced from 20 to 17.
What is a Key Performance Indicator (KPI)?
The next aspect of OKR vs KPI is key performance indicators or KPIs, which are used to assess how well an organization, person, program, project, and so on are performing over time. A KPI, at its most basic level, shows how teams are doing about their goals. Teams should adopt a different approach or reevaluate their objectives if they do not achieve or are not achieving their objectives fast enough.
Here below are some departmental KPIs and their targets:
- Sales department: The KPI is the average contract value, and the goal is to raise it from $250 to $350 per month.
- Marketing team: Conversion rate is the KPI, and the target is to get 30% more conversions.
- Operations department: Materials cost is the KPI, and a 5% reduction in the material cost is the target.
Importance of Measuring Performance
Companies need to evaluate and review performance since there is no other way to improve and perform better. Teams can lose a great chance to grow and learn when they do not create goals or define them but do not review them. Implementing performance metrics will allow teams to learn from their achievements and failures.
OKRs Encompass KPIs
OKR vs KPI might make it seem like they are not connected, but they are not as far apart as they might look. Objectives and key results create OKRs. Key results can be connected to KPIs in turn, but remember, key results do not always have to be linked to a KPI. Let's understand this with an example.
- Objective: New customer acquisition
- Key Result: By the end of the first quarter, there should be a 50% growth in new customer acquisition
The KPI for this can be 'new customer acquisition' since it is a criterion that will determine the company's success. KPIs are very much related to key results.
However, some concepts should be considered when working with OKRs and KPIs. They are
Not All of your KRs will Include Numbers
An important aspect of OKR vs KPI is specific figures or numbers. But, sometimes, teams might find that some key results need to include a KPI. In such cases, they are more likely dealing with a milestone goal, such as releasing a new marketing system or other ideas that can be evaluated based on completion but are unrelated to a specific figure. In those circumstances, the milestone goal becomes a critical aspect that will ultimately help the KPIs succeed.
Define Target Metrics that Reflect your Priorities
Select specific metrics which represent the organization's priorities, objectives, and core principles when using OKRs. This way, teams can effectively connect the intended goals to concrete metrics, ensuring that everyone on the team is on the same page.
Create a Continuous Feedback Loop
An ongoing, continuous feedback loop with the teams and leaders can help them stay on track with the KPIs and OKRs. It helps with monitoring progress and expectations while identifying possible bottlenecks.
Also, use SMART goal criteria, which ensure the key result metrics are specific, measurable, aligned, relevant, and time-based.
Select from 3 Types of Metrics
Teams can select from these three types of metrics.
Such metrics represent a target range; falling anywhere within this range will be appropriate. This creates a range of achievable metrics while encouraging goal and KPI-driven performance.
Anything less than this metric is regarded as "missing" the goal. These numbers reflect the acceptable quantity.
Positive or Negative Metrics
This idea is the baseline metric expanded. For example, it would be a negative metric to attempt to reduce the support response time from 8 hours to less than 5. A positive metric is used to raise a number, like revenue.
When to use OKRs vs KPIs?
KPIs are a quick method for evaluating the success of existing projects. A KPI can assist businesses in determining a baseline level of performance and monitoring progress.
An OKR can be better if the company intends to launch a new product or test a new technique. Reaching for extremely ambitious objectives, even if not achieved, is designed to be aspirational and stimulate learning.
What are Some Common Mistakes to Avoid with KPIs?
While determining OKR vs KPI, it is essential to know the common mistakes with KPIs.
- The KPIs are independent objectives or aims. It is important to remember that KPIs are measures and indicators of the organization's progress.
- The KPIs are vanity indicators instead of leading indicators that show stakeholders the present health of the business and ways to improve it.
- It might be possible to measure the wrong thing just because you need to measure something.
What are Some Common Mistakes to Avoid with OKRs?
To fully understand OKR vs KPI, remember the few common errors that OKRs frequently make.
- Overly focused on the objective: The teams may place excessive emphasis on the number rather than on learning if you define the objective as a stand-alone statistic. Pair objectives with quantifiable key results and examine discrepancies to understand how performance is improved.
- Inability to differentiate between committed and ambitious OKRs
- Only having moonshot OKRS: This might demotivate the team. Instead, mix moonshot OKRs with a roof shot OKRs.
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OKR vs KPI might make it seem that they are incredibly different. Still, KPIs and OKRs will eventually coexist in the organization because if the team is already using KPIs and are adopting OKRs, they are just enhancing and strengthening them to better serve the organizational priorities, not 'switching' techniques. Learn more project management concepts with our PGP in Project Management. You will be attending live online interactive classes and participating in capstone projects. Sign-up today!