One of the most important skills that a modern leader can possess is the ability to align their entire workforce to the big vision of the company, that's why talking about KPI vs OKR is very important!
It’s hard to talk about performance management without mentioning KPIs and OKRs. But what do these acronyms stand for? And how do they benefit your organization?
Key Performance Indicator (KPI)
A KPI is a measurable value that indicates how well an organization is doing in a specific area, from employee performance to process, product, project, and other initiatives. Put simply, it’s a quantifiable measure of success, state, and standard of your company’s performance.
KPI - Within an organization, different sets of KPIs are used by different departments, teams, or business units. The ability to implement relevant KPIs and use them to measure business success is a skill that every leader, executive, or manager needs to have.
OKR - Just like KPIs, OKRs are used by different departments, teams, and business units within an organization. However, OKRsare used not only by people with leadership roles but also in individual-level too. Each employee - from the frontline team to the managers, executives, and key leaders has their own set of OKRs. While KPIs are created only by managers or leaders, the creation of OKRs is a task given to everyone. Each employee is responsible for creating his or her own OKRs.
KPI vs OKR - Structure (What Constitutes Each Tool)
To get a clear understanding of how you can utilize it for your team, let’s take a look at what constitutes a KPI:
A target or “ideal performance range” - each KPI needs to match a specific target within a given timeframe.
Data source - every KPI needs to have a data source to generate a reliable measure of success.
Reporting frequency - KPIs should be discussed among the employees or team members involved. Usually, they are discussed on a monthly basis.
OKR has two parts:
Objectives - specific goals that need to be achieved by an individual, team, or department. They must be ambitious yet achievable, qualitative, and time-bound/
Key Results - These are quantifiable results that indicate whether the objectives have been met.
KPI vs OKR - Scope (Uses and Applications)
KPIs can be used for different purposes - rating employee performance, evaluating an existing process or initiative, or measuring the success of a program.
OKRs help individuals and teams in setting goals. They are not meant to rate performance, but rather challenge employees and teams to set ambitious goals that make an impact on the organization.
However, KPIs can come into play during the execution of an OKRs, particularly in the implementation of Key Results.
It’s important to realize that OKRs encompass KPIs because a Key Result can also represent a KPI.
For example, let’s say you have this Key Result: Increase profit margin by 25% by Q4.
Here, profit margin also serves as a KPI because it’s one factor that determines the success of your company.
KPI vs OKR - Purpose (Desired Output)
Perhaps the biggest difference between a KPI vs OKR lies in the intention or purpose by which they are created.
KPIs goals are typically obtainable. They represent the intended output of a process, project, or initiative, or the expected level of performance of an employee.
OKRs involve ‘stretch goals’. They are achievable but bold and ambitious. Simply meeting the expected outcome of the team does not make them successful.
KPIs are typically incorporated in a scorecard and there are three ways in which they are used:
Quantitative. KPIs can be measured and presented numerically.
Practical. KPIs can be integrated with existing processes.
Actionable. KPIs can also be used for practical applications.
Below are the key steps used to implement KPI scoring:
Identify the performance you want to measure. Examples include financial performance, sales, staffing, customer satisfaction, employee retention, etc.
Establish the target (desired outcome) for the performance. The target should be specific. If the performance to be measured is sales growth, be able to explain what sales growth is for your organization. Ex: “$10M by Q1”. or “25% increase in sales by Q1”.
Compare current performance with the defined target.
Review performance on a regular cycle.
OKRs feature binary scoring. Success is scored from 0 to 1. Contrary to KPIs where achieving the highest score represents a successful outcome, a perfect score in OKR does not always indicate success worth celebrating. Rather, it could mean that the goals set were not too ambitious or aggressive enough to make an impact.
Below are the steps for a successful implementation of OKR
Communicate. The first and most important step is to ensure that everyone in your organization knows about OKRs and is willing to use them. Discussing OKRs during meetings, huddles, and Town Halls should help get everybody’s buy-in.
Choose a tool. It could be anything from a simple spreadsheet to comprehensive software.
Schedule the creation of OKRs. Typically, OKRs are created quarterly, bi-annually, or yearly.
Keep individual OKRs aligned with team/department and company OKRs.
KPI vs OKR
It is important to remember that OKR and KPI are not the same.
OKR is a STRATEGIC FRAMEWORK. KPIs are measurable within that framework.
And for this reason, OKR sits on top of KPIs. It is a crucial tool for achieving company goals.
OKRs have a different purpose. You can use this framework to help your team set high-impact goals, develop transparency and accountability within your team or among employees, and keep everyone’s goals aligned with the organizational goals.
If you have a larger vision and looking to change your company’s overall direction, OKRs is the perfect tool. Unlike KPIs, OKRs allow you to stretch your goals, push your team a little harder, and create big things. It even allows you to be more creative with how you want to achieve that goal.
Now the question is - can you use both?
Yes, of course. As mentioned earlier, KPIs can coincide with Key Results. Together, you can drive your team to do better, accomplish great things, and fuel growth!