OKRs vs. KPIs

OKR vs. KPI on colored background

As strategy management trainers and consultants, we frequently hear the question: “What is the difference between KPIs and OKRs?”  Or, just as frequently, “Which is better: KPIs or OKRs?”  As we learned in Strategy Consulting 101, our response is often “It depends!”  Which is “better” between OKRs and KPIs depends on your organizational complexities, overall strategy cadence, and performance culture.  In many situations, both OKRs and KPIs may live happily together, and complement each other, within a strategic management performance system.  As we provide clients strategic planning and strategic management consulting services, as well as in our Mastering Strategy certification program, we find great value in considering the utilization of both OKRs and KPIs within your organization’s strategy framework.

 

Objectives and Key Results (OKRs)

Objectives and Key Results (OKRs) are a performance management tool to increase focus, engagement, alignment, and agility.  An OKR consists of two parts: 1) Objective: The intended “outcome” the organization, unit or individual seeks to accomplish in a short period of time, often 90 days. 2) Key Results: The measures the organization, unit or individual will use to document progress made toward achieving the objective.

“OKRs is a critical thinking framework and ongoing discipline that seeks to ensure employees work together, focusing their efforts to make contributions that drive the company forward. (Niven and Lamorte, p.6).

“A management methodology that helps to ensure that the company focuses efforts on the same important issues throughout the organization. An OBJECTIVE is simply WHAT is to be achieved, no more and no less.  By definition, objectives are significant, concrete, action oriented, and (ideally) inspirational.  When properly designed and deployed, they are a vaccine against fuzzy thinking—and fuzzy execution.  KEY RESULTS benchmark and monitor HOW we get to the objective.  Effective OKRs are specific and time-bound, aggressive yet realistic.  Most of all, they are measurable and verifiable.” (John Doerr, p. 7)

With roots tracing back to Peter Drucker’s “management by objectives”, OKRs were first introduced by Andy Grove in his tenure as CEO of Intel Corporation, and then energized and popularized by John Doerr at Google.

The primary benefits of utilizing OKRs are increased clarity of purpose, focus, alignment, agility, engagement, accountability, transparency, and most importantly, aligning short term results with stated objectives. OKRs will only deliver intended results with sustained team effort.

The purpose of OKRs is to connect organizational, department level, and personal (or small team) objectives to measurable results while having all team members and leaders work together in one, unified direction.  A large part of OKRs is making sure everyone in the organization knows what’s expected of them at work. OKRs are visible to everyone as the organization moves towards the same overarching goal and enterprise objectives and are aware of what others are working on.  OKRs are typically part of a quarterly planning cadence.

Flow chart of OKR leading to Objective, Key Result, and more

Key features of OKRs include:

  • Ambitious: Objectives should be a “stretch” and feel somewhat uncomfortable with an expectation that not all OKRs will be met each quarter. Seek to establish the sweet spot between aspirational and realistic.
  • Measurable: Each OKR should be measurable and easy to grade with a number (Google uses a 0–1.0 scale to grade each key result at the end of a quarter. The “sweet spot” for an OKR grade is .6 — .7; if someone consistently gets 1.0, their OKRs aren’t ambitious enough. Low grades shouldn’t be punished, they should be seen as data to help refine the next quarter’s OKRs.)
  • Transparent: OKRs should be visible to all in the organization, both vertically and horizontally, so that everyone in the organization is able to see what everyone else is working on
  • Easily Understood: The value of a well stated OKR is articulating in clear language exactly the outcome that is desired with what quantifiable result.
  • Focused Change: OKRs focus attention on what changes need to be made to reach key results stretch targets.
  • All Organizational Levels: OKRs may be used at the corporate level (Tier 1), department level (Tier 2), and employee level (Tier 3).
  • Engagement: The single most important benefit of OKRs is their ability to generate a sense of urgency around commitment. This fast-cadence process engages each team’s perspective and creativity.

Example:

OKR example table with three tiersKey Performance Indicators (KPIs)

A Key Performance Indicator (KPI) is a measure for which the organization has data to quantify and evaluate results of a strategic objective.

“Measurement is the first step that leads to control and eventually to improvement. If you can’t measure something, you can’t understand it. If you can’t understand it, you can’t control it. If you can’t control it, you can’t improve it.” (H. James Harrington)

“Organizations often get this wrong.  They use the following planning process: Strategy → Initiatives → Measures (of initiative completion and cost).  Their strategy consists primarily of a list of initiatives that will be undertaken, and their initial business measures are milestones – time and cost metrics – about initiatives.  Such a planning process is backwards!  Strategy is not about managing initiatives.” (Kaplan & Norton, Strategy Focused Organization, p. 294)

“Selecting the right measures means identifying the vital few rather than the trivial many.” (Speculand, p. 168).

Improvement in organizational performance cannot occur unless leadership intentionally measures and manages strategic performance. The key to improved performance is to put in place strategic performance measures (KPIs) and targets at the objective level prior to defining initiatives and initiative measures.  Both levels of performance measurement and management are important but begin by assigning performance measures at the strategic objective level. Helpful questions to consider when selecting key performance indicators:

  • Is the indicator valid?
  • Is the indicator of value?
  • How difficult will it be to track the indicator?
  • Does the indicator send the correct message to key stakeholders?
  • Does the indicator hold the team to an appropriate level of accountability?
  • Is there a blend of leading and lagging indicators?

Once KPIs have been selected and approved by leadership, establishing meaningful performance targets comes next. Foundational to doing this is for leaders and managers to understand four performance measurement terms to be used consistently with the team:

  • Baseline – The organization’s actual performance for the most recent reporting period.
  • Benchmark – An external comparison point, such as an industry-wide statistic.
  • Target – The specific performance level the organization seeks for an indicator within a predetermined time.
  • Threshold – A specific level of performance that is deemed either acceptable or unacceptable.

In general, performance measures can be developed within four major categories and there is a logical relationship among these different measurement categories.

List of Performance Measurement Categories

  1. “Input” measures are used to track items in production or workflow processes.
  2. “Process” measures are used to monitor quality and efficiency of processes.
  3. “Output” measures are used to monitor what is produced.
  4. “Outcome” measures are used to monitor what is accomplished over the lifespan of an approved strategic plan (i.e. a planning horizon). When measuring results of strategy execution, focus first on the outcome measures.

A difficult task in performance measurement is establishing stretch targets for KPIs.  Targets should be aspirational and challenging while being realistically achievable. Targets are tools leadership deploy to monitor and evaluate effectiveness in organization level strategy execution by revealing the gap between actual and desired levels of performance.  When defining targets, it will be helpful to:

  • use data that your organization already has to establish a baseline.
  • consider using information from outside data sources to benchmark and compare your performance data with those of other comparable organizations.
  • set targets that seem reasonable considering BOTH the baseline AND the benchmarking information gathered.

When setting a target, maintain that delicate balance between challenging and realistic. A stretch target is intended to “raise the bar” enough to inspire. That said, be mindful targets must be set at a level at which your team will have the skills, knowledge, and company resources required to achieve it. Meeting a “Stretch” target should indicate significant effort has been made to achieve it. Ask yourself how much of a stretch will motivate without causing people to become overwhelmed or demoralized.  Always be clear about how long your team believes it will take to achieve your desired level of performance.  Finally, never set KPI Targets alone.  Target setting must be a team effort.

As we provide clients strategic planning and strategic management consulting services, we find this area of developing valid and valuable KPIs can be extremely daunting. Strategy practitioners must work closely with their team to understand that performance measurement and management are integrated processes, not an event. Collecting, reporting, and visualizing performance information is the easy part. Learning from the performance information to continuously improve processes and systems is the hard part. Strategy practitioners have a leading role to play in this regard.

Performance indicators should include a mix of leading and lagging indicators to provide a balanced portfolio of outcomes to be analyzed. Leading indicators are predictors of future success, whereas lagging indicators document what has occurred in the past.

Strategy practitioners must work closely with their leadership team to agree upon the appropriate indicators and set realistic target or target ranges.

 

Looking to learn more about OKRs and KPIs?

We discuss BOTH OKRs and KPIs in depth in all of our Mastering Strategy certification offerings: CLICK HERE for more information.  If you are looking for strategic planning certification and/or strategic management certification, through the Association for Strategic Planning, our Mastering Strategy offerings ALSO serve as ASP Exam Preparation for those aspiring to earn SPP or SMP certification.  CLICK HERE for more information.

 

 

References:

  • Doerr, J. Measure What Matters: How Google, Bono, and the Gates Foundation Rock the World with OKRs (New York: Penguin Random House, 2018)
  • Kaplan, R. & Norton, D. The Balanced Scorecard: Translating Strategy into Action (Boston: Harvard Business Press Publishing, 1996)
  • Kaplan, R. & Norton, D. The Strategy Focused Organization: How Balanced Scorecard Companies Thrive in the New Business Environment (Boston: Harvard Business Press Publishing, 2001)
  • Marr, B. Key Performance Indicators – The 75 measures every manager needs to know (United Kingdom: Pearson, 2012).
  • Montgomery, D. Start Less Finish More: Building Strategic Agility with OKRs (Boulder: Agile Strategies Press, 2019)
  • Muller, J. The Tyranny of Metrics (Princeton: Princeton University Press, 2018)
  • Niven, P. & Lamorte, B. Objectives and Key Results: Driving Focus, Alignment, and Engagement with OKRs (Hoboken, NJ: John Wiley & Sons, 2016)
  • Rollinson, R. and Young, E. Strategy in the 21st Century: A Practical Strategic Management Process (Chicago: Looking Glass Publishing, 2010), 275-280
  • Speculand, R. Excellence in Execution: How to Implement Your Strategy (New York: Morgan James Publishing, 2017), 164-175.

Doug Maris