Key Performance Indicators (KPIs) are standalone metrics that measure performance, while Objectives and Key Results (OKRs) are action-oriented goals that provide strategic context and direction for teams. KPIs show how well a business is doing in terms of performance, while OKRs help businesses improve performance and drive change.
OKRs are a framework for setting and achieving specific, measurable, and time-bound goals, typically at the organisational or department level. They align the organisation's strategy with specific objectives and track progress towards them. OKRs involve setting an objective and measuring progress towards that objective with one or more key results. The purpose of OKRs is to focus, align and engage your team with strategy. OKRs were developed by Andy Grove of Intel in the 1970s and then made famous by John Doerr through his 2017 book “Measure what matters.”
On the other hand, KPIs are specific metrics used to measure the performance of specific processes or activities. They are used to track the performance of an organisation, department, or individual against specific targets. Their narrow focus is used to track this activity over a long period. KPIs have no clear origination point, and it seems they’ve been used for hundreds of years.
At a glance, KPIs and Key Results are very similar. They both track something important and measurable. Key Result comes from the OKR framework, which is broader than and encompasses KPIs.
A more straightforward way of putting it is that OKRs are used to drive strategy with a quarterly cycle. In contrast, KPIs measure various important activities or processes within an organisation for a more extended period.
OKRs vs KPIs examples
Let’s use a simple example of tackling a problem using both to contrast these approaches better.
Imagine that you’ve recently opened a coffee shop and want to grow revenue. You’re currently earning about $10,000 per month and want to grow as much as possible. You think you can realistically grow by $1,000 per month.
The KPI approach
This is the most straightforward approach. You’ve already established that revenue is your KPI at $10,000, and you want it to grow monthly by $1,000. You’d track that monthly and adjust if you miss your target. This is great for focusing your team on an important number and how to improve it.
The OKR approach
The key difference here is that OKRs are broader and stretch in nature. The framework suggests that your objectives and key results should be stretch in nature so that you’re only 70% confident you’ll hit the number. This means you’ll push harder and get creative to hit that objective.
Objective: Drive revenue growth at our store without dropping profitability or customer satisfaction.
Key Result 1: Increase revenue by $1,300 monthly
Key Result 2: Maintain a customer satisfaction level of 85%
Key Result 3: Keep Gross Profit Margin above 40%
The impact of the two approaches
The OKR approach could lead to better business outcomes here. The target is set higher (at the 70% confidence level), so the team must push harder and get creative about hitting it. Being forced to define an ambitious objective also makes the team think more broadly, so they added customer satisfaction and Gross Profit as other Key Results.
Let’s fast forward to a year from now. The store has succeeded in growing to $22,000 per month, and now the team wants to open a second store because they believe this is the limit for this location. Revenue would still be a KPI for this store as they’d want to maintain it, but they’d set an OKR for opening the store:
Objective: Open a new store and have it be successful within three months.
KR1: Hire five staff within three months.
KR2: Train new staff to perform at 80% of the efficiency of the first store
KR3: Reach revenue of $8,000 per month by the third month.
Setting up OKRs and KPIs
Setting up OKRs and KPIs is an essential step in measuring and improving performance in an organisation. Their cadence and use are different, though.
To set up OKRs, identify the organisation's overall strategic objectives. Then, break those objectives into specific, measurable, and time-bound goals for each department or team. These goals should be aligned with the overall strategy and be something the team can achieve in a specific time frame. Next, assign key results, which are specific metrics that will be used to measure progress towards the objectives. These key results should be quantifiable and measurable to ensure that progress can be tracked easily.
To set up KPIs, start by identifying the specific processes or activities that need to be measured. Then, determine the most appropriate metrics for each process or activity. These metrics should be specific, measurable, and aligned with the organisation's overall objectives. Next, set targets for each metric, which will be used as a benchmark for performance. It's essential to regularly monitor and track the KPIs to ensure that performance is on track and, if not, take necessary actions to improve them.
OKRs are typically developed and run for one to four quarters before being replaced by new OKRs. We have a great article on OKRs at Google and how to use them if you need to learn more.
KPIs are typically identified for the company and each department and then tracked over a long period.
Measuring progress with OKRs and KPIs
Measuring progress with OKRs and KPIs is crucial for determining the success of an organisation's strategy and goals.
To measure progress with OKRs, regularly review the objectives and key results that have been set. Compare the current progress to the targets set and see if they are on track to be met. Adjusting the objectives or key results may be necessary if progress is not on track. They are often tracked quarterly because they are broader in scope than KPIs and thus take more time for the team to comprehend and sync on the status of the objective.
To measure progress with KPIs, regularly track the metrics that have been set and compare them to the targets. If any metrics are not meeting the targets, it may be necessary to take action to improve performance. This can include adjusting processes or activities or changing how the metrics are being tracked. KPIs are tracked more frequently than OKRs. They could be tracked monthly or even in real-time because they are typically a core metric like cash generated, sales per month or support tickets resolved, which can all be pulled from the relevant systems.
What is each best used for?
KPIs are best for a snapshot of how an organisation or team is doing and the trend. They are essential to understanding the health of the enterprise and making key decisions.
OKRs are best for collaboration and driving innovation every quarter. They are how you move things forward. They force discipline in picking an inspiring Objective and ensuring that success is measured and the key initiatives are outlined.
Should I use OKRs or KPIs for Employee Performance Management?
Yes and no. OKRs were designed for Business Performance Management and not Employee Performance Management.
OKRs are meant to be stretch goals due to their ambitious nature. If you tie their key results to individual performance and remuneration, staff tend to set more achievable objectives. It also limits the creativity of the process because staff are incentivised to hit the key result and not to adapt it when needed. This completely undermines the point of OKRs to drive strategic and ambitious progress in an organisation and the performance of the individuals. OKRs also tend to be team efforts, so attempting to attribute the outcome to a particular individual creates politics that again reduce the effectiveness of OKRs.
Instead, focus on an individual’s contribution towards their team’s OKRs to understand their performance. This can easily be collected through a 360 review with their team.
Individual KPIs are a better fit for Performance Management because they are less likely to change. Sales revenue for a salesperson is an excellent example, as it’s unlikely to change over time.
Common misconceptions about OKRs and KPIs
One common misconception is that OKRs and KPIs are the same things. While they are both used to measure performance, they serve different purposes. As we’ve discussed, OKRs are a framework used to drive strategic objectives, while a KPI is simply the measure of a key activity or process over a long period.
Another common misconception is that OKRs and KPIs are only used by large organisations. While large organisations commonly use them, they can be just as effective in small organisations. OKRs and KPIs can be used to set and achieve goals and track performance at any level of an organisation.
Another misconception is that OKRs and KPIs are only used for financial performance. While they can be used to track financial performance, they can also be used to track non-financial performance, such as employee satisfaction, customer satisfaction and quality of service.
Lastly, another misconception is that once OKRs and KPIs are set, they do not need to be reviewed or updated. In reality, it's essential to regularly review and update OKRs and KPIs to ensure they remain relevant and aligned with the organisation's overall strategy.