For every business to stand firm, every company needs to have clear objectives and well-defined goals. These goals help organizations keep everyone on the same path and motivate employees towards their work. When it comes to setting business objectives and measuring business performance, the two most common acronyms of the business world are OKR and KPI. Let us dive into OKR vs KPI.
OKR stands for “Objectives and Key Results,” and KPI stands for “Key Performance Indicators.” One is about goal setting and execution framework, whereas the latter is a mechanism to define necessary measures to achieve success in an organization. Thus, comparing OKRs and KPIs is like comparing apples to oranges.
However, at times KPIs are compared with OKRs and create confusion as they both are management tools that helps in decision-making. So, in this article, we will explain the core difference between OKRs and KPIs and how you should leverage them in different approaches to get the best results.
What is an OKR?
OKR is a goal management framework born in the mind of Andy Grove, former CEO of Intel, in 1971, to focus the work on the company’s main objectives. However, OKR started gaining popularity since 1999, when John Doerr introduced the OKR framework to the Google founders, who implemented this methodology and delivered tremendous results since then.
To put it simply, it is a way of internally aligning the company’s objectives with each department, managers’, and team members‘ goals, who contribute to the organization.
With this collaborative goal-setting methodology, companies can focus on the critical areas of business operations. Instead of creating dozens of goals and getting lost among them, the OKR framework focuses on a list of 3-5 goals (objectives). Under each objective, a maximum of 3-5 key results are set to measure the employee’s progress towards the objective holistically.
What are KPIs?
KPIs are the key indicators that measures the performance or growth of a company. While the KPIs have a long and illustrious history, the exact date and precise origin of the KPI are still unknown. But it is speculated that the practice of KPIs dates back somewhere to the third century when emperors of the Chinese Wei Dynasty began to rate the performance of official family members.
Coming to the business world, KPIs serve as the business guideposts for many companies. It consists of result-based tracking metrics that evaluate an organization’s performance and how effectively the business is moving towards set goals. Organizations can use KPIs to track the health of the business, projects, programs, or various other company initiatives at the strategic level.
For a business to establish what its KPIs are, you need to conduct an analysis of what it is delivering and how it can be measured. One way to do this is through the Balanced Scorecard (BSC), a methodology that will help you choose the right metrics for your business. Let’s look at some common KPI examples –
- Average ticket size.
- Conversion rate.
- Customer lifetime value.
- Traffic on the website or blog.
- Completed leads.
- Interaction in social networks.
OKR vs KPI – Breaking it down for you
At first glance, two concepts resemble one another a lot. Both KPIs and OKRs are methods of setting goals, tracking, and measuring the company’s performance and successes. While both are effective methods, there is a significant difference between OKRs and KPIs. But before that, it is also essential to understand the difference between lagging and leading KPIs.
Lagging KPIs represent metrics that allow you to measure the result – the outcome of our strategy and efforts. It measures how well a business performance or system was managed, such as last month’s profit and loss (P&L) statement, the number of products or services sold, total incidents, etc.
On the other hand, leading KPIs are driven by metrics that correspond with the future outcomes or where you are likely to get to. They measure target values that lead to the performance of lag measures, measuring intermediate processes and activities, such as current ongoing customer cases, percentage of team availability, number of outstanding bugs, etc.
So, the KPIs (key performance indicator) consist of a series of metrics to measure the performance of a process, an area, or an entire company. KPI presents information about the efficiency and productivity of a business. Through KPI analysis, it is possible to determine whether progress is being made in the right direction or any new decisions need to be made to achieve the set objectives. In contrast, OKR is more of a goal-setting framework that aligns company goals with departmental goals with that of teams and individuals and ensures every individual is striving towards a common goal throughout the business quarter.
If we list the differences between OKRS vs. KPIs in a table, it will have something like this –
Examples of OKR & KPI
To better understand the difference between OKR & KPI, let us consider the example below:
The marketing team created a great landing page that delivers product value and converts visitors into great opportunities. Now the commercial team wants to take advantage of this potential page to generate more sales.
The OKR for the marketing team is to evolve their qualified lead generation –
- Key Result 1: Increase monthly site visitors from 4k to 8k.
- Key Result 2: Increase product free trial subscriptions from 320 to 600.
At the same time, the marketing team has a lot of tracking KPIs or metrics to monitor. The KPIs includes are –
- Conversion rate.
- CAC (Customer Acquisition Cost).
- Landing page conversion rates.
- Organic traffic and top 5 entry pages.
- Lead-to-customer ratio.
- Social media traffic and conversion rates.
The marketing team continuously monitors all KPIs based on the business objectives. As the business objectives change, it is necessary to improve KPIs accordingly. In the example above, it is demand generation. It could also be conversion rate, social media followers/comments, time on site, customer acquisition costs, funnel optimization, etc. Based on the tracking of your KPIs and the results of the previous objectives, you can formulate the next OKRs.
Although different, do they work together?
Yes, both OKR and KPI can be used together while planning the company’s strategic goals since the two complement each other and help the company achieve the fundamental goals and serve as a starting point for better employee engagement.
Objectives and Key Results are metrics or measurements that outline the objectives and define the desired key result, bringing some benefits such as –
- Quickly identifies what needs to be improved.
- Involves teams and ensures alignment regarding key results.
- Distributed targets.
- Improve Performance and productivity.
When it comes to KPIs to include in your business strategy, they bring various benefits, such as –
- Measures the health of the business.
- Identifies data and compares them with the expected results.
- More assertive decision-making.
In a nutshell, OKRs and KPIs work very well together. OKRs help solves problems, improve processes and drive innovation. KPIs help monitor performance, identify problems and areas of opportunity. Thus, it is necessary to know the differences and benefits of OKRs and KPIs and apply them correctly to go beyond expectations. This guide to OKR vs KPI surely will help you understand how both works in a larger scale.