Performance Management Shared Interest Group

In recent years, Objectives and Key Results (OKRs) have taken the business world by storm. Tech giants, innovative startups and top companies are adopting OKRs as their go-to goal-setting method.

So, what's behind the OKR trend?

1. OKRs provide a clear and concise way to communicate company objectives and expectations.
2. Key Results make it easy to track progress and stay focused on what matters.
3. OKRs promote alignment across teams and departments, ensuring everyone is working towards the same goals.
4. OKRs allow companies to pivot quickly in response to changing market conditions.

Now, here's a question:

What's the difference between OKRs and KPIs (Key Performance Indicators)?

Share your thoughts in the comments below!

#OKR #GoalSetting #BusinessTrends #Productivity #Leadership

Akomu … Thank you for your post here in the IMA Performance Management SIG.

A thought leader in the field of OKRs is Ben Lamorte. He is a good friend of mine. I shared your post with Ben for his comment. He then shared information from his OKR book (see the link below) with his answer to OKRs versus KPIs question. It is the text from chapter 8 in his book.

Here are links to Ben's book, to his website, his e-mail address, and his LinkedIn profile.

https://www.wiley.com/en-us/The+OKRs+Field+Book%3A+A+Step-by-Step+Guide+for+Objectives+and+Key+Results+Coaches-p-9781119816430

www.okrs.com

ben@...

(5) Ben Lamorte | LinkedIn

8. How Are OKRs Different from KPIs? 

If your client is already using key performance indicators (KPIs) to evaluate performance or make calculations for incentive compensation, they must distinguish between OKRs and KPIs. However, many of our clients report KPIs even though they do not have a formal performance review process in place. Such organizations tend to worry about how and if they can integrate OKRs with KPIs. They often worry that the two systems are either redundant or are somehow in conflict. Here is a high-level overview followed by a detailed comparison of KPIs and OKRs. 

High-Level Overview: OKRs versus KPIs 

Based on our experience with hundreds of organizations that use KPIs, we can tell you one thing about KPIs for certain: the term "KPI" does not have a standard definition. Some companies use "KPI" interchangeably with "metric." That is, every metric that is reported is also referred to as a KPI. While some companies have just one KPI, others have thousands.^xxix Some organizations use KPIs as the basis for calculating incentive compensation for all staff while other organizations define KPIs to evaluate performance of the overall company and do not even offer incentive compensation. 

Unlike KPIs, key results do have a standard definition. Key results answer the question, "How will we know we've made measurable progress on a specific objective by a certain date?"  

Organizations with an established KPI system in place often ask if they should replace KPIs with OKRs. The fact that they are asking this question reflects a deep misunderstanding. Choosing between OKRs and KPIs is a false choice. OKRs and KPIs work together in tandem. A given KPI is a key result if it is the focus for near-term improvement. A KPI is classified as a health metric if it is important to monitor but is not the focus for near-term improvement. Metric key results are typically based on underlying KPIs. 

To illustrate how OKRs and KPIs work together, consider a company with the objective: "Achieve financial targets" and the following three key results: 

1. Double company revenue from $5M in Q1 to $10M in Q2 

2. Increase gross profit margin from 20% in Q1 to 25% in Q2 

3. Increase recurring revenue from existing install base from $400k in Q1 to $600k in Q2 

Each of these metric key results has the KPI in bold built in. In fact, metric key results equate to moving a given KPI from X to Y within a set timeframe. 

At the team level, milestone key results are more prevalent. Milestone key results do not translate directly to KPIs. Differentiating between metric and milestone key results helps clarify how OKRs and KPIs work together. Suppose a marketing department has the following OKR: 

type="example" 

Objective: Make growth more sustainable 

Key Results: 

1. Launch marketing automation system as measured by sending our first set of nurture emails by the end of Q1 

2. Reduce marketing cost per lead from $100 in Q4 to $95 by end of Q1 

Notice that marketing cost per lead, in bold, is a KPI at the marketing team level. However, "sending our first set of nurture emails" is unlikely to be classified as a KPI; this statement is classified as a milestone key result. Although a milestone key result is not defined as movement of a numerical KPI from X to Y, milestone key results should be designed to impact a KPI in the future. For example, achieving the milestone of launching a marketing automation system may not impact marketing cost per lead in the current period. However, it is expected to have an impact on a KPI in the future as illustrated in Figure 3.4. 

[Text Wrapping Break] 

Figure 3.4: A milestone key result designed to impact a KPI in the future 

Detailed Analysis of KPIs versus OKRs 

The original question of how OKRs differs from KPIs is better framed as: "How do key results differ from key performance indicators?" Objectives are qualitative statements, and as such, should not be confused with quantitative KPIs. To distinguish between KPIs and key results, some of our clients like to include a chart like the one shown in Figure 3.5 in their OKRs training materials. 

 
Figure 3.5: Distinguishing between key results and KPIs 

Defined in Context of an Objective? 

The most obvious difference between key results and KPIs is the fact that key results are defined in the context of an objective. The objectives that contain key results should include a brief analysis of why the objective is so important now. While KPIs are sometimes defined in context of higher-level goals, they often lack context and appear as a list of metrics to quantify the performance of some part of the organization. 

Achievement Tied to Compensation? 

While KPIs are often designed specifically to determine incentive compensation structures, OKRs are not. OKRs should be decoupled from compensation. While scores on OKRs should not be used as the basis for determining incentive compensation, OKRs are often incorporated, qualitatively, as part of the performance review process. The most critical reason for separating OKRs from incentive compensation goes back to Andy Grove's original intent that OKRs should be stretch goals. 

Visible to All Employees? 

Management by Objectives (MBOs), Andy Grove's inspiration for creating the OKRs model, is often used as a system for determining incentive compensation. Thus, MBOs are often kept secret between manager and employee. Similarly, KPIs are often tied to compensation and may therefore be kept private between manager and employee. 

Andy Grove wanted to take the MBO model to the next level. Grove insisted that OKRs be made visible across the entire organization. The fact that everyone can see a set of well-defined goals in a standard format sets the stage for alignment. With OKRs, the question is not whether to make them visible. The question is to what extent.^xxx 

Most coaches advise their clients to make OKRs visible across the entire organization. However, some of our clients begin their OKRs programs by giving access to OKRs only to certain groups of employees, for example, director and above.^xxxi Given that nearly all organizations decide to make OKRs visible to all staff by default, we do not consider this a universal deployment parameter. Nonetheless, as some organizations choose to specify restrictions, we've added visibility to the list of "other deployment parameters" at the end of this chapter. 

Focused on Maintenance Work and Health Metrics? 

Many organizations classify every metric they measure as a KPI. However, the fact that you are measuring something does not make it a key result. If we think of KPIs as the set of metrics a company measures, then a KPI is either a key result or a health metric. 

A given KPI is classified as a key result if the company decides to focus on improving the value of the KPI in the near term. If a KPI is not the focus for near-term improvement, it is classified as a health metric. Health metrics are already within an acceptable range. For example, while website uptime may be a KPI, if the website is currently at 99.99% uptime, it is unlikely to be a key result that is a focus for near-term improvement. Does it really make sense to define a key result to drive a team to "improve website uptime from 99.99% to 99.999%"? 

Intended to Increase Alignment Across Teams? 

KPIs are often created to measure a given team's performance. Team members care a lot about their own team's KPIs. However, they are often disinterested in the extent to which other teams achieve their KPIs. In fact, a team member might even get a feeling of superiority when their team achieves its KPIs and other teams do not. Conversely, the OKRs framework seeks to get employees working together to make measurable progress. OKRs are often defined and shared across functional teams. As noted in the first deployment parameter, defining OKRs may even lead to the formation of cross-functional squads. 

Informs Near-Term Focus and Prioritization? 

KPIs do not require a specific timeframe. They are simply metrics such as "revenue," "room nights booked," and "net promoter score." KPIs may or may not have target values within a set timeframe. As KPIs include health metrics, lists of KPIs can become massive. KPIs are often intended to be reported in dashboards rather than to communicate the near-term priorities. 

Conversely, key results articulate how an organization will measure progress of an objective within a set timeframe. While KPIs tend to stick around year after year, most key results are modified or removed as part of the reflect and reset step in the OKRs cycle. 

Controllable by a Single Team? 

Given KPIs are often used to evaluate a team's performance, it is only natural that KPIs tend to be totally controllable by a single team. However, key results are often written as amazing outcomes. Amazing outcomes tend to depend on external factors that may not be totally controllable by a single team. And that's fine. Both Measure What Matters and the Stretch Target Commit scoring systems define "commit" key result that should be mostly controllable by the team. Nonetheless, all scoring systems, including Radical Focus, advocate setting key results that stretch teams out of their comfort zone rather than what they feel is completely within their control. 

Originates from Team Members? 

As KPIs are often used to measure performance and even determine bonuses, they tend to come from the top. While most objectives come from the top, most key results originate from team members rather than the boss. To clarify, some key results will (and should) come from top-level leadership. However, the process of creating key results involves a dialog between team members and leadership. This leads us nicely into our last two universal parameters where we explore how to align OKRs and ensure that most key results originate bottom-up. 

Coaching Takeaways 

• OKRs and KPIs work together; they are not conflicting systems. 

• Unlike key results, KPIs do not have a standard definition. 

• A KPI is considered a key result when it is the focus for near-term improvement. 

• A KPI that is not the focus for near-term improvement is a health metric. 

• Use Figure 3.5 as inspiration to create training materials that help your clients distinguish between KPIs and key results.