In our discussions with many OKR enthusiasts and prospects, this is one of the most frequently asked questions. Typical follow up questions are:
- How are OKR and KPIs different?
- How are the 2 similar?
- Do we need OKRs if we have KPIs?
KPI.org defines KPIs as follows — “Key Performance Indicators (KPIs) are the critical (key) indicators of progress toward an intended result.” This is one term that has been wildly popular in the last 2-3 decades.
At the most basic level, KPIs measure an aspect of the business. Let’s look at each term in the phrase and see how they make sense.
- Key: provides a means of achieving or understanding something
- Performance: defines a particular action, deed, or proceeding
- Indicator: designates the state or level of something
You can measure revenue, revenue per employee, revenue per sales rep, and so on. All of these are measurements or indicators of how a business is doing. There are literally thousands of such measurements that can indicate how a business is doing. Among those thousands, you select the “few” that are key indicators for your business and for the appropriate business functions. These essentially are your key performance indicators. Put simply, a KPI serves to perform a health check on the productivity, effectiveness, and efficiency of staff, employees and individual teams.
When it comes to managing your business though, having great KPIs identified by itself is not enough. OKRs may be new, but every business has a plan and a budget for every year. These plans and corresponding budgets are typically based on projections of KPIs, based on what you did in the past and what you target to or expect to achieve this year. This is where OKRs come into play.
It is a lot easier to use the travel analog. Imagine you are driving to some place. If the final objective is your destination, your OKR is the vehicle and your KPI is the dashboard. Your OKR is what gets your car to the final destination, whereas your KPI tells you how your car is doing as it makes its way toward the goal. One can use OKRs and KPIs to achieve the same objective – but they perform different functions.
OKRs provide a simple and powerful approach to set business targets, measure progress and achieve greater success. Extending the travel analog, you can use the dashboard to check on the KPIs such as fuel level, engine oil level, vehicle speed, etc.
But there are other things that you care about, which are not in any dashboards. For example, one of the key results of getting to your destination is to get there safe and sound. So, if you sleep on the wheel, you are not going to get to your destination. Ensuring that you don’t sleep, and drive carefully is a key result of getting to your destination, that is not necessarily measured using a KPI.
We can illustrate the relationship between OKRs and KPIs using a simple diagram:
OKRs consist of Objectives and Key Results. Key Results in turn can be associated with a KPI. The key is “can be”. Key Results need not be necessarily associated with a KPI.
Let’s explore this further with an example:
This illustration is pretty self explanatory. You want to grow revenue and in the current quarter, you want to achieve 3 key results that will put you on that path. Out of the 3 key results, the first one .. “hiring a VP of sales for Europe” is not really tracked using a KPI. The other 2 are associated with a KPI, and will potentially have some starting and target values associated with them. For example, the key result may say that “Increase web leads (KPI) from 22 per day to 35 per day.
As you can see, OKRs encompass KPIs and help you achieve the outcomes you want for your business. Those outcomes, can optionally be defined, measured and tracked using KPIs.