Are Key Performance Indicators (KPIs) or Objectives and Key Results (OKRs) Right for you? Can you use both?
KPIs and OKRs share some common benefits and components. They serve different purposes. How do they fit together, or are they mutually exclusive?
To be clear on terms, I’ll explain what I mean by KPIs. A KPI is an assessment of whether you’re achieving your business strategy. Each KPI measures an aspect of how well you’re doing on the most critical aspects of your business’s success. Another name for a key performance indicator is a key metric. A KPI dashboard is a summary report of the status of your KPIs.
The structure of OKRs is very simple. An OKR is comprised of:
- An objective: an outcome you want to achieve
- Key results: the criteria to measure the achievement of an objective
To learn more about the basics of KPIs and OKRs, check out my articles on
How I’ve Used KPIs
I led the development, assignment, and monitoring process for KPIs at a $2 billion company. It took us a long time to develop those KPIs, and they clearly represented what we wanted to accomplish over the next year. Many of the metrics flowed from the annual budget. The KPIs were often used as a basis for incentive compensation. After explaining the KPIs to all the staff, each department developed its own set of KPIs to support the company KPIs.
KPIs are very useful for established companies in stable industries or business environments. They provide a great deal of focus, clarity, alignment, and motivation over a year. If you want to learn more about them, check out my course on Key Performance Indicators (KPIs) and KPI Dashboards.
Why I Started Using OKRs
I then started CFO Perspective to serve small businesses. KPIs seemed less applicable to these businesses. New businesses make frequent pivots of both tactics and strategy. Many small businesses operate in very dynamic industries or business environments.
Budgets and their related KPIs are a way to negotiate compromises in the allocation of capital and other resources in a company. The budget represents investments and expected results for those investments. In larger companies, it takes a long time to negotiate these compromises.
Smaller companies can make decisions much more quickly. Larger companies in dynamic industries optimize flexibility over efficiency. OKRs better fit the cycle times of these companies.
KPIs vs. OKRs
Both KPIs and OKRs are good ways to explain the company’s strategy and for employees to think about how they can help achieve that strategy.
KPIs focus on assessment, not process. They look at what was accomplished. How things get accomplished is done through other project and task processes. OKRs combine both assessment and process (i.e., “what” and “how”). KPIs don’t include deadlines, while OKRs may include deadlines.
Having one system to measure outcomes and another to manage processes allows each system to optimize for its purpose. OKRs may provide a more integrated process, which some would perceive as simpler.
The difference in KPIs and OKRs may also be matched to how far out a person needs to look into the future in their role at a company. Top managers have more responsibility to do longer-term company planning. This may match better with KPIs. Staff and lower-level managers are focused on shorter time horizons and tactical implementation.
I’m not saying this to advocate having half the company manage with KPIs and half with OKRs. I do think they optimize for different time horizons and outcomes. Each must flow from company strategy and be balanced with other tools or processes.
Using KPIs and OKRs
It’s possible to manage with both KPIs and OKRs. Each has a slightly different focus:
The focus of KPIs vs. OKRs
KPI Dashboard: Monitor the health of the company
OKRs: Managing and monitoring the progress of the company’s advance toward its vision
A company may create a KPI dashboard to monitor the health of the company and identify when problems arise. OKRs would be used more for managing and monitoring the progress of the company’s advance toward its vision.
To use a car dashboard analogy, KPIs would monitor things like the engine temperature and tire pressure. These are expected to be fine, but you want to know immediately if there’s a problem. OKRs would be like your odometer or speedometer. It measures your progress toward your destination.
The answer to “KPIs vs. OKRs” is either, neither, or both. Test each in a small pilot to see which helps you better achieve your goals.
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