What Is an OKR?
The acronym OKR stands for objectives and key results. An OKR is a framework that you use to set goals by crafting objectives and key results. An organization, department, or individual usually sets three to five objectives, which function like goals. You can more information in our Essential OKR guide.
Objectives are ambitious and qualitative, whereas so-called “key results” are quantitative and indicate the point at which you’ve reached an objective. OKRs compel you to review redundant and wasteful activities, and help teams to focus on central priorities for the month or the quarter. Companies frequently use OKRs as tools to help change corporate culture or respond to crises in the competitive landscape.
For a more detailed discussion of OKRs, read this introductory article; you can find OKR examples here. Refer to our other articles to learn more about how to write and score OKR, as well as what is the difference between OKRs and SMART goals. You’ll find more useful free, downloadable templates to help you plan OKRs and reach long-term goals, in our OKR template article.
What Is a KPI?
A key performance indicator or KPI measures changes in performance over time or against a target. KPIs monitor existing continuing activities and programs, and track the health of the daily business processes that keep your organization running.
KPIs also simplify the process of measuring performance by focusing on a few essential criteria.
Some experts say that, ideally, KPIs reflect conversions or changes in cash flow, which affect the bottom line. To strategically measure progress and performance, you can apply KPIs to programs, projects, activities, individuals, teams, or entire organizations.
“I define KPIs as things that you always need to pay attention to,” says Dan Montgomery, Managing Director of Agile Strategies. “They're like the lights on the dashboard of your car. You know that if they don't turn red, then you don't have a problem. You're measuring the things that are crucial to keeping everything in alignment, i.e., to maintaining business as usual.”
What Is the Difference between OKRs and KPIs?
KPIs track the outcome of an existing activity, while OKRs provide a framework to improve KPIs. OKRs (also called lead goals) challenge limitations and define how to achieve success. By contrast, KPIs (also known as lag goals) describe results.
For example, if one of your OKRs is to have the best training program in your vertical, then your lag measure might be to reduce support tickets by seven percent.
As with OKRs, KPIs are rarely carved in stone. KPIs can become irrelevant as your business context changes. And, a KPI that needs improvement might become a key result in an OKR.
OKR vs. KPI: When to Use Each
Another way of looking at OKRs and KPIs is to think of an OKR as a methodology and to think of a KPI as a measurement to gauge the ongoing success of that methodology. Each tool has a different purpose. As the chart below shows, each tool can help you achieve a different end.
| Desired Outcome | KPI | OKR |
|---|---|---|
| To have clearly defined, measurable goals | x | |
| To achieve expansive growth | x | |
| To achieve a cultural shift, a strategic shift, a process change, or leadership growth | x | |
| To stay the course and consolidate gains | x | |
| To improve or scale an existing or in-progress plan or project | x | |
| To set lag goals, which happen as a result of activities, indicating success or failure | x | |
| To set lead goals that drive toward lag goals or forecast outcomes of activities or processes | x | |
| To measure the past performance of existing processes, activities, or entities | x | |
| To continually verify business sustainability | x | |
| To overcome weak KPI performance or energize complacent teams | x |
How OKRs and KPIs Work Together
Both OKRs and KPIs are management tools. OKRs help you attain goals; KPIs help you measure that attainment.
As Dan Montgomery explains, “If KPIs get out of line, then you might need to create an OKR. KPIs are really operational measures, whereas OKRs are more transformative, strategic measures.” Successfully transformative OKRs may then become KPIs.
For example, if you made client-based software in the early 2000s, then you certainly witnessed the explosive growth of SaaS programs shortly thereafter and the near ubiquity of these services by 2010. When you use the right OKR, you can help your product achieve a competitive standing. If your objective is to create a best-in-show SaaS offering, then your KRs (key results) might look like this:
- KR: Prototype five UI options by the end of February.
- KR: Have support use Tier 3 tickets to conduct 40 interviews with customers.
- KR: Use two UI options to conduct the final A/B test with 15 beginner users.
When you launch the product, your KPI for success might be to achieve a Net Promoter Score® of 7 or higher.
How to Write KPIs
Think of KPIs as a way to communicate what your organization should accomplish. Craft KPIs that are relevant to your team or organization; don’t base them on what other businesses and competitors have chosen. Boilerplate OKRs and KPIs won’t work well for you.
Consider these characteristics when writing KPIs:
- KPIs Link to Strategic Goals: KPIs monitor something that’s essential to the health of your enterprise. In order to use this tool, you must first define your strategic goal. (After all, if you don’t know where you’re going, it’s hard to recognize when you get there.) To start, articulate your strategy. And remember, KPIs can also indicate how likely you are to achieve your goal. For example, if your goal is to increase sales this year by 10 percent, then you’ll have a good idea of how likely you are to reach that goal.
- KPIs Measure Movement Against Targets: You need to contextualize KPIs in terms of your target. A target shows how you measure success or the way in which the metrics should move. You can use number-based metrics or ratio KPIs. For example, you may want to increase qualified leads this quarter by four percent.
- KPIs Collect Data: When selecting a KPI, ensure that you can actually track it. In order to determine this capability, you need to figure out which business processes expose KPI data. In cases where results stem from multiple metrics, you may need to use a KPI formula. Formulas for interpreting KPIs often already exist. The order fulfillment cycle time, for example, is such a formula.
- KPIs Show Where to Focus Resources: A business or team needs only a handful of important measures. When you use KPIs properly, you can determine which business activities create cash flow and profits or surface the information that your top management wants to see. In this way, you can avoid tracking a mass of data, which is difficult. For example, if you have more than three KPIs for each department, you could end up with hundreds of KPIs for your organization. You can decide if a metric is suitable by determining if that KPI is tracking specific activities in a department. If so, it may be a good PI (performance indicator), but it may lack the resolution to show more comprehensive progress. The desire to achieve a good social media presence is an example of a bad KPR.
- KPIs Need a Dashboard: You may report on KPIs at annual and quarterly meetings. However, leadership may need weekly and even daily updates. Every employee can benefit from watching in real time how actions affect outcomes. Dashboards provide an effective means to share up-to-the-minute results and larger trends.
KPI Examples
Sometimes KPIs are called healthy metrics or performance metrics. One example of a healthy metric is a Net Promoter Score®. Here are other examples of KPIs that different industries use:
- Healthcare: Bed turnover, patient-to-staff ratio, patient satisfaction rating
- HR: Salary competitiveness ratio (SCR), voluntary termination rate, rate of internal job hires
- Retail: Conversion rate (shoppers who purchase goods), gross margin return on investment (GMROI), year over year growth (YOY)
- Sales: Meetings booked, customer lifetime value, sales qualified leads (SQLs)
- Technology: Customer satisfaction rate, business value realization, earned value management (EVM) for cost and schedule variance
KPI Dashboards
Dashboards offer a technique for tracking changes and comparing results concerning critical metrics. Dashboards help you understand at a glance when your business is thriving or when trouble is looming.
Because KPIs monitor progress, they should become part of your organization’s analytical dashboard. Sharing KPI information throughout your company is essential to highlighting successes and lowlighting areas that need improvement.
To create the best dashboard, consider your audience and what type of data they require. Follow web design best practices, and use established templates to create easy-to-read dashboards. Click here to find more information on creating a great KPI dashboard, and check out this dashboard gallery to see examples of highly effective dashboards.
Darrel Whiteley, a Master Black Belt, Lean Master, and Kaizen Expert with Firefly Consulting, recommends a number of ways to optimize the use of KPIs in a dashboard.
“I love using gauges for displaying KPIs,” Whiteley says. “I love using recognizable images like a speedometer or a thermometer — things that people see and use in everyday life — for dashboards that usually consist solely of business numbers.”
When you use KPIs in a dashboard, make sure that you design the dashboard to calculate any KPI changes in real time or near-real time. Using compound metrics and long-term metrics that take months to accumulate won’t help you. “The best metrics are the ones that you get right off your computer system,” says Whiteley. “For example, SAP closes daily sales every midnight. Its real-time analytics spit out sales totals, so you don't have to calculate results.”
In addition, make sure that you use your KPIs in a way that’s clear and comprehensible to all of your stakeholders.
“People understand sales per day,” says Whiteley. “People don't understand the percent of sales to plan. If your strategic improvement goal is to grow from a $5 billion company to a $5.5 billion company, then you want to show the sales per day. Then, you can easily align your sales per day with your overall goals, giving your team members results that interest them. Remember, you need results that your people find interesting and important. Otherwise, they’ll lose sight of the importance of the corporate goals and, consequently, their own goals.”
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