OKR and KPI are often seen as alternative concepts that companies have to choose between. In actual fact, they combine quite well, especially when it comes to measuring and improving specific areas of a company’s performance. Instead of choosing one or the other, the question should be: What is the best way to combine them?
KPI stands for key performance indicator. KPIs have been used for years to measure company performance. Since they are related to performance, KPIs can be used to control and evaluate company processes, individual projects or departments. For this reason, company goals are cascaded down into subordinate KPIs for departments and teams. Most KPIs are lagging indicators used to measure a company’s performance retrospectively. Revenue growth, for example, is influenced by the number of leads generated by the Marketing Team and the conversion rate of the Sales Team.
If you look at further examples using the HR Department, there are several other KPIs that can be measured, including:
- Employee retention rate
- Employee satisfaction (e.g., NPS)
- Number of employees who have used their personal development budget
But how can these be translated into OKR? We will get there, but first…
OKR stands for Objectives and Key Results and is a method for defining and managing goals. For a set amount of time—usually quarterly—several Objectives containing value propositions are defined. Achievement of these value propositions is documented using two to five measurable Key Results. OKR can be seen as a form of outcome management. That means goals are not defined on the basis of the work put into them but rather the effect the added value has for a customer, for example.
While the overarching goals should be defined in a qualitative and ambitious manner, their respective Key Results must be measurable. OKRs can be defined at all levels of the organization, from the entire company down to departments and individual employees. A positive response to a customer survey at the end of the month, for example, could be a respective Key Result for the Objective of improving a customer’s product loyalty.
Using the HR department as an example once more, let’s take a look at some possible OKRs for the KPIs defined above.
Through improved training opportunities and an increased budget for personal development, employees are happier.
- The number of employees who used their personal development budget increased from 50 to 75 percent.
- The number of employees who said the development budget contributed to satisfaction increased from 50 to 60 percent.
- Satisfaction with development opportunities increased from 40 to 60 percent.
You can find a detailed definition in our article “Objectives and Key Results (OKR)—A definition.”
At first glance, both concepts appear to be quite similar. Both KPIs and OKRs are used for goal management, make goal achievement within companies measurable, and can be defined at different levels and functions of a company. With that said, there is a fundamental difference between OKR and KPI. To better understand this, it is important to distinguish between leading and lagging indicators.
Lagging indicators determine the direct result of a process and correspond to KPIs. An example of a lagging indicator and, therefore, KPI is a 10 percent increase in market share. Lagging indicators are suitable for retrospective evaluation, but not for controlling results. For example, measuring employee turnover does not prevent employees from actually leaving the company.
Leading indicators measure target values that lead to goal achievement and correspond to the Key Results of an Objective. For example, measuring the impact of new development opportunities on employee satisfaction can help prevent employees from leaving. Leading indicators also measure whether added value was created and, through various measuring possibilities within the cycle, provide information on whether a course correction is needed.
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OKRs measure progress and KPIs results. This makes it clear that OKRs and KPIs are neither identical nor mutually exclusive. Therefore, for holistic goal management, both concepts should be used in coordination with one another.
The following chart illustrates additional differences between OKR and KPI:
OKR and KPI are not just different in terms of time orientation. While OKRs are usually applied in quarterly cycles, KPIs observe a longer time period. OKRs, in turn, are seen as a form of outcome management. That means goals are not defined on the basis of the work put into them but rather the effect the added value has for a customer, for example. KPIs, on the other hand, represent “simple” metrics that measure a company’s performance (output). OKRs should also ensure team alignment, transparency and focus. This helps motivate teams to achieve ambitious goals, some of which they have set for themselves and track regularly. With KPIs, the focus is on control, meaning metrics tend to be determined from the top down and remain in place for a longer period of time.
KPIs allow initiative results to be assessed retrospectively, while OKRs provide strategic direction. That means it makes sense to combine both systems to guide an organization in a specific way. The development of certain KPIs can be used to indicate in which areas value should be created for the next OKR Cycle. If KPIs at the organizational or department level are not developing as expected, OKRs can help influence the contributing underlying metrics. If customer satisfaction has remained the same over a six-month period, for example, the next OKR Cycle can be used to influence this metric.
Analyzing the relevant KPIs that impact customer satisfaction can shed light on where to start. If, for example, the Customer Service Team’s KPIs remain unchanged but user engagement has declined, a shared OKR for the Product and IT Teams can be created to engage users and improve product usability.
Since an OKR focuses as granularly as possible on a specific value, several cycles may be necessary to cover various aspects and visibly improve a KPI. Since KPIs are generally measured in longer intervals and can cover several OKR Cycles, it is easier to focus on one aspect after the other.
OKR and KPI can complement each other well and do not contradict one another. Combining them in a logical way can allow for successful, controlled company management. OKRs provide the focus needed to improve aspects of a KPI in a specific way. In this case, it is important to avoid the mistake of simply disguising a KPI as a formulated Key Result. The Objective “Improve customer satisfaction” describes a desired future state, but provides no added value for the customer. To get started, it can help to formulate the problem that lies between the status quo and an improved KPI to derive focus areas for various OKR Cycles.
What are OKRs and KPIs?
OKR stands for Objectives and Key Results and refers to a method for the definition and management of goals. KPI stands for key performance indicator. KPIs have been used for years to measure company performance. OKRs measure the process, KPIs the result.
What do OKRs measure?
OKRs measure value propositions that lead to the achievement of specific desired results (KPIs). In other words, they measure which values can be achieved to influence a KPI. For example, a 10-percent increase in customer satisfaction can be achieved through the Objective “excellent customer service through faster availability.” The corresponding Key Results could be “a 10 percent increase in call center capacity” or “a 5 percent increase in the processing speed of inquiries.”
Is it possible to have both KPIs and OKRs?
OKRs measure added value for customers and KPIs the result. This makes it clear that OKRs and KPIs are neither identical nor mutually exclusive. Therefore, for holistic goal management, both concepts should be used in coordination with one another.
KPI or OKR: Which is better?
OKR and KPI can complement each other well and do not contradict one another. Combining them in a logical way can allow for successful, controlled company management. OKRs provide the focus needed to improve aspects of a KPI in a specific way.
What is an example of a KPI?
For marketing, the number of generated leads is an example of a KPI. For sales, the conversion rate of these leads is a useful KPI. When looking at the HR Department, helpful KPIs include employee satisfaction or employee retention rate.