OKR and KPI are sometimes seen as alternative concepts, from which companies need to choose one. In fact, both provide different perspectives on a company’s performance and success. Therefore, connecting their individual metrics creates a holistic picture of a company’s performance and allows for effective improvement. That’s why you should not choose between KPIs and OKRs, but find a way to integrate them and leverage both. But first, it is important to understand the difference between OKR and KPI.
If you want to know more about the OKR framework, take a look at our article "Objectives and Key Results (OKR) - A Definition"
What is OKR?
The term OKR is made up of the two words "Objectives" and "Key Results" and refers to a method for defining and managing objectives. For a given period of time, usually a quarter, several goals (Objectives) are defined. These objectives are subdivided into 2-5 smaller key results.
While the overall objectives should be defined in a qualitative and challenging way, the associated Key Results have to be measurable above all. OKRs can be defined at all levels of the organization: for the whole company, a department or the individual employee. For example, a survey of 50 customers at the end of the month could be an appropriate key result for closer customer loyalty to the product as an objective.
What is KPI?
The term KPI is an abbreviation for Key Performance Indicators. KPIs represent key figures that can be used to make success factors in a company measurable. They enable companies to translate their business in quantifiable results, such as revenue growth or customer satisfaction. These are cascaded down to KPIs for departments, teams, and employees to determine their influence on the overall performance.
The company KPI of revenue growth, for example, can be broken down into various subordinate KPIs. These may include the number of leads generated by the marketing team as well as the conversion rate of the sales team. Customer satisfaction, on the other hand, rather depends on a quick turnaround time from the service team and easy usability of the product.
What's the difference?
At first glance, the two concepts seem very similar. Both KPIs and OKRs are used for goal management, make goal achievement in companies measurable and can be defined for different levels and functions of the company. However, there is a fundamental difference between OKRs and KPIs. To understand this, it is helpful to distinguish between lead goals and lag goals.
Lag Goals represent metrics which allow you to look back and measure the success of what has been achieved. They define the desired outcome of a process and correspond to KPIs. An example of a Lag Goal and therefore KPI is to increase market share by 10% within a certain amount of time. Only in retrospective will you be able to see if you have achieved it.
Lead Goals on the other hand are driven by metrics which can be directly influenced. They measure target values that lead to the achievement of the Lag Goal and correspond to OKRs. For example, an increase in market share by 10% can be achieved by the Objective "Excellent Customer Service". Corresponding Key Results could be the introduction of a workshop for call centers or the reduction of the number of complaints by 10%.
So, KPIs allow you to look back and measure the success of what you have done before. OKR, on the other hand, sets a strategic direction of what you want to achieve. It
Therefore, it makes sense to use them together and move important company metrics (=KPI) by targeting them with specific OKRs.
How to combine OKRs and KPIs
Let's assume you notice that customer satisfaction has stagnated over the past six months. Analyzing the relevant KPIs feeding into customer satisfaction gives you an idea of where to put your focus. If your customer service KPIs are high as ever, but the engagement of your users is decreasing, it gives you an idea of where to focus over the next OKR cycle. You can draft a joint OKR for your product and IT team to activate your users and facilitate the usage of your product.
Keep in mind, though, that the results might not immediately show after one cycle. Depending on the value you want to create you should rather check on long-term development of the KPI that you want to create new value for. Also, be careful to not formulate your Objective to generic or broad. “Increase customer satisfaction” might be a desirable goal state but does not focus on a specific value. Rather pick one aspect for one cycle at a time. The resulting OKRs should reflect the value you want to create for the customer with Key Results that indicate progress. As an intermediate step, it is worthwhile to outline a problem that stands between the status quo and the KPI. This problem can serve as inspiration for the OKRs that address this problem over a longer period of time.
OKR and KPIs can work well with each other if you know how to use their individual characteristics to the benefit of the organization. However, it should always be borne in mind that OKRs might have a delayed effect on some metrics. Don’t expect your customer satisfaction to jump through the roof once the cycle is finished. Since OKRs describe a qualitative goal, KPIs are only to a certain extent influenced by OKRs. They put the spotlight on one or several aspects with implications to the higher KPI. Nevertheless, it should not be a question which one to dismiss, but how to combine both for successfully steering an organization in the long run.