KPIs vs. OKRs. Talk about alphabet soup! What do these 3 letter acronyms mean, and what exactly is the difference?
Lately, a number of clients have asked about the difference between OKRs (Objectives and Key Results) and KPIs (Key Performance Indicators), so what exactly is the difference?
The OKR acronym has been getting some press lately in the USA tech sector as being some kind of “revolutionary” new way of tracking goals, currently being used by the likes of Google. Ignore the hype. In simple terms, OKRs are just project goals with measurable outcomes attached. We call them “Strategic Projects”. You might call them Key Initiatives, Big Rocks, Quarterly Priorities etc.
As part of my ongoing strategic analysis, I’ve studied this development closely, and all the research I have done so far indicates there’s nothing new or revolutionary to see here, other than a handful of goal-setting software companies flogging the OKR acronym in an attempt to differentiate themselves (and my kudos to them for having good PR firms).
In essence the marketing approach being used is, “Google use OKRs and they are a great company. Ipso facto, if you use the same approach, you will become great company just like Google.”
To my jaded eyes, this is a classic case of “Survivor Bias”, a common cognitive error made by business leaders, and business authors. It’s a system of post hoc analysis that focuses only on the successes and ignores the many failures that used the exact same approach.
(Actually, if you invested in those 11 firms at the date the book was published in 2001 your portfolio would have subsequently underperformed the S&P 500 stock market index, and 2 of the 11 firms went on to financial ruin).
To be fair, most of the principles described by OKR practitioners I have encountered to date, are sound goal-setting practices, e.g.
Objectives (projects) need to be (SMART). Specific, Measurable, Achievable, Relevant, Time-Bound
Objectives (projects) are cascaded into a series of action steps, with measurable outcomes
Company goals are linked to functional team goals, which are linked to individual goals
Progress is made visible so everyone can see how things are tracking
Progress is discussed every week
Objectives (projects) are reviewed and updated every quarter
All of these things I fully agree with. In fact, we have taught our clients the exact same goal-setting practices for the last 20 years as part of our management consulting practice, but they are hardly new, and we don’t claim to have “invented” them either.
To summarize, OKRs are a goal-setting approach to help you implement your projects, and are based on a set of well-known, long-established business practices.
It is worth noting, that the OKR approach does not help you choose the right projects in the first place, merely a way to track projects you have already chosen. To determine whether or not your projects are strategically sound requires a disciplined, well thought out strategic planning methodology.
OKRs are not KPIs.
Your organization already has a business model / operating model.
Your current operating model comprises the things you do every day to create leads, make sales, provide your products and services, keep your customers happy, grow cash and make profits. Let’s call this stuff “Business As Usual”.
Strategic Projects are about “creating what will be”, whereas “Business As Usual” is about “improving what is.”
KPIs (Key Performance Indicators) are what you use to measure the critical success factors that drive your current operating model. KPIs drive Business As Usual.
That’s not to say that your operating model is always going to be the same. Your strategic planning may identify the need to transition to a new operating model in order to ensure your future success and survival.
In my experience, strategy execution (implementing your chosen strategic projects) will likely take up about 10% of your time (and that’s in an ideal world), whereas Business As Usual will take up 90% of your time. Some companies don’t even have a strategy, but they do have an operating model that is currently working for them, and Business As Usual takes up 100% of their time.
Industries change. The lack of a well-crafted strategy for your future success will eventually bite you in the backside, but regardless of whether you have a strategic plan in place right now, you absolutely should be measuring KPIs to track and drive the success of your current operating model.
How to identify your KPIs
To keep things simple for now, figuring out your KPIs starts by looking at the key elements of your current operating model and asking yourself the following questions;
1. What are the key functional areas of our current operating model?
2. What result or outcome are we looking to achieve in each functional area?
3. What “activities” or “actions” drive this outcome?
4. What “effectiveness” measures let us know how well these activities are being performed?
Results are important, but you can’t manage results. Activity and effectiveness measures are things you have the ability to manage and improve. These 2 areas are where your KPIs are to be found.
Each functional area of your business will have a small handful of KPIs that drive the outcomes you seek. I recommend that clients measure 5 or fewer KPIs per functional area.
From this, your organization as a whole should be able to identify a small subset of KPIs that you deem to be the “critical success factors” – the key drivers of your overall operating model. I also recommend you refine this list of critical success factors to 5 or fewer “Organization-wide KPIs”, and keep these scores visible to everyone in your company via a software dashboard, and discuss them every week in your team meetings.
Your software dashboard should have the ability to make your Strategic Projects visible (call them OKRs if you must), as well as show your Key Performance Indicators (KPIs) to give everyone a balanced picture of which parts of the organization are performing well, and which areas need additional attention.