If you are managing an organization, a team, or even self, chances are that you are using both concepts even if you have not heard of either one. Understanding, developing and tracking KPIs and OKRs creates more clarity across an organization and helps you better manage and achieve your goals. If you are new to the filed, you might think you need one or the other. But they are different and you might need both to be a successful. KPIs and OKRs are very powerful concepts that can help you manage any operation more effectively.
What is KPI?
A lot of us have heard of KPIs if we have been a bit close to management of about any business operation. KPI stands for Key Performance Indicator. As the name suggests, KPI is a key metric for measurement of performance. KPI is used to evaluate performance over time for an organization, a plant, a division, a project, a team, or even an individual. A few examples of KPIs in manufacturing are scrap rate, first pass yield, overall equipment effectiveness, capacity utilization, and so on. There are literally thousands of KPIs that can be tracked. It is crucial to identify which KPIs are relevant and meaningful for your organization.
An indicator by definition can only measure what has already happened. So KPIs always give you a rear view mirror. They tell you how you did in the past, so they are mostly "lagging KPIs". Indicators that measures the output of an activity that will be the input of another activity in future, can be considered "leading KPIs". For example, Quotes per month is a leading KPI for expected revenue in future.
To learn more about KPIs, you can read the book by Bernard Marr: Key Performance Indicators (KPI): The 75 measures every manager needs to know.
What is OKR?
Objectives and Key Results, OKRs, comprise of a set of objectives along with a few measurable key results that define the achievement of each objective. OKR is a goal setting framework and can be used as a powerful planning tool. The goal of OKR is to define a framework that helps you achieve your objectives. The approach guides you to list a few overarching objectives and then forces you to breakdown each objective into a few measurables key results as what needs to happen to achieve the objective.
Objectives define "what" you are chasing and key results give you a measure to track "how" you will achieve that objective. As an example, if your objective is to become the market leader in your industry, you need to break it down into something that you can measure your progress. You could list some key results and work towards achieving those results. And if you have your OKR established correctly, your objective is achieved if you have 100% success rate for the listed key results.
A great resource to learn about OKRs is the the book by John Doerr and Larry Page, Measure What Matters: How Google, Bono, and the Gates Foundation Rock the World with OKRs.
KPI vs OKR
We consider KPIs as a goal setting tool when we compare them against a target. As an example, if we measure and track scrap rate as a KPI and we set a target scrap rate of 0.1%, then it becomes a goal. We can track that KPI constantly and compare it with our target. After we achieve that target, we can set a new target and push our team and our system to improve performance and meet the new target. The challenge with this approach is that there are many competing KPIs. Improving one blindly can hurt another KPI. In this example, achieving a 0.1% scrap rate target might not really desirable if it takes a significant amount of time to get there.
OKRs on the other hand are designed to achieve clear objectives. To achieve an objective you might set some KRs that may not directly include a KPI; for example, launching a new product, or deploying a new ERP system. Note that OKRs allow you to list everything that needs to happen for your company to achieve the overarching objectives.
One concept that is often confused is the difference between key performance indicators and key results. If you pay close attention to the words, it is simple. Key performance indicators are "measurements". Usually just a number that presents a meaningful status. Key results on the other hand are specific outcomes.
A Final Note
We all know that it is not easy to systematically improve something that you cannot measure. But we need to remember that there is no end to what can be measured in this time and age. We should not measure things just because we can. It is crucially important to measure what actually helps us achieve our goals. And that, is a measurement that matters. If there is a disconnect between the things that you measure and the goals you have in mind, it might be time to sit down and take a closer look at why you measure what you measure and how they help you get where you want to go.