Managers who are introduced to OKRs often struggle to identify the methodology’s distinctive value, especially in comparison to KPIs. Because key performance indicators are widely used in all industries and regarded as important metrics of business performance and organizational health, OKRs are often met with a considerable degree of skepticism. Replacing functional and easy-to-grasp KPIs with an entirely new methodology doesn’t seem to be worth the effort, particularly if OKRs are to be implemented on a company-wide level. However, this skepticism and reluctance towards OKRs is based on an important misconception.
The relationship between OKRs and KPIs is perceived as competitive rather than complementary. Except OKRs and KPIs are not competing approaches. In fact, the two work best when they’re used together.
To understand how OKRs and KPIs can support and complement each other, we should first examine their differences. KPIs measure your company’s health at a point in time. This includes health metrics such as up-time, ticket response times, margins, etc. They are updated frequently and observed consistently, independent from specific projects or time periods. Often times, department leaders have an eye on their KPIs to ensure a healthy business-as-usual.
KPIs can be used as alarm bells and can serve as inspiration for an OKR. As an indicator of organizational health, KPIs can be an early warning if certain metrics like your Customer Acquisition Costs are suddenly rising. They can draw your attention to poorly performing sales or excessive expenses, leading you to address the issue with an OKR. In a way, KRs can be understood as KPIs on a performance improvement plan (PIP), deliberately pushing the company in a certain direction.
Imagine you’re driving to a far-away destination. It’s important to know how fast you’re going and how much fuel you have but it’s arguably even more important to know where you need to go. Your speedometer and fuel gauge are your KPIs. It is important to have an eye on them to make sure you’re moving efficiently but KPIs alone will not guide you to your destination.
Now, imagine your guidance system as the OKR. The relevant KPIs like your speedometer are vital parts of your navigation and you will benefit from observing them. However, now you have access to all relevant information: your map, directions, and the distance to your destination. Now you know, if you’re driving at 70mph, you will arrive at your destination in two hours.
While KPIs are the metrics to focus on in your day-to-day, OKRs enable you to consciously move toward your destination in a competitive environment.
KPIs can be integrated into OKRs by using their metric in a key result. Rather than just tracking progress and business health, OKRs are meant to focus teams on specific value drivers to achieve improvement. Imagine you’re tracking uptime as a KPI. As long as it’s above 99.9% you’re good. But should it ever drop, you would want to focus your teams on bringing that KPI back to health. You can now create a Key Result for it. That means, rather than just a static KPI, like our uptime example, Key Results define a clear improvement goal e.g., Increase revenue from $20m to $25m in Q3. The KPI “revenue per month” is now incorporated into the key result with a clearly defined target value.
The biggest challenge is choosing the right KPIs for Key Results if necessary – KPIs that indicate a shortcoming might not automatically be the right indicator for success. Here is an example: if your KPI “new leads per month” drops to a dangerously low level, you know that there’s a problem that needs to be dealt with. However, using the same KPI as a KR may not be enough. Often, failing KPIs indicate an issue upstream of the value chain. Consequently, in addition to turning the KPI into a KR, you should also focus on leading or lagging indicators and metrics to find the root cause of your problem.