What is the Difference Between KPIs and OKRs?

What is the Difference Between KPIs and OKRs?

A number of clients have asked about the difference between OKRs (Objectives and Key Results) and KPIs (Key Performance Indicators).

KPIs and OKRs. Talk about alphabet soup! What do these 3 letter acronyms really mean, and what exactly is the difference?

The OKR acronym gets a lot of press in the tech sector in the USA as being some kind of “revolutionary” new way of tracking goals, as used by the likes of Google and Intel. Ignore the hype. In simple terms, OKRs are goals (objectives) with measurable outcomes (results) attached. Peter Drucker coined the term “Management By Objectives” in the 1950’s in his book, The Practice of Management. There’s nothing new or revolutionary to see here.

Venture Capitalist, John Doerr’s best-selling book, Measure What Matters popularized the OKR concept. In essence, his message is, “Google uses OKRs and they are a great company. Ipso facto, if you use the same approach, OKRs will cause you to become a great company just like Google.”

This is one of my pet peeves. To my jaded eyes, this is yet another case of “Survivorship 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 use the exact same approach.

e.g. Steve Jobs, Bill Gates, and Mark Zuckerberg dropped out of college and became billionaires. Does this mean that if you follow their example and drop out of college you will become a billionaire too?

e.g. Jim Collins’ book, Good to Great sold nearly 3 million copies and shared the business practices common to 11 so-called “great” firms which had outperformed the stock market up to that point. Does this mean if you follow their example your firm will become great too?  (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). Survivorship Bias – don’t believe the hype!

Goal-Setting Practices.

To be fair, most of the principles described by OKR practitioners are sound goal-setting practices, e.g.

  • Objectives need to be (SMART). Specific, Measurable, Achievable, Relevant, Time-Bound. It sounds simple, but many managers misunderstand this concept. Here is how to set SMART Goals the right way
  • Objectives are cascaded into a series of action steps, with measurable outcomes (results)
  • 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 are reviewed and updated every quarter

All of these things I fully agree with. In fact, my consulting team taught our clients the exact same goal-setting practices for more than 20 years when I was part of a management consulting firm, but they are hardly new, and we didn’t claim to have “invented” them either.

To summarize, OKRs are a goal-setting approach 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 objectives in the first place, merely a way to track objectives you have already chosen.

OKRs are not Strategy

Goal setting is not strategy!

Unfortunately, most leaders I speak with don’t really understand what strategy is. They think they have a strategy, but usually, all they have done is an exercise in goal setting. Goal setting is important, but setting numerical targets is not a strategy. We all want to grow, but growth is not strategy. We all want to improve quality, but quality improvement is not strategy. We all want to be more efficient, but efficiency improvement is not strategy. Yes, we want to be better than our competitors, but being better than our competitors is not strategy either. Bigger, better, faster, cheaper is not strategy!

Strategic planning is not an exercise in financial forecasting or filling out boxes on a (OKR) planning template. Strategy is understanding how your industry is likely to play out and getting very clear on the key strategic moves your company needs to make to establish a competitive advantage and position your company for future success. Your long term growth and financial outcomes will be a function of the strategic moves you make.

Strategic planning is about establishing a meaningful point of difference in your industry that you can preserve. However, nothing lasts forever, so you need to keep innovating and re-establishing your point of difference.

Strategic planning requires trade-offs. You cannot be everything to everybody. You cannot just blindly copy the moves of your competitors and hope to win. You have to figure out what to say “yes” to, and what to say “no” to. You make clear cut choices about how you will compete, and then allocate your time and resources accordingly.

Silicon Valley companies delude themselves by thinking that setting objectives (OKRs) for growth is strategy. No. No! No!! OKRs are not strategy!

OKRs are not KPIs

Metrics (also known as KPI or Key Performance Indicators) measure the critical success factors that drive your current business model (current operating model).

(Note: I use the terms Metrics and KPI interchangeably – but prefer to use Metrics these days in an effort to reduce the use of 3 letter acronyms).

Your business 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”.

In my experience working with small-medium businesses, the execution of your strategic projects will take up about 10% of your people’s time each quarter (and that’s in an ideal world where you carve out meaningful time for strategy execution), whereas “Business As Usual” will take 90%+ of your people’s time. Some companies don’t even have a strategic plan, but they have a business 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 need to identify and track the Key Metrics that drive the success of your current business model.

How to identify your Metrics / KPIs

To keep things simple for now, figuring out your Key Metrics starts by looking at your current business model and asking yourself the following 4 questions;

1. What are the key functional areas of our business model? (eg marketing, sales, operations, customer support, finance)

2. What result or outcome are we looking to achieve in each functional area?

You may need to ask yourself “Why?” several times to really get to the nub of the most important outcomes for each function.

Then, to identify your Key Metrics, I recommend spending the bulk of your time exploring and debating the following questions:

3. What “activities” or “actions” drive this outcome?

4. What “effectiveness” measures let us know how well these activities are being performed?

You can’t “manage” results. What you can manage are the activity and effectiveness measures that drive results. Activity and effectiveness measures are things you have the ability to manage and improve. These 2 areas are where your most powerful Metrics are likely to be found.

Each functional area of your business will have a small handful of Metrics that drive the results you seek. By handful, I recommend that clients whittle down their measures to 4 to 6 Metrics per functional area at most.

Once you have identified the key Metrics for each business function, you are ready to identify the small subset of Metrics that you deem to be the “critical success factors” – the key drivers of your overall business model. I call these your “tropical island metrics”.

These tropical island metrics are your leadership team metrics, the critical success factors for your company that you display on your one-page strategic plan. You keep these scores visible on a software dashboard and discuss them every week in your leadership team meeting to drive accountability for performance.

Contact me if you need help to identify your Key Metrics.

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Until next time…
Stephen

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