For years now, indicators and objectives have been set for the different areas of our business, because if we do not know how we are performing, how will we know in which aspects we should focus our efforts so that the company continues to grow?
Many businesses have already set their KPIs to address this, but is it enough? Others implement OKRs but sometimes ineffectively, why is that? Do we understand the differences between KPIs and OKRs? Read on to clarify all these questions.
What is a KPI?
KPI is the acronym for Key Performance Indicator. They measure the company’s performance in desired aspects. The keys to these indicators are:
- They define the current company’s strategic framework.
- Realistic objectives should be established.
- It is recommended to set quantitative KPIs, although it is possible to work with qualitative indicators, these are often subject to subjective interpretations that lead to confusion.
What is an OKR?
OKR is the acronym for Objective Key Result. These are responsible for establishing specific metrics to ensure the achievement of goals. These objectives are characterized by:
- Always being quantitative.
- They should be a challenge to achieve. If you get them easily, you are being too conservative.
- Typically, a company has 3-5 objectives and 3-5 key results for each selected objective.
- They are set in a specific time frame.
Both OKRs and KPIs are measurements taken in recent years by large companies that stand out for their target management (Amazon, Google, Spotify, and many others). Most commonly, these metrics are taken by companies focused on growth.
SMART Methodology for an OKR or a KPI
To identify and establish the indicators and objectives that your company needs, you should, as a minimum, know the SMART criteria. These criteria will allow you to identify whether what you want to measure is worthwhile or not.
SMART objectives are defined as:
- Specific: focus your efforts on a specific area of improvement.
- Measurable: quantifies, or at least sets, an indicator to track progress.
- Assignable: clarify who will be responsible for this objective.
- Realistic: set achievable objectives with the resources you have.
- Time-related: specifies when the objectives will be achieved.
This may be confusing, but sometimes there are KPIs that are used as OKRs. Read on and we will clarify this point for you.
Examples of KPIs
There are a large number of performance indicators, and each company can define different ones depending on the industry or business model, among many other factors.
Here are some examples of KPIs by department:
- Project Management Department: costs incurred, invoiced amount, cost variation, etc.
- Sales Department: turnover, CAC (Customer Acquisition Cost), average ticket per customer, or sales margin obtained.
- Logistics Department: inventory turnover of raw materials and finished product, percentage compliance with delivery deadlines or order cycle time.
- Production Department: production cycle time, scrap rate, return rate, or OEE (Overall Equipment Efficiency).
- Human Resources Department: employee performance, average recruitment time, or retention rate.
- Financial Department: net and gross profit margin, cash finance cycle, ROI (Return on Investment) or ROCE (Return on Capital Employed).
Examples of OKRs
OKRs allow us to connect employees with the company’s objectives and therefore the business gets better results.
Some examples of OKR would be:
- Objective 1: Increase our turnover by 25% in 12 months.
- Key Result 1.1: Acquire 10 new clients
- Key Result 1.2: Increase our customer retention to 95%.
- Key Result 1.3: Increase our leads by 15%.
- Key Result 1.4: Attend 4 new on-site events in the next 12 months.
- Objective 2: set a new profitable business unit in 6 months.
- Key Result 2.1: Detect 3 new favorable trends in the market.
- Key Result 2.2: 4 pre-totype two trends with the highest current potential (two pre-totypes each).
- Key Result 2.3: Launch the product or service detected with the greatest potential to find our MVP (minimum viable product).
Our conclusions
Don’t worry if you have a KPI that is very similar to another OKR, it is common for them to overlap in some way since the objectives are defined according to the indicators that the company wants to reach. Here is an example to make it clearer.
To meet the company’s KPIs, the CEO will have to set OKRs to achieve the indicators, in this case concerning several areas.
Other managers will have KPIs established according to the objectives (OKR) that the general manager wishes to achieve, i.e. some of the OKRs of the general manager will be the KPIs of each manager in his specific area and these managers will set new OKRs to achieve their indicators.
This would be the process and is carried out top-down to align the objectives of all members of the organization.
Finally, we leave you our thoughts as a summary.
What is the difference between a KPI and an OKR?
KPIs would be a business metric while OKRs represent how these performance indicators are to be achieved.
The OKRs allow you to strategically align your company at all levels while the KPI will be the “health” indicator of your business.
Common mistakes to avoid with OKRs
Remember that the objectives you set must be ambitious – aim high with your OKRs to drive your business forward! Also, we remind you the key results set must be 100% linked to our goal, and choose them wisely (SMART).
Common mistakes to avoid with KPIs
As with your OKRs, choose indicators that are important and relevant, don’t set them just to make them look good, you will only be fooling yourself and your team. Once you have your KPIs remember to monitor them regularly. Each review, even if it gives bad results, can provide you with information on where you should focus your efforts to reverse the situation.
