We recently shared straightforward explanations of the Objectives and Key Results (OKRs) approach to setting goals and measuring outcomes. What about that other popular acronym in management circles – the KPI, or Key Performance Indicator?
What is an OKR vs. a KPI?
Like the OKR, the KPI has been around for a while. It's a common method of measuring corporate performance – and like OKRs, KPIs can be defined at organizational, team, and individual levels. So how do the terms relate? Are they interchangeable? If not, why not?
Most folks agree that the two concepts and their usage are distinct. (As with many business and technology principles, not everyone agrees on how the terms should be defined or applied, particularly when it comes to KPIs.)
"While there are similarities, OKRs and KPIs are not interchangeable," says Jon Knisley, principal, automation and process excellence at FortressIQ. "KPIs provide a measurable assessment of performance. They are descriptive and tend to look backward. OKRs are also measurable and timeboxed, but since they tend to be more aspirational, OKRs provide a more strategic view of what's ahead."
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OKRs frame forward-looking goals
This speaks to one of the fundamental differences between KPIs and OKRs: KPIs are usually concerned with the way things are or were (or both). OKRs define how you want things to be at some point in the future. They can both be useful in organizational strategy and measurement, but they're not one and the same.
"Critical Success Factors (CSFs) and KPIs, while good for managing our 'steady state' or status quo, are rarely inspiring and don't often address trying out new things we've never done before," says Erika Flora, president at Beyond20. (CSFs are yet another long-running business management term.) "Further, KPIs measure outputs from specific services, products, or processes, whereas OKRs focus on outcomes or results. And OKRs can quickly flow up, down, and across the organization without having to be tied to CSFs or KPIs."
KPIs serve as healthcare vital signs
Think of KPIs as the business equivalent of monitoring vital signs in healthcare: Ideally, the numbers are right around where they should be, and when they're not, it's time to figure out why. The "I" in KPI is not to be understated: These are indicators of your business's health based on key outputs or metrics that matter to its success. (Yes, revenue could be a KPI.)
"KPIs highlight that everything you are doing is working. Or alternatively, not working, which helps you understand in which direction you need to move next," says Marcin Stoll, head of product at Tidio Chatbots. "KPIs are much more straightforward, while OKRs provide greater depth into your goals."
Again, the KPI is more concerned with things as they are today (or in the past), whereas OKRs are forward-looking. As such, IT and business leaders would generally be well-served to use the former to measure systems and processes already in place, and the latter to guide ambitious new initiatives or strategic directions.
"Should they have a fresh, bold idea, OKRs might be more suitable to allow the company to be creative and flexible with their goal-setting," Stoll says.
OKRs are timeboxed, KPIs are not
Another way to think of the differences between OKRs and KPI is in terms of time. OKRs are timeboxed – think quarterly or semi-annual goals and outcomes. They're not intended to last forever, whereas some KPIs may rarely, if ever, change. (Imagine a business deciding it no longer cared about top-line revenue.)
"KPIs are the top-level metrics that executives and other senior leaders regularly look at to gauge the overall health of the business – [such as] users, revenue, etc. – but are unlikely to change in the short- to medium-term, if ever," says Mike Rozensher, senior product manager of connectRN. (Rozensher adds that there is not necessarily a universal definition of a KPI, though, and that in some settings, they may be treated as more or less interchangeable with the key results portion of an OKR.)
The key results in an OKR, on the other hand, are usually more narrow and targeted, even when the objective is inherently big and ambitious – such as "increase customer satisfaction." On that note, Rozensher says that they're often set (and reset) more frequently than KPIs.
"While it is not uncommon for an OKR to carry over from quarter to quarter, if it continues to be a focus beyond a couple of quarters, the objective is likely something more akin to corporate or product strategy or vision," Rozensher notes.
This gives you a solid grasp of the big-picture differences between OKRs and KPIs. Olena Kovalova, senior delivery manager at Exadel, shares a perspective on four additional ways to compare and contrast KPIs and OKRs below:
KPIs vs. OKRs: 4 more ways they differ
1. They flow through the organization in different directions
Kovalova observes that KPIs are almost always top-down metrics dictated by company strategy, meaning they start at the executive level and are communicated level-by-level down the corporate hierarchy.
OKRs, on the other hand, typically require different communication layers. Top-down is one of them, usually to "share the company's vision and strategy with the departments and teams," Kovalova says. "It helps to build objectives on a needs and values basis."
OKRs also come from "side-by-side" or horizontal communication, Kovalova says, "to align different departments and teams across the common OKRs and increase collaboration and cooperation."
Finally, bottom-up communication can also feed OKRs. In this approach, the team shares its ideas and solutions with leaders as part of validating a common, cohesive organizational strategy represented by OKRs.
2. OKRs are more transparent
This one is fairly self-explanatory. OKRs are meant to be open and shared throughout the organization. (If they're not, how will people execute on them?) KPIs, on the other hand, might be more restricted or siloed for various reasons. We won't haggle over whether those reasons are good or bad here, but suffice it to say here that transparency is in the OKR DNA, whereas KPIs might be more team- or department-specific and less of a concern to people elsewhere in the company.
In a similar vein, Kovalova notes that KPIs are commonly used to evaluate team or departmental performance, whether C-level, sales, IT, or any other group. OKRs are intended to involve teams in strategic decision-making and execution, so sharing them openly is a basic requirement. KPIs might be used to measure the ongoing performance of the outcomes OKRs eventually produce.
3. The bar for OKRs is usually higher than KPIs
Words like "ambitious" and "inspirational" are often used to describe good OKRs for a reason: They're not intended to measure minimum standards but to seek out exceptional outcomes.
"KPIs are set as realistic measures and should be achieved or exceeded," Kovalova says. "OKRs are ambitious hypotheses."
If you miss the mark on your KPIs, something is amiss – again, think of the health vital signs analogy. Kovalova and others share the belief that it’s OK to miss the mark on OKRs if there's executive buy-in and a shared sense of what's an acceptable "miss" – say, achieving 70 percent or greater of the key results in a given time period.
"If achieved [at] 100 percent, it means that the team is too cautious and should set more ambitious objectives," Kovalova says.
4. OKRs shouldn't be used in performance reviews
KPIs and similar metrics are often included in employee performance goals and reviews when relevant; as such, they could affect important issues like raises and promotions.
Done right, OKRs should have a "blameless" approach, similar to IT strategies and cultures that encourage experimentation and speed – and don't punish people or teams for making mistakes along the way.
"There [should be] no punishment for bad results [with OKRs]," Kovalova says.
On a positive note, Kovalova adds that OKRs should be associated with some type of incentive or reward when a significant set percentage of the key results is achieved.
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