The Difference Between OKRs and KPIs Explained
The Difference Between OKRs and KPIs Explained
Learning how to benefit from OKRs and KPIs
When I got my first job as a Product Manager, pleasing my stakeholders was the definition of success. That was over a decade ago. Seeing the same misconception nowadays shocks me.
You may interpret “pleasing stakeholders” differently than I did. But what I commonly face is the following aspects:
Figuring out how to deliver requirements from stakeholders consumes most of the time of product teams
An extreme focus on solutions leaves teams far from understanding problems and how to create value
Success means steadily delivering features
What’s the problem with that? Several, I’d say.
First, implementing solutions without knowing the expected result is nonsense, to say the least.
Second, output means nothing without outcome. Teams get distracted with timelines and don’t have time to measure results.
Third, creativity dies because unbearable pressure puts teams in a frenetic delivery mode.
Now you may wonder, what does that have to do with OKRs and KPIs? You can avoid the problems I’ve just described when you understand how to combine OKRs with KPIs.
Let me help you understand the difference between OKRs and KPIs and how to apply them. I hope that helps you.
What are OKRs?
Objective Key Results is a collaborative method of setting goals and enabling teams to focus on delivering valuable results.
The invention of OKRs is generally attributed to Andy Groove, former CEO of Intel Corporation. He used OKRs to lead Intel successfully for an extended period (you can learn a lot by reading Measure What Matters by John Doerr).
How OKRs work
Now, let me share with you how it works. To use OKRs well, the company leadership should align and set important objectives, which should be inspiring and empowering.
As the objectives are set, the leadership aligns with teams and explains the importance of reaching such objectives. Teams are responsible for setting measurable key results. It’s fundamental to evaluate results and adapt the actions accordingly continuously.
Here’s an example of e-commerce:
Objective: Reach a sustainable balance between the customer acquisition cost and customer lifetime value
Key Result #1: Reduce general customer acquisition cost by 20% by the end of Q2, 2023
Key Result #2: Increase order frequency by 10% by the end of Q2, 2023
Key Result #3: Reduce churn rate by 15% by the end of Q2, 2023
Note that the objective isn’t measurable but sets the direction for the team. The Key Results are measurable but don’t define how to reach them. Also, they are independent of each other.
What not to do with OKRs
Misusing OKRs is one of the most common mistakes you will stumble upon. Here are things you must avoid:
Dependencies: Some companies create several objectives but are highly dependent on each other. As a result, teams have to compete against each other. It’s better to have a few aligned objectives than several dependent ones.
Leadership defines Key Results: It’s a mistake to leave accountable teams out of Key Results definition. Leadership should only define the objectives and empower teams to develop Key Results. Yet, the leadership can challenge the team but not define its goals.
Solution-oriented: Key results should leave room for creativity. It should set what success is and let the team figure that out. Defining solutions will trap the team.
Binary Results: The result must be measurable. If you set binary results, seeing progress is impossible, and OKRs lose their power. The team needs to know how far they can reach the ultimate key result.
“We must realize — and act on the realization — that if we try to focus on everything, we focus on nothing.”
― John Doerr, Measure What Matters
What are KPIs?
KPIs stand for Key Performance Indicators. KPIs are used to understand the health of an organization according to pre-defined indicators. The most common KPI types are:
Financial: Revenue growth, profitability, cash flow, etc.
Customer: Satisfaction, retention, churn rate, lifetime value, acquisition cost.
Product: Conversion rate, session time, unique users, new users, etc
Tech: Down-time, availability, response time, error rate, etc
While OKRs point to the future, KPIs help you understand the status quo based on past results. It’s imperative to define actionable KPIs. Otherwise, you will identify a problem once it’s too late.
For example, revenue growth is an important KPI for many organizations, but it’s slow to measure. If you realize you missed your target growth, it might be too late to act on it. That’s why you must understand the actionability of KPIs:
Laggard: A laggard KPI shows you a problem happened, but you may not be able to change it. It takes too long to measure the result. Example, Revenue Growth.
Leading: Different than a laggard KPI, a leading one is highly actionable. You define leading metrics by asking, “What would lead to this laggard KPI?” By answering this question, you come up with actionable KPIs. For example, increasing basket size, recurrence, product availability, or new customers will increase your revenue.
Common Mistakes with KPIs
The most common mistakes I’ve seen are:
The KPI Madness: I’ve seen many companies going wild with dashboards, and they relied solely on numbers. While that has value, you must exchange it with your customers personally. Some insights won’t come from data.
Too Many KPIs: More KPIs don’t mean better decisions. It might lead to confusion and analysis paralysis. Understanding which KPIs will make a difference in your goals is crucial. Less is more.
Non-actionable KPI: Looking at KPIs to make you happy or mad isn’t helpful. Great KPIs trigger action. Focus on leading metrics instead of laggard ones.
Nothing can replace contact with real customers.
Combining OKRs with KPIs
By now, I hope you understand that OKRs point to the future while KPIs look at the past. Combining both will help you progress in the right direction.
Working with OKRs without measuring progress isn’t valuable.
Working with KPIs without having a goal in mind is unwise.
When you learn how to work with OKRs and KPIs, combining them is powerful in creating valuable products. Here are my tips for you:
Set a valuable strategy: Before talking about OKRs or KPIs, you must have a strategy. Otherwise, everything is arguably a priority.
Define what matters now: Leadership decides what matters most based on the strategy, sets objectives, and empowers teams to work on Key Results.
Define success: Teams work on crafting and committing to Key Results based on the objectives. In collaborating with leadership, the team finalizes the Key Results and is ready to thrive.
Set leading metrics: Continuously measuring progress is fundamental to succeed with OKRs. That’s where KPIs come in handy. Based on the committed Key Results, the teams come up with KPIs that enable them to act fast and understand their progress.
Inspect and adapt: The team continuously adjusts their actions according to the established KPIs and focuses on reaching the Key Results.
Final Thoughts
It’s easy to mess around with OKRs or KPIs. I learn that simplicity and collaboration are essential to thrive in product management.
Keep it simple, and you will rock it.
Start small, learn from your actions, and adapt them accordingly. Progress is what matters most.
You’re set to succeed when you have a valuable OKR and learn to measure with KPI.
The first version of this article was published at LogRocket
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