This article provides an overview of:
The differences between OKRs and KPIs
The ideal interaction between OKRs and KPIs
Why numbers don’t belong in objectives (and where they do belong)
A definition of the components of value-based leadership
WHAT DEFINES KPIS?
Every company has its formula for success. The critical value-drivers for the success of a company can generally be summarized in a few key figures. These essential value-drivers are the key performance indicators (KPIs) of a company. The identification of these drivers is usually not rocket science.If you attempt to transfer the factors of success into a simple bar napkin business plan, then you will usually land pretty close. The same applies to individual departments and teams of a company.
In our view, most of the KPIs are values which are constantly optimized in the direction of a minimum or a maximum. Values that are to be kept within a certain parameter after a prime factorization (a root-cause analysis of the success drivers) are comparatively rare. Simply put, there are two types of KPIs: the ones we want to see as high as possible and those we want to see as low as possible. “…As possible” is the decisive statement here because reality is the limiting factor.
If we assume that KPIs are an indicator of success and that the objective is "as high as possible" or "as low as possible," then it makes little sense to assign the indicator with a target value. Everything should be done to increase or decrease the values. The result of your efforts to accomplish this will be relatively independent of whether you defined a specific goal here or not. In the present topic of bringing two systems together - KPIs and OKRs - this point of notassigning a specific target value to a KPIis extremely important: doing so would open up an unwanted second goal system.
THE DIFFERENTIATION OF KPIS AND OKRS
In contrast to the KPIs, OKRs are very concrete and are geared towards the impact the next quarter will have on the company’s strategy. OKRs are focused on the causes of success and failure and the directly associated opportunities for improvement. OKRs therefore tend to describe thecause(s), thereby the leading indicators; whereas KPIs tend to describe theeffect, thereby the lagging indicators. If you recall that the key results are the success drivers of an objective (and not the indicators as to whether an objective is successful!), then it makes sense to link the objectives to KPIs. For many, this point results in a kind of “aha moment” and the common tendency of wanting to add numbers to objectives disappears. As an additional bonus, the other tendency of putting the number you originally wanted to include in the objective in the key results instead, also disappears. This second incorrect tendency usually results in the KR being an indicator rather than a success driver.
To clarify the topic further, here is an alternatively formulated explanation. The key results are independent, measurable drivers to increase the probability that an objective becomes reality. The objective itself is not measurable, it is qualitative. If you are looking for an indicator of a successful objective, you can refer to KPIs. Again, itis not necessary to assign the objectives (nor the KPIs) with measurable target values since the designation of the right key results will positively influence them as much as possible. The result will therefore also be as good as possible.
THE INTERACTION OF KPIS WITH OKRS
Originally, KPIs were expressed as financial indicators; for example, sales or EBIT. From the shareholders’ perspective, these are certainly the most important indicators. However, they alone are not enough to steer a company since they only indicate the status of the company once the causes can express their effects in figures. By this time, it is usually too late to react to a problem or opportunity. It is therefore extremely helpful if leading indicators are included in a KPI set, which represent the long-term causes of future success.
The following success formula may help to understand this abstract construct. Classic business administration has this simple model:
Success = Turnover – Costs
In a kind of root-cause analysis: the factors can be broken down further. What’s the logic for doing this? Money is a purely fictitious construct. Money alone can neither be experienced nor influenced. Therefore, it is often difficult for employees to derive concrete actions from monetary goals. One always determines the value of money relative to known products or experiences. It is similar with costs, which are also understood by people as either lost products or experiences in order to grasp their magnitude. If one now agrees that it is difficult for humans to understand money as an objective and influenceable quantity, it would follow to reframe this kind of abstraction to dimensions that canbe influenced directly.
Imagine the following success formula of an e-commerce company:
Turnover (number of visitors to the website x product selection x attractiveness of the products x
purchasing power of the target group) -
Costs (communication expenses + production of products + logistics expenses)
The company would try to increase the values in the first parenthesis as much as possible, whereas it should be trying to reduce the values in the second parenthesis as much possible. On another level, the individual values such as the “communication expenses” could be further broken down into sub-components to enable the marketing unit even better control.
KPIs are characteristically valid long-term and thus remain relevant far beyond a quarter. This distinguishes them from the OKRs, which are renewed every quarter. An ideal interaction, therefore, would be that the OKRs influence the KPIs each quarter. This removes the tendency to want to address slightly improved “evergreens” every quarter: for example, "increasing sales, traffic or customer satisfaction" are notgood objectives. If you include these in the KPI level, you can always keep an eye on these critical long-term drivers while focusing on the effects of the concrete short term drivers in your OKRs. Since the KPIs are reviewed every week during the OKR meetings, there is no risk of having them fall from sight, even when you are not actively trying to influence them through the OKRs. These KPIs can be likened to the temperature guage on a dashboard of a car: both are values that should be looked at regularly. If there is urgent need for action, you can adjust this in the OKR control process and shift the required focus accordingly. In such cases, it is important to explicitly deprioritize something else.
AN OKR EXAMPLE DERIVED FROM KPI
If we consider the KPI "increasing customer satisfaction," we can replace it with the following concrete quarterly OKR:
Users track the actual supply chain of their products back to the origin of the raw materials
Tracking code requests sent to 25,000 users after purchase
Availability of the digital supplier profiles increased from 72% to 95%.
Error rate in assigning tracking rates to products reduced by 7%.
98% matching rate of the tracking codes submitted
In order to define a quarterly focus for the long-term aspiration of permanently increasing customer satisfaction, this example follows the hypothesis that customers will be more satisfied, when they are able to track the origin of their purchases. This requires the technical and content feasibility, as well as the interest of the customers. Both are tested and proven by the OKR if the goals can be achieved.
We would like to warn you of one thing. The KPIs have no target values and therefore do not serve as an additional goal system. Of course, the KPIs can be used to control and monitor what should be a "well-oiled machine" by keeping an eye on the most important values. If a system is tuned well and delivers reliable results, not all KPIs need to be anchored as objectives in the OKRs. It does not make sense to assume, however, that all values of the KPI set will automatically be good in a well-tuned system. That would pose the risk that the required efforts to achieve the KPIs will not be integrated into the OKR system: thus, either too much will be packed into the OKR set or (even worse) the OKR set will be an "additional burden" since the results within the framework of the KPIs were assumed to happen automatically. The solution to this dilemma is to anchor an essential driver in the OKR set to represent the effort required accordingly.
In sum, it can be said that there is no conflict between OKRs and KPIs. It is therefore also not a question of first understanding the difference between OKRs and KPIs to then decide which of the two systems to implement. Rather, it is important to understand the individual components of both systems and to use them in combination. This ensures that the OKRs do not fall into irrelevance through their formulation as generic evergreens and you will simultaneously remain mindful and informed about the indicators for long-term success.