Why OKRs are Killing KPIs
Every business needs to set targets. Targets provide a structure to assess the business’ performance constantly. Targets help you prepare for the future and identify performance gaps. Setting targets won’t, however, mean anything if you can’t quantify them. To measure performance, businesses around the world use Key Performance Indicators. Many businesses also use Objectives and Key Results, a popular framework for tracking objectives.
KPIs: An Introduction
A key performance indicator or performance indicator is a type of performance measurement. Key performance indicators are designed to measure the success of a business or a particular activity. KPIs are used by different business functions to evaluate performance. A team’s performance is often determined by its ability to achieve predetermined levels of operational goal periodically. Some KPIs include 10/10 customer satisfaction and zero defects. KPIs helps define a set of values against which the performance can be measured.
Categories of measurements for KPIs
Quantitative: These are facts that are assigned specific values, preferably numeric that can be measured against a set standard. Because these are facts, there are no chances of distortion due to interpretation, prejudices, or personal feelings.
Qualitative: These values are based on personal feelings, interpretations (that can be subjective), tastes, and opinions. Though geared towards human emotions, qualitative KPIs are assigned numeric/textual values that represent the interpretation of these elements.
Indicators are designed only to measure past performance. A KPI that attempts to measure future performance (can be prescriptive, diagnostic, or predictive) becomes a prognosticator.
Examples of KPIs
Marketing and sales
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New customer acquisition
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Turnover/revenue
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Rate of collection of bad debts
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Outstanding balances
Accounts
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Percentage of purchase orders raised before the due date
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The number of double payments
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Percentage of unpaid (and overdue) invoices
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Finance report error rate
Supply chain management
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Customized documentation (related to cost savings)
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Real-time scorecard measures
Some important processes that SCM KPIs detail are inventory, warehousing, and transportation.
Define KPIs in such a way that their fulfillment is not impacted due to factors that are beyond your control. Use a simple and easy-to-understand framework. When defining your KPIs, remember to follow the SMART criteria wherein:
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S stands for specific. The KPI should serve a specific purpose.
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M stands for measurable. Select a KPI that can be easily measured.
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A stands for achievable.
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R stands for relevant. The KPI should be relevant to the success of the business.
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The KPI should be time-phased. Meaning, the use of the KPI should be scheduled based on an appropriate time scale.
OKRs: An overview
Objectives and key results is a framework used to define and track objectives and their results. Andrew Stephen Grove, one of the most respected figures in the semiconductor industry, is credited for developing OKRs. His approach on OKR earned him the title- the Father of OKRs. Grove first discussed the idea during his stint with Intel.
Known for their simplicity, OKRs comprise a clearly defined objective (the main goal) and one or multiple key results that focus on tracking the progress made towards the achievement of the goal. Key results used should be measurable on a 0-100 percent scale. Alternatively, teams can use numerical units (could be the number of items or dollar amount) for performance tracking.
OKRs focus on creating a roadmap for achieving objectives through concrete and measurable actions. Businesses using OKRs should come up with plans and determine activities that they need to perform to achieve the objective.
Many business gurus swear by the benefits of sharing OKRs with different teams. They believe that sharing OKRs across the organization can help create team synergy. Providing teams with visibility of goals can help the management align and focus effort. OKRs can be set at different levels, including team level, business level, and personal level.
In 1975, John Doerr, at the time a sales executive employed with Intel, took OKRs to Kleiner Perkins, a venture capital firm that introduced the concept to the management of Google, a startup at that time. After Google, several tech heavyweights, including LinkedIn, Uber, and Twitter, started using OKRs.
Why OKRs are replacing KPIs: The benefits of OKRs vs. the cons of KPIs
Some major issues with KPIs include:
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KPIs should be achievable; however, it’s not easy to determine what’s achievable, especially when a business is innovating.
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If your KPIs are too high, your team may miss the target.
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If your KPIs are too low, your team will achieve the target; however, their innovative potential may take a hit.
Some benefits of OKRs are:
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Help align employees with business goals.
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Help increase transparency across the organization.
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Help improve decision-making.
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Help understand how goal progress aligns with the business’ objective.
