First off…what’s wrong with KPIs?
When you mention the term “KPIs” (Key Performance Indicators) in most companies, you get a mix of reactions. Managers feel a sense of energy because the certainty that having hard measures in place helps them to reduce the debate about performance. Staff feel a sense of dread and anxiety, eye-balls rolling into the backs of heads in sequence like falling dominoes.
Why does this seemingly ever-present dynamic continue to exist in so many companies? Well, the thing is that KPI has become a swear word in many people’s worlds. It’s not that there is anything inherently wrong with KPIs. It’s like the word Kit-Kat – this is generally a positive thing, right? But if I poked you in the eye with one over and over again, eventually you will start to want to break my fingers.
The problem with KPIs is that they are fraught with danger.
Below are the many traps managers fall into when developing and implementing KPIs:
- They measure what is easy to measure, resulting in trivial matters being measured whilst more important areas are not tracked
- They don’t involve their team in developing them, so staff feel that they KPIs are a punitive and controlling mechanism
- They lose interest in them, so their lack of follow up proves them to be mostly useless
- They are not aligned to the strategic and operational priorities, therefore not supporting the business objectives
- They are not measurable, therefore resulting in a vague representation of performance
- They have too many KPIs, therefore making the system too difficult to track and manage
- They believe that the KPIs will do their job for them, so their discussions with staff are at best a waste of time, and at worst are highly demotivating
The end result is that a lot of KPI programs are abandoned, because they are too hard. An alternative concept that is gaining more exposure lately is to use OKRs instead of KPIs. OKRs stands for Objectives and Key Results. Now let me tell you, changing the acronym doesn’t mean people will make the same mistakes as in the past. However, this model has a few differences to KPIs that might just give it a fighting chance. Also, sometimes bringing in something new that doesn’t have the same baggage from the past may help both staff and managers approach performance measurement with a positive mindset.
What’s the difference between KPIs and OKRs?
What are KPIs?
KPI are measures that are tracked on an ongoing basis. KPIs can be measured at a company level, divisional level, team level or for an individual employee. In theory, there should only be a small number of KPIs:
Examples of KPIs are:
- Cost per acquisition – how much it costs in search engine marketing to achieve one acquisition (whether a lead or sale depending on the goal)
- Delivery in Full and on Time (DIFOT) – manufacturing measure of producing goods within agreed timeframes and the order is complete
- Net Promoter Score % – a customer advocacy measure that shows the comparison of promoters versus detractors
- Employee engagement score % – an employee score of what proportion of staff in a business are considered “engaged”
- Lost Time Injuries – the proportion of time lost due to injuries to employees out of the total time available
- Average call handling time – the average amount of time a person speaks on the phone to a customer for.
- Cost per ticket – the amount of cost required to close a ticket in IT helpdesk work
You might be looking at this list and think that they could be very useful in certain contexts. If you are thinking this, then you would be right. They can also be very damaging in the wrong context. I see many of these used in the wrong way or in the wrong situation and be more damaging than not having them at all. Conversely, I have also seen them work very well. So my warning is to not simply take something from the guy over the fence and think it is going to work for you in the same way.
What are OKRs?
OKR stands for Objectives and Key Results.
OKRs have actually been around since the 1950s, but have become significantly more popular since it was revealed that Google used OKRs during a rapid phase of growth. How much of a part OKRs played in the ultimate success of Google is up for debate, however, what is reasonably clear is that their adoption was assisted by this famous association.
Let’s look at the Objective part first. This is a high-level outcome that the business is wanting to achieve. It relates closely to the organisation or divisions overall success. Below are some example Objectives:
- Increase profitability of sales
- Build leadership capability
- Deliver on the customer promise
- Grow a national presence
None of the above statements are measurable as they are not SMART objectives (Specific, Measurable, Actionable, Realistic and Time-based). This is deliberately the case, because they are designed to be simple and therefore easily relatable back to the company’s overall goals.
Now let’s look at Key Results. They can be a combination of KPIs and/or SMART goals and this is one of the most attractive parts of OKRs. The practical reality is that you need both KPIs – that is ongoing measures, as well as goals, which are finished once they are delivered and not ongoing. Delivering on an Objective may require both Goals and KPIs, but easily summarised as Key Results.
Let’s take the first example Objective of “Increase profitability of sales”.
- Achieve an average weighted margin of 45% (KPI)
- Deliver $2m of sales revenue per month in Category A products (KPI)
- Train and assess 90% of field sales staff in Category A core products by 30 June 2021 (Goal)
- Align the commission scheme to profitability and implement to be effective from 1 July 2021 (Goal)
You can see that there is a combination of KPIs and Goals in the Key Results that relate back to the overall Objective.
In this example, Category A products are strategically important to delivering increased profitability. There may be a point of difference that allows a higher profit margin. However, the sales team will need to be equipped to sell the products in the right way and their commission scheme needs to be aligned to support this overall objective if it is not already. These Key Results would most likely be for a Sales Director or Manager. The Key Results for the sales team can then be cascaded down as well to include their own margins, sales of Category A products and being assessed as competent in the new product.
Where to from here?
OKRs provides a more rounded and relevant framework in which to measure performance, align priorities and to engage the team. However, it also comes with the same risks and traps that KPIs have always had. Perhaps given they are less known and therefore have less baggage that they have a better chance of success. The manner in which it is implemented is critical for success. So if you are going to embark on the OKR journey, please make sure not to repeat the same mistakes from the past, or else we may find ourselves jumping on the next model.
If you have already done this, stay tuned for our 5H2G model of employee performance.
We always welcome questions, so send any our way through here.