Content:
How often do you come across a situation where you don’t know what to ask your subordinates? Or when they want something unclear from you?
In our work, we often encounter problems setting criteria for success both in projects and in the work of people: either people do not understand how to set them, or they blindly trust them, or they begin to replace and be progressive, calling KPIs OKRs...
By the way, the right goals and metrics are one of the important elements of management.
In our article about effective meetings , we already said that it is extremely important that at every, especially regular, meeting, employees know what they should say, what to report, what numbers to show.
In addition, without the right goals, it is impossible to build an overall effective operation of the company.
As a result, this problem led us to the fact that we decided to make a review article and analyze for you what KPIs are, what OKRs are, what is their difference, can they coexist, or is one of them modern and progressive, and the second a relic? of the past.
And as always, we have prepared 2 versions for you: a short and simple video, and a more complete analysis in the form of text
So, what is KPI?
KPI, Key Performance Indicator is a measurable value that demonstrates how effectively a company achieves key business goals within its operational activities.
KPIs are used for:
honest and objective assessment of work and its results. Based on the implementation of the KPI plan, bonuses and other rewards are issued;
preparing a sales or production plan;
stimulating employees, motivating them in order to achieve planned results.
Key approaches to defining KPIs
By cost
An estimate of how many resources were expended to achieve goals. In this case, permissible deviations are prescribed;
By efficiency
Shows the relationship between the result obtained and the resources expended (time, money) to obtain it;
By results/performance
Evaluation of performance and results obtained in the context of employees, departments, divisions, and the entire company. Simply put - execution of the plan
Functioning
Compliance of the actual process with the required algorithm. For example, the timeliness of salary payments or the average time of payment for work completion certificates.
KPI Examples
revenue;
revenue from sales;
production cost;
percentage of defective products;
the amount of current assets;
inventory cost$
raw material consumption;
worker productivity;
volume of work in progress and inventories;
repair of equipment;
other production costs;
storage of finished products.
Example of KPI calculation in IDEF0 notation
A detailed calculation algorithm is available at the link
Pros of the system
The emergence of a system of “objective” evaluation of employee performance;
There is an opportunity to work on mistakes. Failure to meet KPIs indicates that something is not working out for the employee or the entire department. This allows you to adjust operational tasks, improve business processes, and understand whether the employee is suitable for his role;
KPI speeds up the identification of problems and allows them to be eliminated with minimal consequences;
Possibility of flexible analytics between departments: by region, specific points, departments and performers;
Forecasting the implementation of key tasks: sales volumes, lead generation, production, etc.:
Disciplines, sets standards and requirements of corporate culture.
Minuses
It takes time and effort to implement the system and change the culture
High labor costs for analysis and construction of a reporting system
Adjusting the principles of work based on KPIs also takes away the energy and attention of managers.
High risks of error. It is almost never possible to build a system the first time, which means a deterioration in the microclimate, an outflow of personnel, and discrediting the system. The best strategy is step-by-step implementation, and this requires effort.
High staff resistance. If the reasons and advantages are not conveyed correctly, employees may think that in this way the manager wants to reduce salaries. In addition, not everyone will be happy about changes when they are used to organizing work the way it was before. It's important to work with resistance
Manipulation of indicators - employees can deceive the system, wishful thinking and outright fraud. As a result, there is nothing behind the KPI numbers, and the company is throwing money away;
There is always a risk of setting the wrong KPIs. This can happen because managers set expectations for goals that are too high. This does not stimulate, but demotivates employees. Or because they have set a goal, the achievement of which they cannot influence in any way. As a result, employees may become fixated on KPIs and not do what they were hired to do.
The difficulty of creating a balanced and objective system of metrics. Or, to put it simply, there is always a scenario where all the metrics are excellent, but globally everything goes down the drain. That is, the implementation of individual KPIs does not always contribute to achieving the company’s goals
Often an excessive number of metrics are created. The optimal amount is 4-5. If there are too many of them, it leads to defocus.
Also, as we see, KPIs are closely related to process management . That is, in order to correctly determine KPIs, it is necessary to understand what processes the department is involved in and how the process as a whole is structured.
In addition, if we engage in lean production , then we need to review KPIs again. And we return again to a systematic approach.
Useful links:
OKR (Objectives and Key Results ) is a method born for project management. Allows you to synchronize team and individual goals. The OKR method was developed at Intel Corporation, after which it became widespread in a number of large technology companies, including Google and LinkedIn.
To explain the essence of OKR briefly, it is a list of company goals that it wants to achieve. These goals should be high, that is, contribute to the development of the company, and not to maintain current performance. There should be 3-5 goals, KPIs are set for each goal, but also 3-5 for each. At the same time, OKRs cannot be tied to salary; fulfillment of OKRs by 70% is considered an achievement.
Approximate algorithm:
1. Identify growth zones
Figure out what you need to improve first and set OKR goals accordingly.
For example, if only 75% of managers met their sales target last quarter, you can set a goal to increase this number by 10% by the end of the next quarter.
2. Align OKRs with overall business goals
Every OKR goal you set should be aligned with the company's core goals.
3. Set OKRs that are quantifiable.
OKRs should be quantifiable—there is no room for vague goals like “increase revenue” or “sell more products.” Assign each OKR goal a number or percentage, starting with the goal and ending with the key results.
4. Collect data from the entire team
When setting goals and key results, it is important to obtain input from the entire team, not just executives
5. Make sure every employee knows exactly what to do
OKR goals are very effective because they are designed specifically for teams. However, every OKR goal should have a clear directive for each employee to do on a weekly or monthly basis to help their team achieve key results.
6.Remove obstacles and provide support
If goals are set too ambitious, employees can easily become disheartened, especially if they encounter obstacles or do not receive enough support.
7. Track your progress
We recommend tracking your team's progress toward their goal on a weekly basis.
8. Summarize the results, publish them so that people know, analyze what can be improved.
The detailed algorithm is available at the link
Advantages:
All teams understand how they contribute to the company
Because all teams' goals flow from the company's goals, no one feels left out, which makes them work harder.
Focus on the most valuable business tasks
Performers often cannot understand the priority of a task, since they are not privy to the organization’s global plans. Because of this, they simply do tasks one at a time. When the company's goals are known, each team is able to prioritize actions.
Coordination between teams
It is important not only to align the team's goals with the overall goals of the company, but also to be in sync with other teams. When everyone knows each other's goals, common actions can be thought of.
Flexibility
OKRs can be set for short periods. Thanks to this, the company can always adapt to new realities.
Flaws:
Implementing OKRs can take a long time
First, you will need to discuss and set the company's goals, then the teams will have to set the goals. Doing this kind of planning for the first time can be difficult. You should also take time to become familiar with the system, as setting goals can be challenging for teams.
Possible bias
A clear vision from management is needed - what exactly they want, critical thinking skills are needed to highlight key results
Not everyone can relate to the idea of ambitious goals.
Not all people like to take risks. Sometimes you want to set a goal that you can definitely achieve. Getting employees to set ambitious goals can be difficult.
Missing goals can be very frustrating for a team.
It is not always possible to achieve ambitious goals, that’s why they are ambitious. When a team doesn't achieve its goals, it can make them feel like failures. In order for the team not to burn out and accept it, an explanation is needed that 60-80% completion is normal. It is important to then analyze what got in the way.
For which companies is the OKR system not suitable or will it be difficult to implement?
1. Previously, the company worked according to the KPI system
The problem here is rather psychological and cultural. With KPIs, indicators are set that need to be achieved, while with OKRs, goals should motivate achievements. If employees have been working according to KPIs for a long time, it will be difficult for them to switch to new thinking. Therefore, it may not be possible to apply OKR technology the first or even the second time.
2. No cross-functional teams
This usually applies to classic companies with strict divisions in functionality, direction, and low communication between them.
For example, there is a workshop that makes certain parts, there is an assembly workshop, etc. Each of the departments cannot release a finished product, therefore, cannot set the team’s goal. And if communication between them is carried out through service desks, then you will never build such a system.
3. No business experience or understanding of the entire system
OCD can lead to internal chaos that increases risks. In addition, there will always be those who will travel thanks to others.
OKRs and KPIs are methods for setting goals. The main difference between OKR and KPI is the meaning that goes into setting goals. KPI goals must be set in such a way as to ensure that they are achieved. They should reflect the results of an already established process. If the result is not 100% achieved, it means that the process was somehow disrupted. OKR goals should be above average. They must be motivated to change something in the process of work in order to do more and better. It cannot be said that one system is better than the other. They are different and suitable for different stages of business development. Both systems can be combined or used in turn. Sometimes stability is more important for the entire business or an individual team than disruption
OKRs are never part of remuneration and financial motivation for an employee is never directly tied to OKRs - this is the fundamental difference from KPIs. In the article “Why does your company need goals?” we discussed a possible example of indirect incentives. Let me remind you that the OKR framework can be linked to performance review, during which you can evaluate the contribution of each performing employee to achieving OKR and link financial motivation. For example, at the end of the quarter, reward with an additional bonus or a separate bonus;
KPI is about business processes that already exist and which you should regularly monitor without interruption from the activities of your company. OKRs are about change and innovation, which is why they are ambitious;
OKRs can be organized either top-down or bottom-up. For example, the practice of international companies shows us that 40% of OKRs are organized by management “top-down”, then 60% are formed by employees “bottom-up”. This principle does not apply to KPIs - the management team develops and organizes the necessary metrics only on a top-down basis;
Since OKRs are about ambitious goals with a focus on breakthrough changes, there can be from 3 to 5 maximum of them for the entire company in one target cycle. As for KPIs, there can be many of them, just like processes in a company. Namely, the optimal number of KPIs corresponds to the number of existing processes in your company, with the help of which you must monitor the effectiveness of these processes;
KPI is always about 100% fulfillment, and sometimes overfulfillment. Achieving 70% of OKRs is already a breakthrough, because ambitions are always difficult to achieve and are associated with a challenge. If OKRs are fulfilled by more than 70%, this indicates that the goals set were not ambitious enough. In case of completion less than 70% most often means that the capabilities were overestimated;
KPIs are not open at all levels of the company (for example, support staff usually do not have access to the KPIs of marketing department employees and vice versa + employees of any department never have access to the KPIs of their immediate supervisor). It is worth considering the fact that each company adapts the issue of access to its individual characteristics. At the same time, it is acceptable that the owner and senior management of the company can have access to all KPIs, if necessary. Although it cannot be ruled out that there may be restrictions on access between TOPs to KPIs outside their area of responsibility. OKRs, in turn, imply openness, so they are always publicly available within the company. This principle of openness allows you to see not only your tasks, but also the tasks of other employees, managers, and the company itself as a whole. This creates an understanding of how, at the individual level, personal goals relate to department and company goals, and helps to understand who, how and with what resources will achieve their goals. In addition, this allows you to track the dynamics of implementation in the process of achieving OKRs.
Is it possible to use both methodologies? Yes, but it's quite a difficult task. You need to highlight the operating system that you will evaluate through KPI, and the goals for achieving which you will pay bonuses at the end of the year/semester. In addition, you will have to decide whether you will pay bonuses to those who can only work on KPIs and do not participate in OKRs? Are you demotivating them?
In general, here you need to take into account all possible conflicts of interest and the psychology of motivation .
How can this be implemented in practice?
For example, divide the motivational part, salary bonuses, into 2 parts:
half of the bonus, which is paid monthly (optimally) or quarterly, is based on the fulfillment of KPIs, that is, it is formed from operating activities. For example, all tasks are completed in a timely manner, there are no complaints from partners or regulatory authorities, information on the Kanban board is filled out in a high-quality manner
the second half of the bonus is paid quarterly or semi-annually for achieving key indicators and goals, personal contribution, etc. You can, of course, tie this to the annual cycle and pay the 13th salary, but, in our opinion, this is too long a cycle, and people manage to lose connection and do not fully understand why they receive a bonus. As a result, they are happy, but the cause-and-effect relationship necessary according to Vroom’s theory does not form ; doubts about the fairness of the distribution of bonuses may also form, and these are already conditions of the theory of justice .
Let's look at it with a practical example
Engineer in the region. His stable salary, taking into account all bonuses, is 49,700 rubles. As a rule, this is divided into salary + bonus based on the results of meeting all KPIs.
Total: 35,500 rubles salary + 40% bonus = 49,700 rubles.
If an engineer does not fulfill his tasks and KPIs are violated: complaints are received from clients or partners, the plan is not fulfilled, and so on, then this bonus is withheld. BUT! Each such deviation must be analyzed, why does this happen? For example, using the 5 Whys tool from Lean Manufacturing. It is necessary to understand the reasons, is it a person who is not working hard or are there deeper problems?
And there is a second part, usually an annual bonus, about 50,000 - 60,000 rubles.
But it is better to divide it into 4 quarters or 2 half-years. Total 15,000 per quarter or 30,000 per half year.
Link them to key goals and pay as a bonus for achieving key goals and metrics. However, as written above, this bonus part should be reviewed regularly so that a person wants to set more and more ambitious goals for himself.
Ideally, of course, it is necessary to share a percentage of the over-planned profit among the entire team, which gives additional motivation and allows us to unite the team a little, this gives them an understanding that we have a common goal and we depend on each other.
But friends, this is just one very superficial example; to effectively configure the mechanism, you must always dive into the specifics of the industry, company, team.
Bonus: balanced scorecard
We have looked at what KPIs and OKRs are. But some of you may still have a question: “So what KPIs or OKRs should we set for the entire organization?”
The balanced scorecard (BSC) system will help here.
Its essence is:
emphasis on the strategic goal of the organization;
selecting a small number of metrics;
combination of financial and non-financial indicators.
The result is 4 sets of indicators that characterize our strategic vision and goals of the organization:
Finance - what are our financial goals?
clients - in which customer service indicators do we need to excel in order to achieve the desired financial results?;
internal business processes - which internal processes must we excel at to satisfy our customers?
learning and growth - what we must do, what competencies to obtain to develop our internal resources in order to succeed in our processes
And in our work we convey a simple idea: “The client pays for a quality product, service and brand.” To get this you need:
a product that solves customer problems and is convenient to use;
streamlined processes;
a competent and motivated team in which everyone is engaged in their own area.
And the BSC goes well with these tasks: it allows you to set metrics that will guide you towards achieving these goals.
Below are examples of working with BSC
Well, you can achieve your goals using our systematic approach
Useful links:
Objectives & Key Results (OKR). How to use a popular planning technique
OKR vs KPI: how do these management approaches differ and why do business analysts need them
Part 3. OKRs and KPIs. Fundamental differences and application features
OKR vs KPI: how do these management approaches differ and why do business analysts need them
What is a balanced scorecard and how to draw it up correctly