The global economy is facing unprecedented challenges these days. The current volatility puts pressure on companies to adapt their operational efficiency to face the new reality. With this scenario in mind, it is absolutely critical for businesses to track performance. How can they do this? To answer this question, we must first understand what performance management is.
Corporate performance management is a set of methodologies used by companies to measure their progress toward predetermined goals. By focusing on the key factors that influence the success of business objectives, business leaders can improve their decision-making skills and better prepare their company for the future.
When assessing company performance, business leaders often look at performance indicators such as KPIs and OKRs. These two measurements provide insights into whether or not an organization is operating at an optimal level.
What are KPIs?
KPI is an acronym for Key Performance Indicator. KPIs are a set of health metrics that allow organizations to regularly gauge their overall performance, while taking into account past results and future expectations. They assist managers in understanding where a company stands and the efficiency of its overall operations.
By tracking progress of specific targets and comparing them to internal benchmarks, companies gain insight into any discrepancies that may be in their business model and can adapt strategies if needed. This information helps managers identify opportunities for future growth and development.
Some of the most commonly used KPIs are revenue growth, profit margin, revenue per client, client retention rate, and customer satisfaction.
What are OKRs?
The acronym OKR stands for Objective Key Result. OKRs are a systemic goal-setting framework intended to guide an individual employee or team to achieve strategic goals within a certain time frame.
This set of action-oriented objectives is used to clear expectations, bring focus, and aid in moving forward to get desirable outcomes. In most cases, OKRs represent areas for improvement (objectives) to aid in reaching KPI targets.
In other words, these mission-based quantifiable goals describe what a business wants to accomplish. They also allow business leaders to identify the company, team, and employee objectives that are going to be able to move the needle the most.
Business OKRs examples, for instance, could look like this:
Objective: Grow our business
- Increase sales growth by 30% in Europe YoY
- Reduce churn to less than 4% YoY through Customer Success initiatives
Understanding the difference between OKRs and KPIs
To remain competitive, businesses are increasingly looking for ways to swiftly boost operational efficiency. One simple strategy is to enhance cross-functional alignment by using a performance measurement system.
The adoption of KPIs and OKRs has become a popular decision among corporate executives in the last decades. However, despite being widely used practices across multiple industries, these approaches are frequently confused for one another, as the two of them refer to different types of performance management systems and should be used appropriately depending on the situation.
There is a big difference between measuring performance and managing it. While KPIs provide useful metrics to track progress, they don’t necessarily translate into tangible improvements.
KPIs are a great way to measure performance, as they are easy to understand, provide a high-level overview, and can be applied to any role or function within an organization. Yet, they also have limitations, such as the lack of context or guidance on how to enhance performance.
OKRs, on the other hand, align people, processes, and technology to drive better results. These allow managers to clearly define their team's roles and responsibilities, while also providing a structured way to monitor and evaluate performance. They serve as a road map for reaching the desired outcomes in alignment with the company's mission, and because they are linked to measurable actions, they allow employees to see exactly what needs to happen to reach their personal goals.
Although both are complementary and non-exclusive frameworks, prioritizing one over the other will solely be based on a business leader's needs and preferences at a given period of time. While measuring KPIs may provide senior executives with a quick snapshot of performance metrics, OKRs can serve as a step-by-step guide on how to change, fix, or improve specific areas of the business.
5 common mistakes to avoid
Lastly, the following are some specific pitfalls to keep in mind when using either OKRs or KPIs.
- Measuring for the sake of measuring. Don’t just measure OKRs or KPIs just for the sake of it. Be intentional with what you choose to track and ensure that they apply to your organizational goals.
- Using KPIs or OKRs without a proper plan for achieving them. It is important to set clear objectives, identify the right people responsible for achieving them, and ensure everyone knows what needs to happen to reach success.
- Using KPIs as a replacement for OKRs. KPIs are useful metrics to track performance but they shouldn't replace OKRs. The two approaches complement each other and should be used together.
- Defining excessive KPIs or OKRs. Setting at least 2 to 3 metrics or objectives, and no more than 5, is recommended for both frameworks to be effective. This will enable teams to prioritize performance impact by focusing on the quality rather than the number of their activities.
- Setting business-as-usual metrics. KPIs and OKRs should be based on ambitious objectives and aspirations, instead of easy-to-accomplish goals.
Automating the process of monitoring business performance
The world of business is changing. The pace at which it is changing is accelerating, and the speed with which companies need to adapt to these changes is also increasing. This means that businesses are under immense pressure to make decisions faster than ever before, but they must do so in a way that ensures their strategies evolve over time.
To achieve this, businesses need to adopt the use of new technologies that automate many of the tasks that were previously done manually. One such tool is FP&A software.
FP&A solutions free up valuable resources inside a company by automating the performance measurement and report generation processes. This enables employees to focus on higher-value activities that have a greater impact on business success. In addition to helping businesses manage their operations more efficiently, FP&A software also allows users to create dashboards and scorecards that can be shared across teams and departments for everyone to be aligned.
To find out how our product can help you streamline corporate performance management and drive change within your organization, request a demo today.