Level-Up Your Leadership Knowledge: Performance Metrics Masterclass
Terms such as KRA, KPI and OKR are thrown around pretty frequently in the business world. Many organisations use them as measures of success; basing bonus, promotion or grades of pay on the progress (or lack of) that staff make towards these goals. But what is the best set of performance metrics designed to unify the workforce and drive your organisation forward?
We need to understand exactly what these measurement approaches can achieve if we’re going to use them as more than just workforce yardsticks.
Key Result Area (KRA)
These are critical success factors: actions that are necessary to achieve a specific objective. Ideally, everyone within an organisation is assigned KRAs specific to their team, department or other workgroup, so they know exactly which actions they must take to realise strategic goals and ensure future success.
Teams that use KRAs have been shown to be proactive, rather than reactive, simply because they make a point of consciously identifying the areas where their efforts make a difference long-term.
By defining expectations and providing clarity, employees know exactly why they’re there and what they’re doing. Individuals understand why some KRAs take precedence over others and have the knowledge to effectively prioritise their workload.
In fact, the KRA-centric appraisal system of Simbawli Sugar Ltd., one of the biggest mills in Northern India, has had a significant influence on employee engagement (an issue I tackled a little closer to home in this post). Senior staff credit the KRA approach with focusing employees on outcomes, improving competencies and increasing accountability.
There are a couple of downsides to KRAs, namely finding metrics that are easy to measure. Setting individuals objectives also poses a problem, since it only captures around 80% of a department’s workload (the rest falls in areas of shared responsibility).
When would you use it?
This system works well for organisations with multi-skilled teams and high numbers of experienced staff. Everyone understands the vision and their role in achieving it, so using KRAs negates the need for micromanagement and daily check-ins.
Objectives and Key Results (OKR)
Objectives and key results are a favourite of the tech industry (see my recent performance management post). They were designed to challenge individuals and are comprised of one objective and multiple quantifiable key result measures. Progress indicators for these measures are scaled by either 0-1 or 0-100% and are regularly updated. A good OKR should be pretty hard to nail, so they’re considered complete when progress exceeds 75% or 0.75. If you hit 100%, your OKRs are far too easy.
Google loves this one; Rick Klau even credits it with helping to keep the company on track and moving forward. That’s because OKRs provide clarity, every person in the organisation knows what is expected of them and why, and everyone’s OKRs work together to drive the business forward.
The defining factor about OKRs is that they are transparent. Employees can see what colleagues are working on, their progress on current targets and how well they performed previously. This is also true at Google, where even Larry Page’s objectives and progress are available for all to see.
They’re also pretty adaptable. Google sets an annual flexible OKR supported by quarterly objectives that are set-in-stone. Of course, you can opt for biannual or monthly targets: it’s really about what works for your business.
The main disadvantage of OKRs lies with managers, specifically their goal-setting ability (if you’re not sure exactly how to set worthwhile, actionable goals, take a look at the Cognology guide to writing SMART objectives).
When it comes to OKRs, managers must have a realistic understanding of employees’ roles, skills, and resources. Otherwise they risk setting unachievable goals that demoralise their workforce.
In contrast, the ‘nice guys’ set a couple of easy and one difficult objective because they don’t like to see employees scoring 0.6 (remember, OKRs are meant to be challenging. Google sets targets of 0.6-0.7).
When would you use it?
OKRs are particularly well suited to start-ups and those operating in capricious markets. Quarterly or bimonthly objectives provide staff with a sense of purpose and direction but are flexible enough to adapt to a changeable long-term vision.
Key Performance Indicators (KPIs)
KPIs are probably the best known performance metric. Of course they vary between companies and industries, but KPIs are frequently used to analyse factors that are crucial to the success of an organisation. They exist at both operational and staff appraisal levels, with employee KPIs supporting operational KPIs.
Used to help manage both KRAs and OKRs, employee KPIs measure of primary responsibilities. Consisting of a timeframe, a target, and a benchmark, KPIs focus on results, opposed to activities. They are milestones designed to help individuals, and their managers, gauge whether their performance is on track.
Like all appraisal systems, KPIs allow organisations to measure progress towards a strategic goal. They require discussion on how they will be measured before they’re converted into a benchmark, so are more likely to be realistic and attainable than OKRs.
Unlike KRAs, they can be team-wide, with whole departments monitoring and addressing issues associated with the success rate of an indicator. They’re also great for turning prospects into clients since the metrics tend to go hand-in-hand with performance data and often provide actionable insight.
Pfizer, a pharmaceutical Goliath, relies heavily on KPIs at both an operational and corporate level. And it makes good use of them when it comes to boosting brand trust, publicising KPIs of public concern, such as carbon emissions.
No matter how you tackle it, measuring KPIs can be a time-consuming process. Pfizer might love them for the insight they offer when it comes to identifying strengths and weaknesses in its global empire, but those insights come at the cost of data collection and analysis, internal audits, facility self-assessments, and management system reviews.
Which leads us to the next point: KPIs can be expensive. They’re also pretty limited since they are restricted to variables that can be measured (employee engagement, for example, is difficult to quantify). Plus they’re inflexible – changing a KPI can potentially mean disregarding years of comparative data.
When would you use it?
KPIs are an excellent way to measure performance and profitability metrics. They work particularly well in organisations that have multiple uses for performance data and can justify the time and expense of monitoring it.
These appraisal systems each ensure employees are working towards a common goal; the best even include individuals in the attainment of that goal. Each has weaknesses, but they are not insurmountable – it’s all about what works best for your organization. Choosing the correct performance management system requires a keen vision, long term goals and an understanding of the resources and skills available to your staff.