Building Blocks for Lasting Success with OKRs and KPIs

A few months ago, I came across an intriguing problem statement about quantifying the ROI of technology investments. The core question was: How does the relationship between our investments and the actual value delivered by our services really look like? The problem statement was shouting "ROI" from all angles, and initially, our reaction was, "How hard could this be?" After all, we’re all familiar with the straightforward ROI formula:

ROI = (Gain from Investment − Cost of Investment) x 100 / Cost of Investment

All we needed to do was plug in the right data, and voilà! Problem solved. Simple, right? Turns out, not quite! At a high level, calculating ROI for an entire Line of Business seems straightforward, where the numbers are relatively easy to track. But when you dig deeper, it gets complicated. The real challenge lies in understanding how each part of the business, like revenue-generating areas, support functions, operations, regulatory tasks, and customer service, contributes to the bigger picture. Each component must be extremely effective and optimized to deliver the most value. Only then can all these moving parts add up to a meaningful ROI that truly reflects the impact of our efforts.

At this granular level,

1. Determining the monetary value of outcomes can be challenging.
2. Each component has its own functional and non-functional metrics to justify its value.
3. Sufficient data to translate these metrics into monetary terms may not always be available.

The term metrics is super-important here. Let's give it a scholarly definition.

Metrics and Strategic Frameworks

Metrics are quantifiable measures used to track and assess the status or performance of a specific process, objective, or entity. They help in understanding progress, identifying areas of improvement, and making informed decisions. Nothing new, right? Something that we all already know. However, a related concept always pops up when you search for metrics, and that is "strategic frameworks". So what are strategic frameworks?

Strategic metric frameworks are structured approaches or systems for organizing and managing metrics in a way that aligns with strategic objectives. They help companies not only track progress but also draw meaningful insights to guide their decisions.

But, which of these frameworks fits every situation perfectly and can be used consistently throughout a product's lifecycle? Spoiler alert: None.

While I'll dive into each framework in detail in my upcoming posts—covering their ideal use cases, industry examples, and key Do's and Don'ts—I can share one insight now: a balanced approach combining OKRs and KPIs in synergy is, in my view, the best bet for covering over 99% of a product's lifecycle scenarios.

In a nutshell, this hybrid framework looks something like this:

To drive innovation, ambitious goals, and significant changes within a timeline, OKRs are your go-to framework.

They help set clear, bold objectives and encourage teams to stretch beyond their comfort zones. This is where creativity thrives, and where big leaps in product development or strategic shifts happen.

On the other hand, KPIs are crucial for maintaining consistency, achieving operational excellence, and improving efficiency.

They keep teams grounded in performance, ensuring that day-to-day operations and key business processes are optimized and aligned with long-term goals.

It's crucial to understand that using "metric" and "KPI" interchangeably is a common but significant mistake. KPIs are the specific metrics that are critical to your performance, and not every metric qualifies as a KPI. Confusing the two can lead to a loss of focus, obscure what truly matters, and create misalignment within teams.

The combination of OKRs and KPIs in synergy enables organizations to balance strategic growth with operational stability. By capturing the right metrics and aligning them with these frameworks, you create a structured yet adaptive system that responds effectively to evolving business needs.

Tracing back to the ROI

There are numerous real-world examples of companies using metric values to calculate their impact on financial performance through a formula-based approach. In this method, they input specific metric values into a predefined equation to determine the financial outcome.

For example, let’s say a company tracks its website traffic as a key metric. They might use a formula that includes the traffic volume, conversion rate, and average order value to estimate the impact on revenue. If website traffic increases by 20%, and the conversion rate remains steady at 2% with an average order value of $100, they can calculate the additional revenue as follows:

In this example, by plugging-in metric values into the formula, the company can quantify the financial impact of their efforts, showing a $10,000 increase in revenue due to the boost in website traffic.

But two key insights drive the next steps forward:

1. Metrics, but only if you’re capturing the right ones that are critical to your product, will exhibit correlations among themselves.
2. Financial performance is also a metric.

This means that when you identify and track the right metrics—typically those elevated to KPIs—you can leverage data and machine learning techniques to establish direct correlations with financial outcomes, such as revenue in revenue-generating areas or operations or cost reductions in other streams.

However, the journey isn’t as straightforward. Establishing these correlations and applying machine learning effectively requires careful consideration of the complexities and nuances involved. The effectiveness of these techniques depends entirely on the quality of the data being fed into them, which is why “Measure What Matters” is more crucial than ever.

Conclusion

Quantifying ROI goes beyond simple formulas and depends on the scope of analysis. It requires understanding how individual business components perform. To achieve objectives, teams rely on metrics, and strategic frameworks continuously evolve to improve their effectiveness.

OKRs drive innovation by setting bold objectives and pushing teams to achieve ambitious goals. This is where creativity and major shifts happen. KPIs, on the other hand, maintain consistency, operational excellence, and efficiency by focusing on key performance metrics.

Together, OKRs and KPIs provide a balanced approach, enabling strategic growth while maintaining stability. By identifying the right metrics and elevating them to KPIs, you gain a deeper, data-driven understanding of their impact on financial performance.

Stay tuned for more insights on these frameworks!