ROI from OKRs – Measure!

Posted by Bo Pedersen
on October 22, 2018

In this blog series, we will be looking at the potential return on investment from implementing Objectives and Key Results (OKRs).

Across 5 articles we will look a how the different characteristics of OKRs drive return on investment (ROI).

In this second article, we will review how measurement drives performance.

Take a look at the first article on ROI from Stretch Goals.

Summary recommendation

A strong foundation to measure and improve what matters:

  1. focus on leading indicators
  2. focus on what you can control
  3. link leading indicator measurements to objectives

Background

While more and more people are aware of Objectives and Key Results (OKRs), the idea of measuring employee performance, and tracking a wide range of operational metrics, or Key Performance Indicators (KPIs) goes back to the dawn of industrial era.

A search for ‘Objectives and Key Results’ in Google yields 157,000 results, whereas as a search for ‘Key Performance Indicators’ yields 10,500,000 results.

So while OKRs are crossing into the mainstream, KPIs became mainstream decades ago.

OK, so what’s the problem?

Measuring lagging versus leading indicators of performance

Most companies track a combination of income and expense metrics to gauge financial performance. A set of typical metrics might be:

  • Revenue
  • Cost of Goods Sold (COGS)
  • Gross Profit
  • Operating Expenses
  • Earnings before Interest, Taxes, Depreciation, and Amortization (EBITDA)

As a company with a mandate from investors to create shareholder wealth, these are excellent financial performance metrics.

However, as a gauge of realtime performance, Revenue, Costs, and similar financial metrics are often very misleading.

The core issue here is that financial metrics are lagging indicators which means that  metrics such as revenue, COGS, and EBITDA lag the underlying performance of the business.

So while shareholders are of course interested in having regular and accurate updates regarding the lagging financial performance indicators, savvy investors spend much more time looking for clues in company updates regarding the leading indicators of performance.

Shift Focus to Leading Indicators

So what are the leading indicators of financial performance?

Let’s work back revenue.

Before we can recognise revenue we ship a product or deliver a service.

Before we can ship product or deliver service we close an opportunity.

Before we close an opportunity we agree commercial terms.

Before we agree commercial terms we define the solution.

Before we define the solution we qualify the need.

Before the call we generate a lead.

Before we generate a lead we generate a visit.

Before the visit we generate a click.

Before the click we generate an ad view.

Before the ad view we launch a campaign.

And so on….

Each lagging indicator has multiple leading indicators, contributing in concert to the eventual results.

Once we have established a clear link between leading and lagging indicators, we can proceed to defining how managers, teams, and team members can contribute towards the financial performance of the organisation by improving the performance of the leading indicators that they can influence directly.

Measure what you control

For each of the new leading indicators, and relevant owners in the organisation, we can now easily identify several relevant metrics to measure progress:

  • Implementation Services needs to accelerate configuration process, as measured by:
    • Time to Acceptance
    • Time to Activation
  • Sales reps need to negotiate effectively, as measured by:
    • Win Rate
    • Average Discount
    • Average Deal Value
  • Sales Operations should streamline the sales process, as measured by:
    • Time to close
    • Win Rate
    • Funnel Conversion Rates
    • Content Usage
    • Approvals
  • Sales Development Reps should create qualified interest, as measured by:
    • Activity Levels
    • Responsiveness
    • Number of contact responses
    • Lead to Opportunity Conversion Rate
  • Product Marketing should create compelling propositions, as measured by:
    • Landing Page Form Submission
    • Number of touches / contact
    • Number of Page Views / contact
  • Marketing Communications should reach the right audiences, as measured by:
    • Audience Segments
    • Segment Conversion Rates
    • Clicks
    • Clicks / Views

Now that we have identified the right metrics to measure our progress and ultimate success at different levels and across different functions of the organisation, we can set the right objectives.

Link metrics to objectives

With the availability of relevant metrics for each function and across all levels of the organisation, we can now define objectives to improve the performance.

Using the examples above, we see how the availability of relevant leading indicators of performance makes measurement easy:

An Account Executive Objective:

  • Objective: Improve Quality of Deals Closed
    • Measurements (Key Results):
      • Increase Average Deal Value by $15,000
      • Maintain Win Rate at 45%
      • Reduce Average Discount to 18%

A Marketing Objective:

  • Objective: Generate More High Quality Traffic
    • Measurements (Key Results):
      • Increase Ad Views for Target Audience by 50,000
      • Generate 10,000 additional clicks from Target Audience

A Sales Operations Objective:

  • Objective: Drive Sales Velocity
    • Measurements (Key Results):
      • Reduce Time to Close by 10 days
      • Reduce Quote Approval Time by 3 days

Summary recommendation

A strong foundation to measure and improve what matters:

  1. focus on the leading indicators
  2. focus on what you can control
  3. link leading indicator measurements to objectives