OKR

What does OKR mean?

OKR (abbreviation for Objectives and Key Results) is a method of goal setting and management that links an objective formulated in words with a few measurable key results. The key results apply for a fixed period, usually one quarter; as a rule of thumb, two to five belong to one objective. The objective describes what is to be achieved; the key results define how it can be clearly read off at the end of the period whether it was achieved.

The method, often called the OKR framework, is an internal management tool, neither regulated by law nor part of financing agreements. It is used in growing companies with several independent teams. Investors encounter it in advisory board meetings, in the investor update and in due diligence, when the question is how management turns the funds of a financing round into results.

Structure of OKRs: objective, key results, initiatives

• Objective: a short, understandable sentence that describes a desired change and does without numbers, for example “New customers achieve reliable benefit in the first weeks”.
• Key results: two to five measurable states at the end of the period, each with a starting value and a target value. One example: “The share of new customers who use the three core functions within 14 days rises from 45% to 70%”.
• Initiatives: the projects with which the team intends to achieve the key results. They are adjusted continuously and are not scored.

The most common construction error is confusing result and activity. “Publish new website” is a task that is either done or not at the end of the quarter, regardless of whether it achieved anything. “Qualified enquiries via the website rise from 40 to 90 a month” describes a result and leaves the way there open.

The OKR cycle: rhythm and scoring

An OKR cycle usually combines objectives with an annual perspective and key results per quarter, whose status the teams review in short weekly or fortnightly meetings. At the end of the quarter, each key result is scored, usually on a scale from 0 to 1 as the share of the distance covered between the starting value and the target value.

In practice, two types are distinguished. Committed OKRs describe results that must be fully achieved, for example the on-schedule changeover of a billing system. Aspirational OKRs are deliberately set so high that, by a widespread rule of thumb, an achievement level of 0.6 to 0.7, that is, 60 to 70% of the distance, counts as a good result. Which type applies is determined when the OKRs are set, so that the scoring is not reinterpreted afterwards.

Remuneration and employment law

It is a widespread recommendation not to link OKRs to variable remuneration, because teams otherwise tend towards cautious objectives. If goal achievement is to affect pay, a separate target agreement is usually concluded.

The separation also has legal grounds. A target agreement to which variable remuneration is tied creates claims under the employment contract. If the employer sets targets unilaterally, they must accord with reasonable discretion (billiges Ermessen), that is, be appropriate; the labour courts can review this. If there is a works council (Betriebsrat), co-determination rights under the German Works Constitution Act (Betriebsverfassungsgesetz, BetrVG) may come into play. On the one hand, this concerns software that is objectively suitable for monitoring employees' behaviour or performance (Section 87(1) no. 6 BetrVG). On the other hand, it concerns general principles of appraisal (Section 94 BetrVG) and questions of company pay structure. How far these rights extend depends on how the system is designed.

OKRs in a financing round and the shareholding relationship

In a financing round, management translates the planned use of funds into milestones up to the next round. OKRs break these milestones down into quarters and make progress reportable after closing. For investors, what matters above all is consistency of planning over several cycles. In investment controlling, the investor's ongoing monitoring of the investment, and in the due diligence of a later round, earlier quarterly objectives are compared with the actual results. This corresponds to the budget vs actual comparison that controlling carries out for revenue and costs.

Practical example: OKRs for a software company

A provider of practice management software with around 60 employees finds that new customers cancel strikingly often in their first contract year. For the coming quarter, management sets an aspirational company objective with three key results:

• Objective: New customers achieve reliable benefit in the first weeks.
• Key result 1: The share of new customers who use the three core functions within 14 days rises from 45% to 70%.
• Key result 2: The average onboarding time falls from 21 to 10 days.
• Key result 3: The number of customer service enquiries per new customer in the first 30 days falls from 8 to 4.

The teams themselves decide on initiatives such as a standardised data transfer and in-product guides. At the end of the quarter, the scoring is as follows:

• Key result 1, achieved 60%: (60 minus 45) ÷ (70 minus 45) = 15 ÷ 25 = 0.60
• Key result 2, achieved 12 days: (21 minus 12) ÷ (21 minus 10) = 9 ÷ 11 = 0.82
• Key result 3, achieved 5 enquiries: (8 minus 5) ÷ (8 minus 4) = 3 ÷ 4 = 0.75
• Scoring of the objective: (0.60 + 0.82 + 0.75) ÷ 3 = 0.72

For an aspirational objective, 0.72 is a good result. The cancellation rate in the first contract year is deliberately not a key result: the rate reacts only with a delay and continues to be monitored as a KPI. If it does not improve in the following quarters, the assumption that onboarding is the cause of the cancellations was wrong.

Distinctions: OKR, North Star Metric, target agreement and budgeting

• North Star Metric: the one guiding metric for customer value, which stays the same over years. OKRs address its drivers for one quarter at a time, for example the depth of use by new customers.
• Target agreement (management by objectives): sets individual targets, usually annually, and links them to remuneration. OKRs are generally visible across the company, run on a shorter cycle and are separate from remuneration.
• Budgeting: determines which funds are available for which purpose. OKRs determine which results are to be achieved with those funds.

Common mistakes

• Tasks as key results. Lists of activities measure effort, not impact, and can be worked through without anything changing.
• Too many objectives. Many objectives of equal rank per level remove the prioritisation that the method is meant to provide. A widespread rule of thumb sets the upper limit at three to five.
• Linkage to bonuses. OKRs that affect pay lead to cautiously set objectives and to discussions about the scoring instead of the substance.
• No alignment with planning. OKRs that are not aligned with the budget, headcount plan and financial model describe objectives for which no funds are planned.

Frequently asked questions

At what company size are OKRs worthwhile?

As soon as several teams work independently of one another and priorities can no longer be agreed in a single joint meeting. In small teams, a shared quarterly plan with a few measurable objectives is often enough.

What is the difference between OKR and KPI?

A KPI describes the state of the business on an ongoing basis and is reported every period; OKRs describe a desired change within a limited period. The two complement each other: a KPI becomes a key result when it is to be moved deliberately within a quarter, for example the activation rate of new customers.

What does an achievement level of 0.7 mean?

For aspirational OKRs, a good result. For committed OKRs, by contrast, full achievement is the standard; a value of 0.7 counts there as a miss.

Are investors interested in OKRs?

Indirectly. Investors do not assess a method but management's ability to set realistic objectives and to achieve them. A traceable series of quarterly objectives and results is evidence of this.

The Roemer Capital view

The OKR format is particularly well suited to the quarter before the start of a financing round, because the preparation consists of a few clearly verifiable results. The objective reads, in essence, to be prepared for investor conversations. The key results here are committed OKRs, that is, states that must be fully achieved. They include a financial model covering at least three years with a base case, a cautious case and an optimistic case, and a pitch deck of 15 to 20 slides. Equally committed are a data room that is ready within 24 hours and a liquidity buffer of 12 to 18 months (runway) at the start of the process.

The benefit lies in the commitment. A general intention becomes a list with responsible persons and dates, the status of which can be read off every week. Since a financing round generally takes 6 to 8 months, this preparation helps decide whether the process begins with sufficient liquidity.