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Monday, March 2, 2020

Leading and Lagging Indicators Work Best In Tandem

In performance management we often talk about “lagging” and “leading” indicators. But what do they mean exactly?

Lagging indicators are typically “output” oriented, easy to measure but hard to improve or influence. A lagging indicator is one that usually follows an event. The importance of a lagging indicator is its ability to confirm that a pattern is occurring.

Leading indicators are typically input oriented, hard to measure and easy to influence. These indicators are easier to influence but hard(er) to measure. I say harder because you have to put processes and tools in place in order to measure them.

Let me illustrate this with a simple example: For many of us a personal goal is weight loss. A clear lagging indicator that is easy to measure. You step on a scale and you have your answer. But how do you actually reach your goal? For weight loss there are 2 “leading” indicators: 1. Calories taken in and 2. Calories burned. These 2 indicators are easy to influence but very hard to measure. When you order lunch in a restaurant the amount of calories is not listed on the menu. And if you are me, you have no clue how many calories you burn on a given day.

Now lets try to translate this to business. Most financial indicators such as revenue, profit, costs are “lagging indicators”. They are results of the activities of the company. Past company efforts influence your lagging indicators.

Lagging indicators serve as a starting point on the road to improvement. If a lagging indicator shows negative results, it’s too late to correct the damage that has been done. But it’s not too late to correct any future damage that might occur.

Leading indicators in business are used to gain a sense of the direction a business is headed. Company leaders use them to adjust their strategy to create positive future business conditions. Good leading indicators should help you forecast whether or not you will reach company goals. Valuable leading indicators should help you address company challenges. That way you can realign your actions and strategies to make your company successful.

Managers really need to understand the difference between the two and ensure they have both types of metrics in place if they’re to build an accurate understanding of performance.

Lagging and leading indicators both have an integral place in your organization’s metrics. Lagging indicators show the health of the organization, and are important signals to investors, stakeholders and the like as to how the organization is performing.

Leading indicators show how well the key processes and essential customer appreciation points are performing, and therefore are good predictors of whether or not you are going to meet the performance goals of the organization as a whole, i.e., whether or not your lagging indicators will continue to look favorable.

Leading indicators benefit companies in a variety of ways by:

  • Creating visibility of the efforts and activities which impact the future
  • Helping leaders know where to improve performance
  • Setting individual and team performance expectations
  • Holding employees accountable for their responsibilities
  • Helping to maintain consistent execution of high-impact efforts

The bottom line is if you’re using lagging indicators without leading indicators, you’re only getting half of the KPI picture. Lagging indicators are an important resource for creating leading indicators that can launch your business into growth mode, but they aren’t the entire package. These sets of metrics work best in tandem to produce the most accurate and achievable KPIs.

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