As we work through metrics from top to bottom at PGS, and continue to pursue a data driven culture, we have had a lot of discussion about lagging vs leading indicators and how to use them to both understand and manage an organization. We thought there would be value in sharing some of that discussion with our readers.
First, what are lagging and leading indicators?
Lagging indicators show the after effects of your work. They show you how you did. On our PGS Instrument Panel, lagging indicators are referred to as organizational outcome measures. They measure the results of the work you have just done.
What is your gross revenue? How many customers were served? What is the turnover of your employees? With each measure you are looking backwards – counting the dollars brought in during the previous week, counting the customers who walked out of your door with a product in hand, counting the employees who left. You can’t count any of them forward, i.e., you can’t say “gross revenue next year will be X” or “4 employees will leave next month”.
Leading indicators are just the opposite. They point forward and help you anticipate and predict what will happen. The leading indicators on our PGS Instrument Panel are the core processes. What processes are unique to your organization? What do customers most appreciate? What are the unique drivers to your outcome measures or lagging indicators?
Leading indicators are those you can influence and control, and are those that can help you predict what the lagging indicator will be.
Why are they both important?
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.
How do you select them?
Lagging indicators or organizational outcome measures are usually much easier to determine and to create. What shows your stakeholders that you are a healthy organization? What are your organizational goals and how do you know the progress you are making on them? Those are your lagging indicators.
Leading indicators are typically trickier to develop. Start by asking how you impact the lagging indicators. And keep asking until you get to an answer that you can influence or control. That is an essential component of a leading indicator. Not only do they predict how your lagging indicators will perform, you should be able to influence them. If you can’t influence the leading indicator, it has little value except to give you fair warning – whether positive or negative.
For example, a food truck vendor has no influence over the weather, though the weather may have a great impact on sales. Tracking weather as a lead indicator may be interesting and a good predictor of sales, but if the vendor wants to actively move the dial on overall sales, he needs to track something he can influence. How are sales impacted when he changes location of the truck? What happens if he changes the hours of operation or prices? What about changes in product line or tweaks to his recipes? These are the core processes or customer appreciation points that he can both influence and measure to track the impact on the lagging indicator of sales.
The bottom line
To create good lagging and leading indicators ask the following questions.
For your lagging measures:
- What is my goal and how do I know (measure) that I have achieved it?
- What are the indicators of my organization’s success?
For your leading measures:
- How do I influence my goal, i.e., what active steps can I take that will assure the goal will be met, and how do I measure those steps?
- What are the unique processes or strongest customer appreciation points in my product or service, and how do I know that they are on track?
- What impacts my organization’s success measures or lagging indicators that I am in control of or can influence?
There is a mix of lagging and leading indicators at each level of an organization. While both lagging and leading indicators are important, the ratio of lagging to leading indicators that you might track individually or in your department depends on your position and your responsibility in the organization. Further, one department’s lagging indicator may be the starting point of another’s leading indicator.
For example, one of the lagging indicators for a typical Marketing Department is the number of qualified leads it has generated and passed on to the Sales Department. That number of leads becomes the beginning of the Sales leading indicator. What does Sales do to nurture those leads until they have made a successful sale (their lagging indicator). Do they send materials, make calls, schedule appointments? Sales cannot influence the number of leads given to it – that is Marketing’s job. But they can influence what they do with each lead to make a sale. Measuring what they do with the leads that come in becomes Sales’ leading indicators and number of successful sales is a lagging indicator that they then pass on to those who serve the customers directly.
Tracking both lagging and leading indicators is essential to understanding what is happening in your organization, and to knowing what changes to make to improve those statistics. We have tools available to help you brainstorm the measures and metrics that are right for your organization. Give us a call or drop us an email to get a free 30 minute consult or learn more about how to develop meaningful metrics or how to establish a data driven culture in your organization in these posts.