Regardless of the size of your organization, you need to realize the huge importance of monitoring, improvement and evaluation. Once you have analyzed your mission, identified all stakeholders and defined your goals, you need to make use of leading and lagging indicators in order to measure your progress towards your goals.
Types of Indicators
There are two main types of key performance indicators: leading and lagging KPIs. Lagging indicators are also called outcome KPIs, while leading indicators are driver KPIs. While lagging indicators are indicators of past performance (customer satisfaction last month, quarterly revenue, low number of desk calls the previous month), leading KPIs show your organization’s progress towards achieving goals (total number of sales calls, product quality, monthly self service incidents).
- Leading Indicators: these indicators lead performance, telling you exactly where the performance of your teams, processes, assets or any other resource is leading you. Leading indicators allow you to act in a proactive manner, as you will already be aware of both threats and opportunities. These indicators drive the performance of the outcome measure, being predictor of failure or success.
Leading indicators signal future events, events that may happen in the near future or in the distant one. You can think of leading indicators as traffic lights. The amber light that indicates the coming of the red light is exactly how leading indicators are for corporations and businesses. In the world of finance, these indicators are probably less accurate than street lights, but work in the same way. For instance, bond yields are a good indicator for the stock market, as they allow bond traders to easily speculate trends and anticipate economic changes. Some other examples of leading indicators are total number of qualified leads contacted over a one month period, proposals written and future planned appointments with customers.
- Lagging indicators: these are indicators that usually follow an event, reflecting the success of failure after the event has been consumed. Their importance lies in their ability to confirm that a certain pattern is occurring. In the world we live, unemployment is probably one of the most popular lagging indicators available. Hence, if the unemployment rate is rising, it means that the economy is on a downfall. Lagging indicators allow you to take a reactive reaction by knowing where the performance of your assets has been.
Lagging KPIs tell you what happened, being reactive and historic in nature. Most organizations measure their performance using lagging KPIs, because they want to base their assessments on things that have already happened. Some of the most common lagging KPIs are: total number of sales, orders closed last month, sales calls made last semester, number of potential customers converted last year, and the list goes on.
Differences Between Leading and Lagging Indicators
Leading indicators are input oriented, very easy to influence but hard to measure. On the other hand, lagging indicators are output oriented, easy to measure but hard to improve.
A good example to understand the differences between leading and lagging KPIs is having a common goal. Let’s say you have a personal goal to lose 30 pounds this year. A lagging indicator is when you step on the scale and you see the actual weight you have. However, how do you actually reach your goal of losing weight? This can be accomplished using several leading indicators: calories burned, number of hours spent at the gym, amount of fruits and vegetables eaten, and the list goes on. These leading indicators are easy to influence, but quite hard to measure. After one week, you can step on the scale again in order to see if you have lost weight. Some of the lagging indicators might be: the number of pounds lost, fat loss factor, wellbeing etc.
If we were to translate this into the modern business environment, we should acknowledge that most financial indicators, such as profit, cost and revenue are lagging indicators. They are definitely the direct result of what the company has done in the past. Now, if you have to meet a deadline and you have 48 hours to resolve a high priority incident, you need to make use of leading indicators in order to know how to solve this problem. This could be translated into the following leading indicators:
– Percent of open incidents older than 6 hours.
– Percent of incidents not worked on for 1 hour.
– Percent of incidents worked on more than 2 times.
If you measure these indicators on a regular basis and you focus on improving them, you are definitely on the right path to success.
The Bottom Line
Leading and lagging KPIs are definitely extremely useful in the competitive and harsh business environment in most countries. These indicators, when used wisely, can make the difference between success and failure. Do not shy away from using leading and lagging KPIs in your advantage and stay focused on the bigger picture – your company’s success.