To effectively monitor and measure a company’s performance, there should be a mix of leading and lagging indicators. Most companies are able to easily define the desired results (lagging indicators) they wish to achieve, but often struggle to define leading indicators. Here we define a leading indicator and give examples of some good ones.
Every company needs to measure performance to not only understand current reality but determine how to improve in the future. Many find it easy to identify and monitor lagging indicators—those that measure results or outcomes such as revenue or profit. Defining the predictive measurement of leading indicators can sometimes cause challenges for companies. However, it’s important to have leading and lagging metrics in place to build an accurate understanding of performance. To help clear up confusion about leading indicators that I commonly see when I help companies with their measurement systems and performance management, this overview explains more about what leading indicators are and gives examples of good ones.
What is a leading indicator?
Leading indicators give you the opportunity to influence the future since they are forward-thinking insights and predictions.
The term leading indicator was first used in economics. The objective was to determine measurable indicators that if monitored could predict the ups and downs of the economy in the future. If the number of mortgage defaults begin to increase that’s a warning signal (a leading indicator) that the economy might alsohead fornegative changes. Otherleading economic indicatorsfor the economy include manufacturing activity, the stock and housing markets,consumer confidence,and the number of new businesses entering the market.
Companies with effective performance management in place will also have leading indicators. If you think of your business like a car, leading indicators would look out from the windshield and focus on the road ahead while lagging indicators will look backward (out therear-viewmirror) at the road you’ve alreadytravelled—did you achieve the intended result or not?
Leading indicators help you build a broad understanding of performance, but they aren’t always accurate. Leading indicators express whatmighthappen, not what definitely will happen. They are also usually unique to your company so they can be a bit more challenging to build, measure and benchmark.
Examples of Leading Indicators
When you consider leading indicators, think about what are the things that you can do and monitor now so that you are in the best position possible to achieve your goals and targets (lagging indicators). Indicators can also be leading or lagging depending on your perspective. For example, a signed contract would represent a lagging indicator for a sales team but potentially a leading indicator for a finance team.
Here are some examples of leading indicators businesses have used to achieve the results they want:
Potential leading indicators:
- Participation numbers for webinar, conference, etc.
- Number of products purchased by each customer
Result: improved customer renewals
Potential leading indicators:
- Number of calls into customer service
- User guide downloads
Result: enhanced customer satisfaction
Potential leading indicators:
- Number of marketing campaigns
- Number of sales appointments
Result: increase sales
Potential leading indicators:
- Budget for training
- Goal alignment
Result: development of talent
Potential leading indicators:
- 360 evaluations
- Competitive analysis on wages, bonuses and benefits
Result: employee satisfaction
How to Determine Leading Indicators
There’s no one-size-fits-all leading indicator that you can just copy and paste from another organization even if they are in the same industry as you are. Therefore, you must take the time and effort toanalyseyour business to determinethe value drivers of your business – the activities that will lead to future success and results. Once you have done that youcan identifytheleading indicatorsthatare most important for your organization to impact your future results.Here are some key steps to help you find your leadingindicators:
1. Define the business goals and results you want to achieve
Start with your strategy and identify what it is you want to achieve. Most companies set outcome goals around financial performance and customer or market performance such as increase profits, improve customer satisfaction or gain market share.
2. Findmeasures for your goals and results
Once you are clear about what you want to achieve, you want to have measures in place to track your outcomes or results. This means definingyouroutcome or lagging indicators foryourgoals.For example, net profit margins or relative markets share.
3. Identify the value drivers
In this step you try to figure out what activitiesyou needto perform toor conditions do youneedto meet toachieve your goals or results. The questions you are trying to answer are e.g. What do I need to do to achieve my goals and results?What are the key activities that will drive success?What market conditions need to be in place?Etc.
4. Define your leading indicators?
This is the step where you will defineyourleading indicatorby identifying how you might measure your value drivers. These can be measures of the activities you need to perform to achieve your goals and results, or they can be signals or measures of conditions, such as consumer behaviours or market trends.
Leading and Lagging Indicators: Better Together
The best way to really understand your company’s performance and to improve in the future is to set upa performance management system that contains a mix ofleading and lagging indicators. Since indicators can be both leading and lagging, it’s important to evaluate them based on the business function. When I work with a client, I break down the company strategy into a “plan on a page” that has panels fore.g.finance, customers, operationsand resourceswhich help you definethe desired results as well as the value drivers. When we determine where we’re going (the outcomes) we can determine what actions will get us there through the right combination of leading and lagging indicators to track performance.
To dive in further, you might want to read these related articles:
- A Sample KPI Template– to help you define your leading and lagging indicators
- TheKey Performance Indicator (KPI) libraryfor some inspiration
- The 10 Biggest Mistakes Companies MakeWithKPIs
