How & Why To Set Leading Indicators

As a business person, you’re constantly trying to figure out how to accomplish your organization’s goals. To do this, you need “key indicators” (also referred to as “measures”, “metrics”, "lead measures", "leading indicators", or “KPIs”). They tell you whether or not you’re accomplishing your goals and whether you’re on the right track to accomplish future goals.

There are two different types of indicators: leading and lagging. In general, leading indicators can be thought of as drivers, and lagging indicators can be thought of as outcomes. But, of course, that’s an oversimplified definition. So within this article, we’ll do an in-depth exploration of what both leading and lagging indicators are and why leading indicators are so vital for your business.

Lagging Indicators

To understand leading indicators, you need to first understand lagging indicators. Lagging indicators offer the most concrete way to understand if you’ve accomplished your goals or not. You can come up with solid lagging indicators that tell you what happened for that goal over the last quarter or the last year by examining your outputs and outcomes. Lagging indicators aren’t predictors of what is going to happen, but they’re great at telling you what did happen. When you create lagging indicators, you need to consider what a good predictor for your goals might be. What are the processes or inputs that lead to that result? These are important elements to understand.

Here are a few examples of lagging indicators:

• Profits
• Revenue
• Expenses
• Number of Customers
• Percent Renewal

Leading Indicators

A leading indicator is any measure or observable variable that corresponds with a future change in another variable of interest. Leading indicators are valuable as they provide insight into likely future outcomes giving organizations the ability to act accordingly in the present.

I mentioned that indicators tell you how you’re progressing toward a goal. A leading indicator (or driver) forces you to ask yourself, “What process or variables will make me achieve this goal better or faster? What do I need to do well in order to improve my outcome measure or my goal?”

Once you understand your lag indicators (which help you understand if you’ve met your goal), you move to the predictors, which allow you to look forward: your leading indicators. Lead indicators ask, “What are the best things we can do to help us get to our future goals and targets?”

Leading indicators are different based on the goal. For a goal of “improve customer renewals”, some leading indicators might be as follows:

• Percent of customer that complete the midyear check in process
• Number of customers that attend the annual conference (or webinar, or other activity)
• Number of products a customer purchases

For a goal of “increase customer purchases”, a lagging indicator might be the number of products purchased, but the leading indicators might be the number of product bundles for sale or the number of discounts of products or the number of products recommended based on previous purchases. Depending on your business, it could be the number of seasonal products or seasonal sales that occur. All could drive customer purchases.

Example: Employee Satisfaction

There are two important lagging indicators for employee satisfaction: what employees will tell you when they fill out a survey (i.e. what they say) and what they actually do. The best correlation for what they actually do is absenteeism. If they miss work frequently, that can mean they’re not very satisfied with work. If they say they aren’t very satisfied and they’re absent a lot, you can look at tried and true inputs and processes for employee satisfaction.

The inputs you might look at could include:

• Do you have the right people working for you? (Do you have the right skill sets for the job?)
• Are your managers good? (Can you tell through 360 evaluations?)
• Do you have a nice work environment? (Are there complaints about the kitchen, bathrooms, chairs, working hours, or culture?)

The processes you might look at could include:

• Do you have a good performance management process? (i.e. Annual review process)
• Do you give appropriate raises and bonuses?
• Do people have flexibility to choose their projects or job mobility within the organization?

You can come up with indicators that would tell you these things and help you improve your future employee satisfaction.

When You Should Use Leading Indicators (& When You Shouldn’t)

If you have a high degree of confidence of what you need to do in order to achieve your goal, you can likely benefit from leading indicators.

For example, if you run the Department of Motor Vehicles (DMV), you know that every citizen needs to renew their driver's license every 10 years. Thus, you have a good idea of how many people you can expect on a yearly, weekly, and daily schedule. You know you need to be able to manage the length of the lines, update information accurately, remind people to come in with appropriate documentation, and more. In other words, you know exactly what the leading indicators are.

But let’s say you’re trying to introduce your product to a market where you have never operated. You are unfamiliar with the business climate and purchasing culture for your products. Therefore, you have no idea what the indicators should be. And you really shouldn’t be concerned with them, because lead indicators may stifle innovation. They’re great at telling you what you should be doing; but if you’re being innovative, you want people to experiment and try new things—so leading indicators would do more harm than good. Of course, there are always exceptions to every rule. A pharmaceutical company may have their research and innovation process down pat, and thus may be able to benefit from using some lead indicators. But as a general rule of thumb, steer clear of them if you want to give people the freedom to experiment and determine what works in a changing environment. It may be the best way to achieve real stretch goals.

In Conclusion

If you only looked at your lagging indicators it would be really hard to drive your performance forward—you might find yourself stagnating or being blindsided by the future.

If you look at your lagging and leading indicators—and question them on a regular basis—you can begin to drive better than average performance. And you can start to predict whether you’re going to meet the end-of-year (or five-year) targets. Outside of stifling some innovation when you’re launching something new, they can be extraordinarily helpful for the future of your business.

FAQ:

How do you identify leading indicators?

- Define Goals and Objectives: Identify what you want to achieve or improve.
- Review Historical Data: Look for correlations between past performance and outcomes.
- Analyze Metrics: Identify metrics that change before the desired outcome.
- Consult Experts: Seek input from subject matter experts or stakeholders.
-Test Hypotheses: Formulate and test hypotheses to validate leading indicators.

Why are leading indicators important?

- Early Warning: They provide early signals of potential future performance or outcomes.
- Actionable Insights: Enable proactive decision-making to influence future results.
- Performance Tracking: Help track progress towards goals before final outcomes are realized.
- Strategic Alignment: Align efforts with strategic objectives and focus resources effectively.

What are the leading indicators of the economy?

Leading economic indicators include:

- Stock Market Trends
- Consumer Confidence Index
- Building Permits
- Unemployment Claims
- Manufacturing Activity

These indicators often change before the economy as a whole starts to follow a certain trend.

How do leading indicators work in project management?

In project management, leading indicators:

- Predict Outcomes: They forecast project success or failure based on early data.
- Guide Decision-Making: Help project managers adjust strategies or allocate resources proactively.
- Monitor Progress: Provide continuous feedback on project health and performance.

How does benchmarking help a business?

Benchmarking helps businesses by:

- Identifying Best Practices: Learn from industry leaders and competitors.
- Setting Goals: Establish realistic performance targets based on industry standards.
- Improving Processes: Drive continuous improvement and efficiency.
- Measuring Performance: Evaluate and compare performance against industry benchmarks.