At Intrafocus, one of the strategy topics that we find most interests our clients is lead and lag indicators. In this blog, we’ll take a closer look at what these measures are, and provide some real-world examples to bring the theory to life.
Review: What are lead and lag indicators
Essentially, lead and lag indicators are a form of business measurement, used as part of the business strategy process in order to assess and measure performance. Remember, strategic KPIs are measurable values that demonstrate progress towards key business objectives. A business will usually have KPIs which span leading and lagging indicators; using both types of measure to get the most from their strategy process.
Lead indicators
- These are predictive measures that attempt to define something that will happen, or the probability of it happening.
- By nature, they are forward-facing and yet to happen
- They can also be used to effect change – influencing the outcome of lag indicators.
- Lead measures tend to be based on a goal – and are very often linked to the activities that employees carry out (processes) and things which customers value.
- Because lead indicators are predictive, they are harder to set and don’t provide any guarantee of success.
Lag indicators
- These indicators measure output or something that has happened and are by their nature, retrospective.
- Essentially, they measure whether or not the goal in question was achieved.
- These are the most common type of measure found within a business, as they are easier to set.
A good acid test is to remember that a leading measure is a driver, and a lagging measure is an outcome.
Examples of lead and lag indicators
Let’s take a customer services example. If there is a broad goal to improve customer satisfaction, then lead measures could be:
- No. of customers engaging through corporate social media channels
- Training and investment per customer service employee
- Number of hours spent engaging with a customer
- The percentage of customers completing a referral.
Within this same customer services example, lagging indicators within a defined period of time might be:
- Number of customers retained
- Percentage of customers served to call handling targets
- No. of customer complaints handled/resolved within a defined timeframe
- Percentage of customers who rated their service experience as good or above.
Is one type of measure better than the other?
No – and for most businesses and organisations, both types of measure need to be used for the best result. The lagging indicators will give a picture of your organisation’s overall health. As such, they will be valuable to your stakeholders (particularly investors) as a sign of overall performance. Leading indicators will show how well core processes are going well – predicting whether the organizations performance goals overall will continue to be favourable.
When results can be anticipated
Let’s look at another corporate function – finance. Financial teams may do very similar things each year, which make it easier to predict what exactly will need to happen for them to achieve success against their KPIs. In this instance, it is relatively easy to create a set of leading indicators which can be used to predict what a successful outcome will look like. Because the work in question is familiar, well benchmarked and predictable, leading indicators can be set confidently and without stifling innovation.
This point about innovation is key.
When outcomes are unknown
Think about a project which involves a new product launch. Perhaps your business is expanding into a new market or bringing a disruptive or innovative solution to an existing client base. In this instance, there will be plenty of unknowns.
If you try to set lead indicators, the innovation that your new direction needs to be successful will be stifled. Business leaders and managers will focus too much on trying to achieve their measures – rather than flexing and being responsive to what they learn as the project rolls out. Creativity, innovation and smart risk-taking are keys to success when the environment is changing. In this context, lead indicators can easily be detrimental and drag decision making in the wrong decision.
How do I set the right lead and lag measures?
First, know that the lagging variety is quicker and easier to develop! What are your strategic goals and what do you need to measure to see your progress to achieving them? What will demonstrate to your stakeholders that you are performing well? These questions will help to define your lagging measures.
To ascertain your leading indicators, ask what you need to do to affect the lag indicators. What can you do to control or influence them? If you can’t, then the measure simply becomes a ‘fair warning’ indicator.
Consider an ice cream van as an easy example. The weather is beyond control, but it will affect the number of ice-creams sold. Tracking the weather could be a good sales predictor, but as a lead indicator, it can’t be influenced.
However, the ice-cream van can influence sales by shifting location from a quiet industrial estate to outside a busy play centre, or by adjusting prices, hours of business or the ice-cream varieties on sale. These are all a) core processes and b) points of customer appreciation that can be influenced and measured. Hence, they are great choices for lead indicators – and their delivery will impact the lagging indicators. KPI Management is a crucial part of this process
In essence, therefore:
1. To set a lagging measure ask:
- what is my goal, and what measure will evidence that I achieved it, plus;
- what will prove that my organisation is performing to my stakeholders.
2. To set a leading measure ask:
- what steps can be taken to influence a goal and ensure it is met – and how will I measure those. Plus;
- what are the key processes or most important customer-experience points in my business offer – and what will tell me that they are on track?
In Summary
Most organisations will need to track a mix of lagging and leading indicators as part of their KPIs, in order to present a full picture of what is happening within their organisation. To find out more, and to get expert help on your business strategy or any element of its development, please contact Intrafocus for a no-obligation chat about your needs.
