A Guide for Busy Managers and Leaders: Lagging and Leading Indicators
When thinking about metrics and measures, each organization should have a blend of lagging and leading indicators. Below we discuss why you should measure, the definitions of lagging and leading indicators,and how to use them wisely.
Why Bother to Measure?
Companies need measures to operate their businesses effectively. Here are some reasons why organizations need both lagging and leading indicators:
- People need to know their score. Unlike previous centuries, people are often separated from the output of their labour. As a result, there is a strong desire by most people to have some idea of where they stand, and what their results are.
- Lagging and leading indicators can be used to improve a business. It is very difficult to initiate improvement, if you do not know where you currently stand. Lagging and leading indicators should both be used to establish baselines for both results and processes that need to be improved over time.
- Lagging and leading indicators can identify trends that can be used to better understand the business, and make better business decisions.
Lagging Indicators
Of lagging and leading indicators, it is usually the lagging ones that are better established in organizations:
• Follow an event or measures the results of past activity.
• Often measures results or output.
• Can confirm a pattern, or that an event is about to occur.
• Most financial indicators are lagging (result from past performance).
• Example of a Lagging Indicator: Net Income
Leading Indicators
Businesses often struggle more with Leading Indicators when they are initiating their measurement systems:
• Often measure activities or sometimes processes
• Indicators that signal future events
• Measures the drivers of business results (whereas the results themselves are represented by lagging indicators)
• Example of a Leading Indicator: Training or qualification levels
How to Use Lagging And Leading Indicators
Many organizations embark upon a measurement program by establishing lagging and leading indicators. However, here are a few simple tips that will make sure the time spent on lagging and leading indicators is time well spent:
• Don’t allow your lagging and leading indicators to take on a life of their own. Measurement systems should make your business easier to manage, and make business decisions easier to arrive at. If your measures are not doing this, then you’re doing something wrong.
• Have a mix of lagging and leading indicators. Most organizations have lots of lagging indicators, but don’t establish or track any leading indicators.
• Track a few measures for a while, and monitor to see if they are useful. Your measures will change and evolve over time. To start with, you should measure what is readily available, and see if that is helping you to manage the business.
• Change your lagging and leading indicators as the business (or measurement of the business) evolves. Don’t become too committed to certain indicators. Change them as you need over time.
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