22 Nov Lagging and Leading Indicators
In performance management we often talk about “lagging” and “leading” indicators. We will try to clearly explain what do they mean exactly?
Lagging indicators are typically “output” oriented, easy to measure, but most of the time hard to improve or influence.
Leading indicators are typically input oriented, hard to measure but more easy to influence.
Let’s try to illustrate this with a common example : weight loss.
A clear lagging indicator that is easy to measure. You step on a scale and you have your answer. But the real question is how do you actually reach your goal ?
For weight loss there are 2 “leading” indicators:
1. Calories taken
2. Calories burned.
These 2 indicators are easy to influence but hardest to measure. When you order lunch in a restaurant the amount of calories is not always listed on the menu and most of the people have no clue how many calories they burn on a given day.
Lets try to translate this example to the Business Analytics. Most financial indicators such as revenue, profit, costs are “lagging indicators”. They are the results of the company’s activities.
Now, imagine you are managing a B2C company and your engagement is to deliver all your products to your customers within 6 hours maximum.
The output is easy to measure: You either delivered your clients in 6 hours or not. But how do you influence the outcome? What are the activities you must undertake to achieve the desired outcome? You need to make sure :
- your staff starts working on orders immediately when they occur.
- orders are assigned to the right people and this person isn’t already overloaded with other work.
This could be translated into the following “leading” indicators :
- % of orders not assigned for 2 hours.
- % of orders older then 4 hours.
- % of order dispatched but not delivered.
- Average backlog of orders per staff
When you would start measuring these KPIs on a daily basis and focuses on improving these KPIs, you will probably see an improvement in your ability to reach your engagements.
Remember our common example? Losing weight is not an activity, exercise and eating are.