Lagging vs. Leading Business Indicators – Do you know the difference?

In strategic planning it is important to discuss key performance indicators (KPI). Key business indicators are a type of measurement. They are essential for business leaders to understand what is happening in their business. The first step to determining your KPI is to understand the difference between lagging and leading indicators. The second step is to define and monitor your business indicators.

Lagging and Leading Indicators

Lagging indicators are used to measure performance and allow the business leadership team to track how things are going. Because output (performance) is always easier to measure by assessing whether your goals were achieved, lagging indicators are backward-focused or “trailing”—they measure performance data already captured. Just about anything you wish to monitor will have lagging indicators: returns on investments, a budget to plan variances, number of sick days, bags moved per day, equipment support incidents, etc.

Leading indicators, on the other hand, change quickly and are generally seen as a precursor to the direction something is going. For example, changes in building permits may affect the housing market, an increase in new business orders could lead to increased production, interest rate changes will impact spending and investments, a diminishing of demands for natural resources will often indicate work slowdowns, and aging baby boomers may indicate future stresses on the healthcare system. Because leading indicators come before a trend, they are considered business drivers. Identifying specific, focused leading indicators should be a part of each business’s strategic planning.

Consider These 7 Tips When Defining Your Indicators

1. Though are some guidelines that can be used, there is no “one” way to define the key performance indicators for any particular business. It is as unique as your approach to strategic planning.
2. Review your strategic planning process, in particular the assessment section of the various questionnaires and the environmental scan. Identify what you are already measuring and determine if it provides value to your business in your backward and forward thinking.
3. Review your strategy map and roadmap to identify the key areas of focus. Identify the indicators that will tell you whether you have achieved your desired outcome(s) (lagging), as well as the indicators that tell you the direction of the market and where you should focus (leading). Be specific.
4. Step outside your core senior management team and get additional leadership and external business stakeholders involved. An outside perspective can often help you determine what your lagging and leading indicators are, as well as help in recognizing the key leading indicators for your market that will drive your business.
5. Always keep an eye on your lagging indicators–they will continue to provide insight into your business. Poor lagging indicators generally translate into poor leading indicators. A performance indictor survey might assist you in the process of ensuring the indicators are appropriate. The challenge is to ensure you have the correct indicators, and that your management team understands how they can be used to align your business impact zones.
6. Choose your leading indicators carefully. The leading indicators should be unique to your business environment, originate from your key strategic initiatives and work elements, and ultimately be used to drive your business. Try not to be too ambitious. Keep focused on the business key impact zones represented in your strategic plan.
7. Train your leadership team in understanding key indicators and how to use them to improve the business. It is important that your team can not only identify KPI’s, but also recognize the potential business impact indicated by them.

Ensuring that you have the correct indicators may be a challenge, yet is vital to the ongoing health of your business. Make sure your team’s strategic planning process includes determining your indicators and that everyone understands what they are and why they are important. Key performance indicators are either lagging or leading. They are either relevant or they are not. There should be no in-between. Remember, what gets measured gets done.

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