Lagging and Leading Indicators

When considering measures and metrics, every 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?

Organizations need metrics to effectively operate their businesses.  Here are some specific reasons as to 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 and leading indicators can help ensure people in the organization are not working at cross purposes

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 outcomes 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 (a result of past performance).
• Examples of Lagging Indicators:
  • Unemployment rates
  • Net Income
  • ROI
  • Output measure such as production

Leading Indicators

Organizations struggle more often with Leading Indicators when they are setting up 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)
• Examples of Leading Indicators:
  • Bond yields
  • R&D dollars invested
  • Patents filed or pending
  • Employee satisfaction
  • 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, there are a few easy tips that will ensure the time spent on lagging and leading indicators is time well spent:

• Don’t let your lagging and leading indicators 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 metrics are not doing this, it is being done improperly.
• Have a mix of lagging and leading indicators.  Most organizations have lots of lagging indicators, but fail to establish or track any leading indicators.
• Track some things for a while, and monitor to see if they are useful.  Your measures will change and evolve over time.  To begin, 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 necessary over time.

3 Things to remember

1. Don’t spend more time measuring work than doing the work.  If your measurement system is too time consuming or onerous, it’s value diminishes quickly.
2. Don’t get hung-up on labeling an indicator “leading” or “lagging”. Some indicators will be both lagging and leading indicators, and some may fall into each category for various purposes.  Don’t agonize over the label.
3. You need some leading indicators. You likely already have a number of lagging indicators.  However, past performance is not always an indicator of future results, so you need to give some thought to what your leading indicators are.

Watch the ‘3-Minute Crash Course’ about Lagging and Leading Indicators (CLICK THE ARROW TO START THE VIDEO):

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