Insight

Leading vs Lagging Indicators, Performance Management
Dr. Agus Setiawan

PhD Holder and result-oriented Director with 25 years experience with involvement in all levels of Business Strategy, Sales and Marketing, Managing Project and Product Development. Aside of managing a company, he is also the best corporate trainer and public speaker in seminar and conference.

Leading vs. Lagging Indicators: What are They?

The terms "leading" and "lagging" indicators are now commonly used to determine the success of an organization. These indicators help organizations make informed decisions and understand the current and future trends in performance. They are also useful to identify how beneficial a business might be later on. Let's delve into them further!

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Leading Indicators

A leading indicator is a type of performance measurement that provides predictions and insights into future performance. They are forward-looking and can help organizations anticipate trends or outcomes before they actually occur. By offering early warnings, this indicator is crucial for directing proactive decision-making.

Leading indicators are often input-focused, measuring activities and behaviors that are expected to drive future results. They are useful for anticipating performance trends and taking preventive or corrective actions. Leading indicators are usually utilized for the following circumstances:

  • Forecasting Trends: it gives flexibility to adjust to the changing environment.
  • Strategic Planningit helps to create realistic goals that are used for planning strategy.
  • Risk Management: it assists in identifying early warning risks.
  • Monitoring Organization Health: it provides insightful data on the organization’s overall well-being.

To give you clearer understanding about leading indicators, we provide you two simple examples of leading indicators that are applicable to any organization.

  • Sales Leads:The number of new leads generated can be a leading indicator for future sales performance. An increase in leads may suggest a potential increase in sales.
  • Employee Training HoursThe number of hours employees spend on training can be a leading indicator of improved performance in the future.

Lagging Indicators

A lagging indicator is a type of performance measurement that offers insights into past events, performances, or results. This metric is useful for reviewing historical results, assessing the success of efforts, and doing retrospective analyses.

Lagging indicators are often output-focused, measuring the end results of activities and strategies. They are useful for assessing the effectiveness of past decisions and actions. Lagging indicators are usually utilized for the following circumstances.

  • Assessing Historical Performance: This helps to prepare for future measurements by analyzing past data and identifying patterns and trends.
  • Benchmarking: This identifies areas for improvement by comparing your performance data against competitors or industry standards. This can help you identify areas where you are excelling and areas where you need to focus your efforts.
  • Validating Strategies: This involves evaluating whether your implemented strategies have achieved the desired outcomes. This helps you determine the effectiveness of your strategies and make adjustments as needed.
  • Confirming Trends: This involves analyzing emerging trends and patterns to assess their potential impact on your business. This can help you identify opportunities to capitalize on new trends or mitigate potential risks.

To give you clearer understanding about leading indicators, we provide you two simple examples of leading indicators that are applicable to any profitable businesses.

  • RevenueTotal revenue is a lagging indicator because it reflects the outcomes of sales and business activities over a specific period.
  • Customer Satisfaction ScoresCustomer satisfaction scores collected after a service or product interaction are lagging indicators that measure the success of past customer service efforts.

Conclusion

Leading indicators are proactive and provide early insights into potential future performance, meanwhile lagging indicators are reactive and measure performance based on historical results. Leading and lagging indicators are both valuable in assessing overall performance, but they provide insights at different points in time.

For example, while leading indicators may signal future success or challenges, lagging indicators confirm whether past efforts and strategies have been effective. Organizations need to carefully select and monitor a balanced set of both types of indicators to gain a holistic understanding of their performance and make informed decisions for continuous improvement.

By analyzing leading and lagging indicators together, organizations can develop a more holistic view of their performance, identify areas for improvement, and make strategic decisions to achieve their goals. These indicators will help you narrow your focus that will enable you to meet your business goals faster!



Reference:
Intrafocus Limited. (2023). Lead and lag Indicators | Intrafocus. Intrafocus. https://www.intrafocus.com/lead-and-lag-indicators/
Marr, B. (2021). What is a leading and a lagging indicator? and why You need to understand the difference. Bernard Marr. https://bernardmarr.com/what-is-a-leading-and-a-lagging-indicator-and-why-you-need-to-understand-the-difference/
Watts, S. (n.d.). Leading vs Lagging Indicators: What’s The Difference? BMC Blogs. https://www.bmc.com/blogs/leading-vs-lagging-indicators/.

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