Leading vs. Lagging Indicators
Last week, we wrote about KPIs, a management tool that measures the critical success factors of your business. KPIs act as a roadmap to your company's organizational objectives. However, there are many important landmarks along the way that ensure you are headed in the right direction for success. Leading and lagging indicators are two types of landmarks that you can use to make sure everyone is on track.
Leading Indicators are like inputs - they measure the activities necessary to achieve your goals. Leading indicators are often predictive, and communicate a change in the working environment. Because they are meant to come before a trend, leading indicators can be a powerful business driver. Identifying specific, focused leading indicators can help any strategic team gain traction.
Lagging Indicators are like outputs - they measure actual results. Lagging indicators trail behind your goals, capturing data that directly relates to your activities. Lagging indicators are much easier to capture than leading indicators because the data they use is retrospective and does not change.
Leading Indicator Examples
Most companies use leading indicators to capture financial and customer related data. Some popular examples include:
- Interest rates
- Number of orders
- Customer Satisfaction
- Customer Retention
Lagging Indicator Examples
Using lagging indicators helps to monitor any functional area in your business. Firms use lagging indicators to understand the following:
- Return on investment
- Sick days
- Total sales volume
- Return on assets
Finding the right indicators for your business may be a challenge, yet it is vital to the success of your organizational goals. When your leadership team determines your organization’s KPIs, make sure that your leading and lagging indicators are clear, focused, and contributive to your vision.