Business owners often focus on results they can’t directly control while overlooking the activities that create them. Understanding the difference between leading and lagging Key Performance Indicators (KPIs) can transform how you manage your business.
Lagging indicators measure outcomes – they tell you if you’ve succeeded. They are easy to measure but hard to influence directly. Revenue, profit margins, and customer satisfaction scores are all lagging indicators.
Leading indicators measure the activities that drive those outcomes. They can be harder to track, but for the individuals who are directly accountable for them, they are easy to influence Sales calls made, inquiry response times, and employee training hours are leading indicators that lead to improved results.
Here is a simple example: my weight-loss goal. The scale provides a lagging indicator (weight), a result that is easily measured but difficult to influence. Weighing myself daily doesn’t cause me to lose an ounce. To lose weight I need to eat less and move around more. The strategy is both actionable and measurable. Focusing on the leading indicators—calories consumed and physical activity—gives me actionable metrics that lead to success.
Let’s apply these same concepts to numbers we commonly measure in business.
I have a sales goal, but just like my weight, I cannot manage it. Sales are a lagging indicator. They’re easy to measure but hard to influence. To increase sales, I need to attract new customers, and new customers are a leading indicator of sales.
How KPIS Can Be Both Leading and Lagging
The same metric can be a leading AND a lagging indicator. For example, new customers are leading indicators of sales growth but are lagging indicators of the number of leads and conversion (win) rates. I absolutely must monitor my leads and conversion percentage.
To monitor my lead generation efforts, I might count marketing activities. My main activities include professional networking, publishing a monthly blog and newsletter, and posting to social media. If I stop doing those activities, my leads drop off. KPIs that measure those activities are good numbers to watch in my business because they are leading indicators of leads generated.
Identifying and Selecting Your Critical Leading Indicators
Look beyond your accounting system, where activities that drive a successful business are tracked. CRM tools, point-of-sale systems, job costing, and scheduling or dispatch systems are great sources of leading indicators that are “just the right KPIs.”
What must you get right to be successful in a business like yours? Your answer reveals the “leading” business processes that deserve your focus. For most companies, lead generation and selling effectiveness, quality control and production efficiency, and customer retention and satisfaction should be on the list. And none of these are found in the financial statements.
Next Steps
Decide what you must get right and choose “just the right KPIs”—both leading and lagging—and set goals for each. Then, make reviewing your progress towards them a team sport, get focused, and get going!
- Determine your priorities for the month, quarter, and year
- Identify the results you’re after (your financial goals, aka lagging indicators)
- Determine the leading indicators that measure your success drivers (KPIs)
- Set goals for your leading indicators.
- Set up review routines to track and evaluate your progress
- Celebrate your successes when you meet or beat a goal. Investigate the roadblocks and alternate approaches when you don’t.
- Make adjustments based on what you learn along the way.
Remember, your success is measured by lagging indicators, but it is driven by leading indicators.
Need ideas for Leading Indicators that drive sales, production efficiency or customer satisfaction? Click here for our free Sample Leading Indicators Resource.