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 Planning: it 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.

Examples

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

1. 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.
2. Employee Training Hours: The 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: it helps to prepare the future measurements.
• Benchmarking: it identifies areas for improvement by comparing data against competitors.
• Validating Strategies: it determines if the strategies have yielded the desired outcomes.
• Confirming Trends: it validates whether new trends will give benefits to the business.

Examples

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

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

To Sum Up...

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. 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!

To effectively apply these concepts and master various business metrics for informed decision-making, explore relevant training programs at the Multimatics Academy.

References

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/