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Leading Vs Lagging Indicators: What'S The Difference?: Key Performance Indicators (Kpis)

Leading indicators are metrics that predict future business conditions and performance, while lagging indicators measure current conditions and past performance. Leading indicators inform managers of actions needed to achieve goals, like processes to improve or skills to develop. Lagging indicators measure outputs like expenses, revenue, and customer participation. Both types of indicators should be used together to understand trends and determine if goals are being met. Leading indicators are more difficult to measure but provide insights into future growth opportunities.

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Mohammad Abdullah
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127 views7 pages

Leading Vs Lagging Indicators: What'S The Difference?: Key Performance Indicators (Kpis)

Leading indicators are metrics that predict future business conditions and performance, while lagging indicators measure current conditions and past performance. Leading indicators inform managers of actions needed to achieve goals, like processes to improve or skills to develop. Lagging indicators measure outputs like expenses, revenue, and customer participation. Both types of indicators should be used together to understand trends and determine if goals are being met. Leading indicators are more difficult to measure but provide insights into future growth opportunities.

Uploaded by

Mohammad Abdullah
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
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Leading vs Lagging

Indicators: What’s The


Difference?
Key performance indicators (KPIs) are values that measure your
organization’s success at meeting its objectives. KPIs provide
insight into business conditions like:

Predictability
Early return on investment (ROI)
Product quality
And more

In practice, KPIs measure how a company will strategically


grow.

However, behind every KPI is the implication that current


conditions influence trends and inform predictions for future
growth. Leading and lagging indicators are qualifiers that
assess a business’s current state (lagging indicator) and
predict future conditions (leading indicator), so companies
can achieve accurate projections.

In the following article, we’ll discuss leading and lagging


indicators: what they are and how to use them.

What are leading & lagging


indicators?
Leading and lagging indicators help enterprise leaders
understand business conditions and trends. They are metrics
that inform managers that they are on track to meet their
enterprise goals and objectives.

Leading indicator
Leading indicators are sometimes described as inputs. They
define what actions are necessary to achieve your goals with
measurable outcomes. They “lead” to successfully meeting
overall business objectives, which is why they are called
“leading”.

A leading indicator encourages business stakeholders to ask:


What processes can I employ to achieve this goal to
higher levels of success?
What skills can the team improve to better achieve the
desired outcome?
What steps can be taken to speed up product development?

Leading indicators do this by providing benchmarks that, if


met, will be indicative of meeting overall KPIs and
objectives. Some examples of leading indicators for an
enterprise business software company with an annual
subscription fee might be:

Percent of customers that sign up for two-year


agreements
Number of customers that renew software at or before
mid-term alerts
Number of customers that purchase software add-ons

Lagging indicator
If a leading indicator informs business leaders of how to
produce desired results, a lagging indicator measures current
production and performance. While a leading indicator is
dynamic but difficult to measure, a lagging indicator is easy
to measure but hard to change. They are opposites, and as such
a lagging indicator is sometimes compared to an output metric.

A lagging indicator encourages business stakeholders to ask:

How many people attended an event?


How much product was produced?
What response did it receive?

Lagging indicators measure output that’s already occurred to


gain insight on future success. They do this by measuring
things like:

Profit
Expenses
Customer participation
Renewal rates
Revenue

How to use lagging indicators


Lagging indicators are always triggered by an event that has
just occurred, and, in that sense, are a little more self-
explanatory than leading indicators.

If you’re measuring the outcome of an event, product release,


sales training program or what have you, you’re using lagging
indicators to determine, in retrospect, who attended, what was
produced, or how it was received by attendees.

Lagging indicators are best used in conjunction with leading


indicators to determine trends and if outcomes were met. This
can be made simple with the right technology infrastructure
that compares leading and lagging indicators, offering
insight.

How to use leading indicators


Leading indicators are trickier to measure than lagging
indicators. That’s because they tend to be more abstract.

As mentioned, a leading indicator is a measure of where your


business is going. For instance, if you stick to lagging
measurements, like revenue, you may completely miss an
important, but relatively small, segment of your market that
is purchasing from another geographical location in which you
don’t have a presence.

That’s where leading indicators enter the scene. By creating


measurements like tracking individual purchases outside of
certain zip codes or regions, you can learn where your company
could potentially establish a new foothold.
That’s an insight you can’t understand by looking at overall
revenue alone. When you have a question that asks you to look
into future growth and success, it’s the right time to use a
leading indicator.

Example of lagging indicators in


practice
Since lagging indicators measure what’s already occurred, they
can be a useful business asset. However, some enterprise
organizations rely too heavily on lagging indicators because
they are so much easier to measure. As such, they don’t spend
a lot of time working on leading indicators.

A best practice is to deploy both. Here are some examples of


lagging indicators so you can see how to use them in practice,
and how they interact with leading indicators:

The Corporate Retreat


Imagine you’ve just organized a corporate retreat and you’re
trying to determine if it was successful. One way you can do
that is by using lagging indicators like:

How many people attended the retreat? This can give you
an idea of general interest.
How much money did the retreat cost? This is helpful to
calculate the ROI
How many of the attendees signed up for workshops? This
metric tells if your programming was engaging.
Which workshops had the most attendees? This indicator
implies which parts of the program were most
interesting.
Example of leading indicators in
practice
Leading indicators may be harder to measure but the offer
valuable insight about the future. They work with lagging
indicators to create a number of metrics that are key
performance indicators of future growth.

The Corporate Retreat


For example, in the previous section, we decided on some
lagging indicators from a fictional corporate retreat. One of
those indicators was, “how much did the retreat cost?” Imagine
the retreat was a sales training seminar and business leaders
want to use this lagging metric to determine the potential for
ROI in three months, six months and one year.

What values do they need to do that? The answer is they need


to calculate leading indicators that determine sales revenue
growth in three months, six months, and one year. Once they
have those figures, they can measure them against the cost of
the retreat to project future ROI over the course of a one-
year sales cycle.

Here are some more other leading metrics that might be


associated with a retreat of this nature:

Where can we expect the most sales growth? Based on


attendance and other factors, this indicates what new
regional or industry markets you can corner after the
retreat.
What individuals sales goals can we predict in new
markets? Given that you expect to grow in certain areas,
this percent of growth indicates how much to expect
What attendance can we expect at next year’s conference?
Using lagging indicators like total attendance, managers
can come up with leading indicators like percent of
future attendance.

The end game strategy


The bottom line is if you’re using lagging indicators without
leading indicators, you’re only getting half of the KPI
picture. Lagging indicators are an important resource for
creating leading indicators that can launch your business into
growth mode, but they aren’t the entire package. These sets of
metrics work best in tandem to produce the most accurate and
achievable KPIs.

Related reading
BMC Business of IT Blog
IT Organization Metrics & KPIs: A Well-Rounded Approach
DevOps Metrics & KPIs
Digital Transformation Metrics & KPIs for Measuring
Success
Choosing IT Metrics That Matter

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