Organization’s Performance Indicators– Leading, Lagging..: Foresight-Key Drivers and Hindsight-Outcome Measures…

Performance indicators: Everything that can be counted does not necessarily count; everything that counts cannot necessarily be counted. ~Albert Einstein… What gets measured gets managed. ~Peter Drucker

Performance Indicators are agreed-upon measurements that reflect your organization’s critical goals for success– a snapshot. They are measurable, objective, and actionable. Think of it this way: there are dozens of metrics that let you know how things are running on a daily basis, but you elevate a few of the most important metrics to become strategic touchstones for the organization, team, service…

They are quantifiable measures that can be expressed in either financial or non-financial terms and reflect the nature of the organization… Sometimes success is defined in terms of making progress toward strategic goals but often success is simply the repeated, periodic achievement of some level of operational goal; e.g., zero defects, customer satisfaction, revenues, profit… whereas, performance indicators for non-profit organizations are often less-quantifiable and more subjective.

Accordingly, choosing right indicators relies on clear understanding of what is important to the organization; e.g., indicators for finance will be quite different from indicators assigned to sales… Simply stated, performance indicators are measures of accomplishment… tools used by organizations to track progress and success in achieving the objectives of the organization. However, according to Karin Hunt; one of the biggest management mistakes is talking about performance indicators instead of the behaviors needed to achieve them.

A focus on indicators versus behaviors (without an underlying change in behaviors) can lead to useless outcomes… Performance indicators are often defined as either, leading or lagging: Where leading indicators gives a foresight-signal before the new trend or reversal occurs, whereas lagging indicators gives a hindsight-signal after the trend has started or occurred…

According to Drs. Kaplan and Norton; the concept of leading and lagging indicators has firmly entrenched itself as best practice. The difficulty, however, is that the inherent definition of leading and lagging is confusing and completely based on one’s own perspective of a strategic objective.

According to Douglas Wick; most successful growth companies measure and monitor both leading and lagging indicators… since using only lagging indicators is very much like trying to drive your car using only the rearview or side mirrors. It’s great for backing out of driveways, but moving forward is difficult if not impossible. Some of the most important information needed to successfully navigate-avoid peril is information that gives foresight…

According to Daryl Mather; performance measurement is at the heart of propelling an organization towards breakthrough performance, and the old adage; ‘if you can measure it you can manage it’… but, before you think about how to measure it, first work out what it is you want to manage…

Performance indicators-measures are just tools: Measuring and managing performance is critical for organizational success and leading and lagging indicators represent a way to understand issues and make decisions. Performance indicators must be rationally chosen… gaps honestly discussed… root causes pursued… only then can performance indicators serve their true purpose, which are mechanisms for insight, learning, decision-making...

In the article What are Leading and Lagging Measures? by systemwise writes: A simple way to understand leading and lagging measures is to use the metaphor of a stream or river to imagine how work flows through your organization. When you think about where to measure organizational performance, you can look both upstream and downstream.

A leading measure is ‘upstream’ in a work process. The lagging measure is ‘downstream’ in the same process. The job of leading measures is to be an early warning signal of process performance– in time to adjust the work-in-process to achieve the desired result on the lagging measure. If managers rely only on lagging measures to manage performance, it could be too late to do much if the downstream measure shows that performance is not satisfactory.

For leading measures to do its job there must be a real and direct relationship between the performance attribute it’s measuring, and the performance attribute the lagging measure is measuring. Here are examples of leading and lagging measures for different work processes:

  • In sales, a leading measure can be the number of prospecting calls made. A lagging measure can then be the number of sales made.
  • In production, a leading measure can be the amount of product produced. A lagging      measure can be level of inventory.
  • In customer service, if leading measures are employee satisfaction and product quality, then a lagging measure can be customer satisfaction with the product.
  • In employee training, leading measures might be the number of employees trained and percent of trainees giving positive ratings to the training. Lagging measures can then be the degree of improvement in work processes due to training.

In the article Lead vs. Lag Indicators by Ian Seath writes: The difference between  leading and lagging indicators is important, but what really matters is that lagging indicators without leading indicators tell you nothing about how the outcomes will be achieved, nor can you have any early warnings about being on track to achieve your strategic goals.

Similarly, leading indicators without lagging indicators may enable you to focus on short-term performance, but will not be able to confirm that broader organizational outcomes have been achieved. Leading indicators should enable you to take pre-emptive actions to improve your chances of achieving strategic goals. Implicit in the design of any balanced performance management framework is the ‘cause and effect’ chain of goals and strategies.

So, investment in organizational capability leads to efficient and effective processes, which deliver products and services that satisfy customers and ultimately lead to profit in private sector, or positive stakeholders in public sector. Due to the ‘cause and effect’ chain, there is a corresponding chain of ‘leading and lagging indicators’…

In the article Look Ahead with Leading Indicators by Heather Smith writes: Just as you can’t drive with your eyes only on the rear-view mirror, you can’t drive organizations forward by focusing on the past. Yet that’s what you’re doing if you’re relying solely on lagging indicators, such as; revenue, profit… to manage organization’s performance.

These lagging factors are important, but once they’re calculated, it’s too late to impact them. Whereas, good leading indicators allow you to spot trends and see issues before they balloon into real problems. Leading indicators are early predictors and in combination with lagging indicators give a holistic view of the organization’s performance.

Lagging indicators depict trends-measurements, such as; revenue, sales, expenses, inventory turnover… that help management understand whether or not certain objectives have been met. On the other hand, leading indicators pinpoint the source of future problems and help predict whether or not target values for the lagging indicators will be met. Leading indicators enable organizations to avoid problems and operate more cost-effectively…

In the article Lagging vs. Leading Indicators by Pamela Jett writes: We have all been taught that we can’t change the past; we can only impact the future. And, most managers understand that communication that focuses on the future as opposed to being trapped in the past sends a powerful-positive message. One way to focus on the future and to present a ‘forward thinking mindset’ is to understand and utilize the difference between lagging and leading indicators.

Lagging indicators are those things which capture and summarize the past. For example; quarterly sales reports, customer satisfaction reports are lagging indicators… they summarize what has already occurred. Leading indicators are considered ‘drivers’ of lagging indicators. A savvy communicator will focus his or her communication on ‘leading indicators’: For example; when pitching proposals to management, spend time talking about leading indicator data…

Find out what the ‘drivers’ are for management’s top lagging indicators, and focus efforts and energies on creating ways to impact those specific leading indicators. Sophisticated business people spend less time talking about what was and more time focusing on what can be.

In the article Leading and Lagging Indicators—Making Sense by Phil Jones writes: The debate about whether an indicator is leading or lagging is one of perspective in the sense of who is looking at it. You have to ask: From whose perspective? Otherwise the conversation is meaningless. For instance, a ‘signed sales contract’ is a lagging indicator for the sales team, whereas a ‘signed sales contract’ is a leading indicator for finance, since no money has been received; revenue has not being realized.

So, leading indicators for one part of the organization can be lagging indicators for another, vice versa. Then, what leading-lagging indicators should ‘I’ use? The answer is simple: It depends who ‘I’ is. It also depends what you are trying to achieve…

Performance indicators provide information that helps management respond to changing circumstances and take action to either; achieve desired outcomes or avoid unwanted outcomes. Their role is to promote action that corrects potential weaknesses without waiting for demonstrated failures. This ability to influence-improve future performance by guiding current actions is important characteristic of successful organizations.

According to Douglas Wick; for every one lagging indicator, there should be two leading indicators. Leading indicators are used in forecasting, predicting… where the organization is going... According to Ray Baird; lagging indicators are simply a measurement, whereas leading indicators are a measurement tied to a hypothesis, which can be tested-refined in order to explain or predict behavior. The point is that you learn nothing by observing the result– only by understanding the process that leads to the result.

All measures are not created equal: It’s critically important to measure performance using combination of both leading-lagging indicators, since they are a distillation of the desired outcomes… According to Robert; a system of metrics will objectively show your progress and success each step of the way. It’s essential to follow a course of action that produces ongoing improvement, sustainable and repeatable innovation…

According to Avinash Kaushik; without a clearly defined list of indicators-objectives you are doomed, because if you don’t know where you are going than any road will take you there. The indicators must be ‘DUMB’: Doable, Understandable, Manageable, Beneficial. The beauty of indicators is that they reflect specific strategies. They are really DUMB… they are the priorities. They are things almost everyone in the organization will understand…

Managing organizations with the most relevant performance indicators will lead to better decision-making, fewer losses, and more timely improvements… According to Linda Williams; implementing a well thought out and comprehensive set of performance indicators is the first step to a more proactively performance-based organization…