Use Leading Performance Metrics to Understand What Might Happen
by Betsy Burton
One of the topics that I have heard a lot about in the news as it relates to data about the COVID-19 pandemic is related to different types of data metrics. This is a very common issue in business performance management, which has not has gotten a lot of visibility beyond the performance management discipline until recently (Using Metrics To Measure The Business Value of Your Investments).
In terms of time, there are different types of performance metrics: lagging indicators versus leading indicators. And it is important for organizations to clearly identify and distinguish what types of performance data they are looking at in order to use the metrics effectively.
In this blog, we are going to explore these two types of metrics and understand how they can be used for different purposes to complement each other.
A performance metric is a concise and measurable piece of data. Interestingly, however, we find that less than 40% of organizations define any business performance metrics beyond those required for key financial reporting (KPIs). And, of these, only a small minority of organizations ever go back to verify whether their performance metrics were achieved or not.
The reason performance metrics are so critical is that they help inform investment decisions. Without them, business and technology leaders are often left to make investments based on limited performance data, estimated metrics, and, worst of all, gut feeling.
Lagging Indicators: Highlight What We Know Happened
A lagging indicator is a performance metric that highlights some change that has already happened, such as increased revenue, increased sales, cost of goods, investment income, budget, or net-contract value.
Depending on the financial reporting structure of the organization, lagging indicators are used to indicate the state of the organization for a given quarter, year, or month. Since lagging indicators illustrate what has already happened, they are generally highly auditable metrics.
Lagging indicators provide a clear picture of the state of a business at some previous snapshot of time.
Leading Indicators: Signal What May Happen in the Future
A leading indicator is a performance metric that signals some current change that may have a broader impact in the future, such as increased web traffic, increased customer engagement, increased sales efficiency, decreased reputation, reduced downtime, or increased number of customer accounts.
While leading indicators themselves may be auditable forms of quantitative or qualitative data, their real impact on the business is less clear in the immediate timeframe. For example:
• An increase in customer/prospect web-traffic of 25% and an increase in customer satisfaction of 15% may be leading indicators that the organization could see an increase in sales in the future. However, there is not an exact correlation.
• A 10% decrease in customer ratings and a 20% decrease in customers using chatbots and support centers may be a leading indicator of customer issues that could impact sales. But once again, these tend to be less defined and less auditable metrics.
If the organization tracks these leading indicators over time, and particularly a collection of them, they can build up enough data that enables them to estimate the correlation. But it is not exact; these are leading performance indicators that are signaling changes, which should/could affect a lagging indicator.
Organizations need both lagging and leading indicators. They need lagging indicators to illustrate the business state for a specific period of time, and leading indicators to illustrate the change that may have a broader impact on a lagging indicator in the future.
The challenge is to 1) determine the right portfolio mix, 2) clearly identify what is a lagging and leading indicator, and 3) use leading indicators as signposts of what may affect future lagging indicators.
Don’t simply throw away or discredit leading indicators because they are not exact or auditable. Use a collection of leading indicators in context with known lagging indicators to inform investments.