Confusion Over Leading and Lagging KPI’s
Confusion Over Leading and Lagging KPI’s
By Marshall Krupp, Certified EOS Implementer
In collaboration with Ashley Berecz, Client Relations Manager
Business today is driven more than ever by data. In a time when data is so readily available, we should not be making decisions that are not driven by it. Our technological advances are at a stage that enables us in a moment’s notice to hit a button and generate a report in detail. When such reviews in the past could take long periods of time to generate it can now be done in seconds. Data are the numbers that enable us to understand our businesses past, present, and future. They come in the form of metrics, measurements, or what we can call “Key Performance Indicators” or KPI’s.
The main point of identifying and tracking specific metrics or KPI’s is to measure the progress toward specific goals… usually our 1-year plan.
There are two rules that need to be followed in working with numbers:
- Know what numbers are important to review and look at, and the time periods of those reviews. There are thousands, if not tens of thousands of numbers in any particular business. Know the numbers that are important that should be regularly reviewed.
- Numbers are only as valuable as their accuracy. The old story is, “garbage in garbage out”. So, accuracy of the data input is critical and needs to be “quality controlled” at all times. Inspect what you expect!
There are tons of materials you can read and review to better understand the concepts of KPI’s. One of the most valuable books that I often refer to others to read is “Key Performance Indicators for Dummies” authored by Bernard Marr.
Where we most often fail in our development of KPI’s is in considering and understanding “lagging” and “leading” indicators or KPI’s.
Not all metrics can give you the information you need right away. Lagging indicators take a long time to change and show the later-stage results of efforts. Leading indicators, on the other hand, measure the activities you think will help you reach your goal, and can be tracked on a more ongoing basis.
Because of the different time frames required by leading vs. lagging indicators, it’s important to understand when you’re tracking a lagging metric so you can identify leading indicators to help guide you as you go. Understanding the difference between leading and lagging indicators and how they tie into your objectives will help keep your teams on track and help you accurately monitor progress towards your goals.
It is important to recognize that lagging and leading indicators are interrelated. Building a system of KPI’s on one without the other does not provide a great road map to understanding the journey of your business. So, what is the difference between the two?
- Lagging Indicators measure performance in a period that is past. Financial metrics are classic examples. As the standard disclaimer warns, past performance does not guarantee future returns.
- Leading Indicators contain guidance about future results. For example, an increase in orders for auto parts suggests a rise in new auto production and sales in the near future.
In most businesses, the goal is to have the right balance of both leading and lagging KPI’s.
The benefits of lagging indicators include:
- A clear indicator of past success
- In many cases, the metric that best assesses the impact of your efforts is going to be a lagging indicator because it takes time for your changes to take effect.
The benefits of leading indicators include:
- Faster feedback: By tracking leading indicators, the team can get feedback on their efforts more quickly and determine what actions they might need to take to achieve their over-arching objectives.
- Team involvement: Because there are often many facets to broad goals, there are typically many leading indicators to track. Different team members and departments can own different metrics, so everyone contributes to meeting the company’s larger objectives.
The relations of leading and lagging indicators is simple:
“If this…………………………then this!”
An even more simpler way of showing this is the formula:
So, ask yourself the following when considering your KPI’s:
“You’re on an island. You can’t communicate with your team. The cabana boy or girl, whichever you prefer, brings you a sheet of paper with numbers on it. Those numbers tell you exactly how the business is doing.
- What would the numbers on that sheet of paper be for your business?
- What results would you want to see on that sheet of paper that would tell you if your business is failing or succeeding?
Remember, the only thing that you have on the island is that sheet of paper sharing the results of the business based on the measurable KPI’s… the lagging and leading indicators. And, in a time when mass data is available… less is more!!!!!!!!
As you build your KPI’s and your laggings and leading indicators, ask yourself the following questions:
- Are these KPI’s derived from a valid strategy?
- Are they simple to understand?
- Are they relevant, not just now, but over time as well?
- Are they clearly defined?
- Do they accurately reflect the business process?
- Do they involve factors or quantities that can be more fully controlled or influenced by the business?
- Do they focus on improvement?
- Do they offer quick feedback?
- Can they be used to create and reinforce a culture of accountability?
Today more than ever, if you are going to beat your competition, knowing your numbers is critical if you are going to make the pivots and adjustments over time to overcome the challenges. Leading and lagging indicators can assist you with making those pivots.
If you have any questions or would like to continue this discussion further, please contact us at email@example.com or go to our website at www.peerexecutiveboards.com and contact us virtually. We will be happy to get back to you!
EOS®, the Entrepreneurial Operating System® takes entrepreneur businesses on a journey of mastery of the EOS tools which enables businesses to elevate their leadership teams to make better decisions, maintain a level of accountability, at attain greater success more simplistically. The components of EOS® are Vision, People, Data, Issues, Process, and Traction, which when used effectively attains a healthier organization with greater success. Marshall Krupp is a recognized Certified EOS® Implementer serving clients through the nation. He is also a national speaker, a past award-winning Vistage Worldwide Chair, and a past career of providing crisis management strategic advisors service to businesses, governmental agencies and not-for-profit organizations. Review more at www.peerexecutiveboards.com and at www.eosworldwide.com/marshall-krupp. Review the YouTube video here.