What’s So Special About Lead Indicators?

October 19, 2009 by Stacey Barr

Most performance measures or KPIs tell you what happened. But if we’re really going to manager company or organisational performance, we need to know something about what’s going to happen.

And that’s what lead indicators do. They are a special breed of performance measure or KPI because they have predictive power.

They always have a relationship to a lag indicator, which is your typical performance measure or KPI that tells you what has happened already. Lag indicators track performance outcomes or end results that your business or organisational goals are based on.

When a lead indicator starts to improve, your lag indicator will likely improve too. And if your lead indicator starts to show poor performance, you can expect your lag indicator will follow suit.

Now this relationship is not quite the same as any other cause-effect relationship. There’s usually a time lag, so when your lead indicator behaves differently, the lag indicator won’t start changing until some time in the future. And that’s where the power of the lead indicator lies!

You can use your lead indicators to give you advance warning of likely future performance, so you can do something about it before your lag indicators – your performance outcomes or end results – are affected.

So an increase in building permits now could be a lead indicator of a boost in the economy in the future. Or an increase in the number of other websites linking to your website now could be a lead indicator of increased traffic to your site in the future. Or higher than average rainfall could be a lead indicator of bigger sugar harvests and thus demand on sugar mill processing rate in the future.

The stronger the correlation – or quantitative relationship – between a lead indicator and lag indicator, the better the predictive power of the lead indicator. So a great way to find good lead indicators for the lag measures of your performance outcomes is to first consider some potential lead indicators, and then to gather some historic data to measure the correlation.

Finding really fabulous lead indicators takes time and practice, so the sooner you get started, the sooner you’ll have more control over performance!

TAKING ACTION:

Choose one of your company’s or organisation’s KPIs, and spend some time discussing and thinking about potential lead indicators, that could have some useful predictive power for that KPI. Gather some historic data and check the correlation of each potential lead indicator, and if you find a good one, start tracking it!

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  1. David Gerbino says:

    One of my favorite leading indicators, "sales calls", can be considered simple. How many businesses track results by the number of "sales calls" in the past month. If my goal as a sales person is to have 60 quality sales calls (assume they are qualified and not junk for this discussion) a month, an executive summary report may show show I had 75 out of 60 or 55 our of 60. If I was over, great. If I was under, I get do better next month. How is that a leading indicator? It is not. However, if I track my "sales calls" 30 days into the future on a weekly basis, I should be able to manage myself to make or exceed my goal. My manager can then have a weekly report that shows salesmen not meeting their "sales call" goals.

    Please note that this indicator is not a solitary metric. It belongs in a family of sales metrics.

    Creating forward looking metrics is not easy but if you start to break down your business into components, they start to materialize.

    @dmgerbino

  2. […] Lead indicators are just as important, maybe even more important, than lag. They are the markers along that way that tell you you’re heading in the right direction. […]

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