In every business organization, the performance has to be measured. The performance of a business is measured by taking measurements of lagging indicators and leading indicators. Lagging indicators are those measurements that focus on the output. It is easy to measure lagging indicators. However, these are hard to improve and influence. Examples of lagging indicators include aspects like customer satisfaction, weight, and a number of deaths. On the other hand, leading indicators are those measurements that are input-oriented. They are hard to measure but can be easily influenced. Examples of leading indicators include user guide usage, calories taken per day and use of safety equipment.
Lagging and leading indicators can be used together with the objective and key results (OKR), to determine the outcome of a business organization. Objectives and key results (OKRs) refers to the framework used to define and track objectives and the outcome, over a specific amount of time. OKRs are set and evaluated on a regular basis so as to ensure that the business's goals are met. They can also be used for future references; to determine how well projects were executed. The OKRs of a business organization go hand in hand with lagging and leading indicators.
When determining the general performance of your business organization, it is true that you will consider both lagging and leading indicators. However, if you are to ensure the success of your business and secure its future, then it would be best for you to consider more of the leading indicators than the lagging indicators. This article provides detailed information on the benefits of leading indicators over lagging indicators.
Leading Versus Lagging Indicators
Lagging indicators look into the past. They indicate past performance and focus on how a business performed in the past. Since lagging indicators are only records of what has already happened, they cannot influence or cause any positive change in the future of the business organization. They are, therefore, not the best measurements to use when handling complex solutions in the business. After all, a company can only act after the fact, not after the outcome has already been revealed.
For instance, consider an IT outsourcing company. In its Service Level Agreements (SLA's), the organization may have made several agreements with its customers. One of the agreement terms may have involved the company's resolution to be solving any high priority incidents within 36 hours. Therefore, the main objective/goal of the IT outsourcing company would be to always be compliant with the service level agreements (SLA's), in other words, always solve cases within 36 or less hours. In such a case, the lagging indicator would be; 'the company solved the incident within 36 hours or the company didn't solve the incident within 36 hours.' Measuring this lagging indicator is very easy, all you need to do is look 36 hours back and see if the company solved the incident or not. However, that would only be past performance. Such a record will not in any case influence how the IT outsourcing company performs in the future. After all, the fact that the company either solved the incident within the agreed time, or did not solve the incident, does not mean that in the future incidents will be solved within 36 hours or not. The lagging indicator can only be used for recording purposes. This aspect of lagging indicators is what makes these indicators not the best for determining complex solutions of a business.
Unlike lagging indicators, leading indicators can help to predict future behaviors of a business. This enables proactivity in a business, that is, the company can use lagging indicators to determine what activities to undertake, so as to impact the organization positively. Leading indicators are therefore the way to go to get the business boost you will need in the future. For instance, qualified leads are a leading indicator of future sales.
Again, take the example mentioned above, of the IT outsourcing company. Taking the same case, where the company's main goal is to solve all incidents within 36 or less hours, measuring the leading indicators would be quite difficult. Leading indicators would be an aspect like 'the amount of time that the employees spent on checking for any filed incidents online.' Measuring this leading indicator would not be easy. This is because most employees would not have a specific timetable for when to check for filed incidents; they would just be checking randomly from time to time. Furthermore, it would even be more complicated to measure the leading factor when more than one employees are involved. However, this leading indicator would influence the future of the IT outsourcing company by enabling proactivity. The leading indicator would so by helping determine the activities that must be taken to achieve their goal of solving incidents with 36 hours or less. For instance, the company could assign several people to be checking for filed incidents, such that one person is not overloaded, which could lead to delays. Another proactive measure that the IT outsourcing company might do is install alarms on computers, which go on wherever an incident is filed. Leading indicators can, therefore, be used as predictive measurements.
Due to future orientation, leading indicators are the "right" key results for objective and key results. Most of the time, organizations focus on measuring the results, outputs, and outcomes. They opt for such measurements since they are easy to measure. However, this is a huge mistake that they make. These measurements are lagging indicators. They are important when it comes to determining charting progress. However, lagging indicators are not beneficial whatsoever when it comes to influencing the future of a business. Rather, leading indicators are the best for achieving the right key results for OKRs. This is because they look in the future, unlike lagging indicators that look into the past. As a result, the organization or teams can grow with the OKRs and achieve greater success when using leading indicators.
Leading indicators bring the organization into the future because they allow statements about the coming time. These statements include changes that may occur in a business organization or its environments. Knowing such possible changes can help an organization prepare for such changes so as to ensure the future success of the business. For instance, a leading indicator statement may predict a future increase in sales. This statement may move the organization to undertake activities that will favor them, such as making additional sales calls or running additional marketing campaigns. Other statements could predict an increase in the number of accidents that may occur in a factory. Such a statement could guide the factory to include safety training programs for all employees and encourage them to wear hard hats at all times. In other words, leading indicators can help a business grow and make continuous progress without ever progressing backward. This is so since with leading indicators they can predict and plan for future changes.
This article has outlined three main reasons as to why you should focus on the leading indicators and not on lagging indicators in the context of objective key results. First, leading indicators can help your organization stay focused on the future. Second, due to their predictive nature, leading indicators enable proactivity in an organization, ensuring it's a future success. Lastly, leading indicators can help predict changes in an organization, hence the organization can prepare for such changes in advance. Indeed, leading indicators are simply the way to go to get better results for your objective key results!