When it comes to measuring performance, it is important to distinguish between lagging and leading indicators. Lagging indicators measure past events, while leading indicators provide a forecast of future events.
Lagging indicators are retrospective metrics that measure what has already happened. They are often easier to find within a company's databases and are commonly used in regular monthly reports. Some examples of lagging indicators include:
- Software bugs reported to Support in Release x.x
- Q2 revenue
- Call center calls completed within two minutes
- Product returns in November
The limitation of relying on lagging indicators is that issues can start brewing within a business well before these metrics trigger a warning on the scorecard. Using metrics that measure past events to guide business decisions is akin to driving while only looking in the rear-view mirror. This approach makes it easy to miss an opportunity or a threat on the road ahead until you're right upon it.
Leading indicators, on the other hand, provide a forecast of future events. They are often more difficult to find, but they can provide valuable insights into potential problems or opportunities. Some examples of leading indicators include:
- The percentage of identified software bugs fixed in Release x.x
- Contracts currently in negotiation for Q2
- The number of customer cases currently open
- The trend of customer complaints over the last three months
The Importance of Leading Indicators
So, does it really matter which type of indicator is used? The answer is a resounding yes. While lagging indicators offer insights into what has happened, leading indicators provide a forward-looking view that can help organizations to anticipate and prepare for future outcomes. This allows for proactive management and decision-making, helping companies to seize opportunities and mitigate risks before they fully materialize.
The Right Mix of Indicators
Ultimately, a balance of both lagging and leading indicators should be used for a comprehensive view of company performance. By pairing the retrospective insights from lagging indicators with the predictive power of leading indicators, companies can create a more responsive and agile management strategy.
By understanding the difference between lagging and leading indicators, organizations can make better decisions about how to measure and manage their performance. By using a combination of both types of indicators, organizations can gain a more complete picture of their current state and future prospects. This can help them to identify and address potential problems early on, seize opportunities, and mitigate risks.