“In strategic planning it is important to discuss key performance indicators (KPI). ... The first step to determining your KPI is to understand the difference between lagging and leading indicators. The second step is to define and monitor your business indicators. Lagging and Leading Indicators.” - May 27, 2014 - Project Times
Both leading and lagging indicators can occur at approximately the same time and there are circumstances where the leading and lagging indicators may not be easily identified. Today we will review definitions, examples and how to recognize the differences. By doing so, we hope to help you improve Key Performance Indicators (KPIs) to make better decisions.
Definitions:
Indicator:
An indicator is anything that can be used to predict future financial or economic trends.
Leading Indicator:
These types of indicators signal future events. Leading indicators are measures that lead to the performance of lag measures; normally measuring intermediate processes and activities. Often you will hear “what drives results?” when talking about leading indicators.
Leading Indicator Examples:
- Amount of sales in the pipeline at 90%
- Customer complaints three-month trend
- Number of leads created
- Contracts in negotiation for Q3
- Average handle time
- Number of leads converted to opportunities
- Customer cases currently open
- Team closing ratio
- Average speed of answer
- Number of contacts
Leading indicators may prove difficult to identify and capture. With new measures there is no history within the organization. Attention to leading indicators are an advantage since they are predictive in nature and allows an organization to make adjustments based on results.
Lagging Indicator:
A lagging indicator is one that follows an event. Lagging indicators focus on results at the end of a time period, normally characterizing historical performance. Lagging indicators can also be referred to as Key Results Indicator (KRI)
Lagging Indicator Examples:
- Last month's P&L statement
- Q2 Revenue review
- Total problems
- # of units sold
- Call center calls completed within two minutes
- Total incidents
- # of different products sold
- Product returns in July
- Total customer contacts
One of the advantages of lagging indicators is how easy they are to identify and capture. This often has teams focused primarily on these KRIs which are only one piece of the puzzle. Lagging indicators are historical in nature and do not reflect current activities. These measures lack predictive power.
Caution:
Quotas or goals should only be placed on lagging indicators, not on leading indicators. Placing a goal on a leading indicator may result in gaming the system which can generate the wrong results.
Conversations about leading and lagging indicators may get slightly confusing as other terms, phrases and special lingo may be used. For example, when talking about leading indicators, many will refer to “performance indicators” and lagging indicators may be referred to as Key Results Indicators (KRIs).
Goals and Compensation:
It goes without saying that goals and incentives drive behaviors. Consider how you want to influence those desired behaviors. Develop processes, metrics which help to measure success and compensation to keep motivations aligned with goals.
Don’t leave out the support analysis team. Develop a list of behaviors you hope to see from them as well. If you identify and document the desired behavior, it becomes the basis for future behavior.
When choosing the right sales performance analytics to focus on and help their organizations grow, sales managers typically face the dilemma of focusing on lagging or leading indicators.
Lagging indicators are typically “output” oriented, easy to measure but hard to improve or influence, while leading indicators are typically input oriented, hard to measure and easier to influence.
Sales leaders ask a questions such as: “Which KPIs do I want my team focused on that will best correlate to sales success?”
If you focus primarily on lagging indicators, they may in fact be detrimental to success. Leading indicators can become a secret formula for improving sales productivity. If a sales team works together to discover which indicator(s) are most valuable as a core sales KPI, there is “buy-in”. This will increase the sales team’s ownership of their performance and offer better accountability at all levels. Leading indicators focus on the likelihood of achieving goals and what might occur in the future, serving as a predictor or a warning sign.
The combination of leading and lagging indicators offers a bigger picture view of the operation. It also gives you a comprehensive look at your risk, and allows you to make changes to improve scenarios before lagging indicators come into effect.
While both types of sales metrics are critical for any sales organization to track, the best companies study more leading sales metrics than lagging.
Help and Resources:
Do you need help with identifying leading vs. lagging indicators and analysis? Please reach out to me here. We can talk about your opportunities and what resources are available.
If you are in the process of selecting a CRM software, we have an ebook to help you through the decision process: "The Pros and Cons of Our 5 Favorite CRM Software Systems"
If you are about to update or create a new sales compensation plan, you can refer to our white paper: “Sales Compensation Plans - Examples, Templates and Software Options”
