To improve product performance, it is important to understand the concept of key performance indicators and how to differentiate leading indicators from lagging indicators (also known as trailing indicators).
While it is true that both terms could be confused for the other, and that the concepts could be quite difficult to nail down and identify, the ability to understand and differentiate between them would afford managers a better understanding of KPIs. This knowledge would tremendously impact decisions when a company makes structures for better performance.
Good KPIs Are a Balance of Leading and Lagging Indicators
Key Performance Indicators, or KPIs, are metrics that can help forecasting a product performance. These indicators signify anything that can be considered to predicting financial or market trends.((Elizabeth Harris. The Advantages of Leading and Lagging Indicators. Resultist Consulting. Retrieved on August 29 2021. https://www.resultist.com/blog/leading-indicators-vs.-lagging-indicators))
In successful businesses, KPIs emerge as a result of proper combination and synergy of both leading indicators and lagging indicators. Leading Indicators and lagging Indicators are distinct performance indicators that measure different events and prospects of a product. They create a balance and work together to set achievable targets for a product to meet.
In that balance, one would find Lagging Indicators overlapping with leading indicators, and vice-versa. This is how managers and stakeholders merge their primary metrics with abstract opportunities to plan for the future of their growing products.
Managers need to learn how leading indicators differ from lagging indicators, and how they can be jointly used to assess current situations and make plans for growth in product development.
Leading Indicators
Leading indicators are achievable standards and goals for a product to meet. They can be identified from the metrics of ongoing situations that have not yet happened. The potential of its value is what is recorded and this is what gives leading indicators such an abstract nature.
True to its name, they lead and show managers the way forward. Take this analogy for example: imagine a driver in a vehicle driving along the highway, leading indicators are the windscreen through which he sees what is ahead, and navigates acceleration.((Bernard Marr. July 2 2021. What are leading and Lagging indicators? Bernard Marr. Retrieved on August 29 2021. https://bernardmarr.com/what-is-a-leading-and-a-lagging-indicator-and-why-you-need-to-understand-the-difference/))
Leading indicators are also regarded as a metric for measuring output. Since they are the potential value given to an event that hasn’t yet occurred, they are also the goal set against that event and used to measure it after it has happened.
Leading Indicators help managers and their teams to find the paths for their products to grow, and give teams a clear objective to follow.
Some examples of metrics that constitute leading indicators are:
- Brand insights
- Leads
- Market analytics
Due to its nature, calculating leading indicators may not always bring precise results. However, with the right tools, managers will be able to come up with accurate metrics that are achievable for their products to attain.((Lionel Valdellion. July 12 2020. Leading and Lagging indicators. Everything you need to know. CleverTap. Retrieved on August 29 2021 https://clevertap.com/blog/leading-vs-lagging-indicators/))
Lagging Indicators
Lagging Indicators are metrics that measure the current state of the product. They are the already available metrics that indicate how the product is fairing, and if they had met the performance predictions set by previous leading indicators.
For an analogy, the same hypothetical vehicle referred to earlier is still relevant here. Now, in this hypothetical vehicle, the lagging indicators are the things behind the vehicle that can be seen by looking through the rear-view mirror.
Essentially, lagging indicators measure achievements from concluded events and situations. It is these situations that further determine the achievability of new prospects when planning towards future performance.
Likely metrics to find as lagging indicators are:
- Profit
- Resources
- Units of products sold
- Net Promoter Score
Lagging indicators focus on factual resources that are primarily available and combine this with leading indicators to make precise future predictions.
It is clear from the driver-vehicle analogy that a driver needs both the windscreen and the rearview mirror to have a smooth ride. In product development, acknowledging lagging indicators and correctly implementing indicators would lead to a better understanding of the market environment, effective deployment of resources, and ultimately, better product performance.
Using Lagging Indicators in a Contextual Example
Product A is a new product that has spent 6 months in the market since the beginning of the year. On entering the third quarter, stakeholders decide to have a brainstorming session to consider the expansion of production and improve performance across all departments.
Looking through the scope of lagging indicators, the following are things that would be brought to the table by stakeholders:
- Monthly profit returns over the past 6 months
- Reports of complaints and incidents in the last two quarters.
- Charts of sectors where products have recorded the most success.
- Consumer reviews received from market research
- Advertisement expense and ROI
- Brand exposure
- The success of previous campaigns
Six months’ data of monthly profit returns could help outline months and seasons where their products did better in sales and also predict, to some extent, how the next months would fare based on the same factors. Also, Net Promoter Score would help production improve on complaints made by product users and in effect, increase product performance in the market.
As earlier mentioned, with lagging indicators, all data that show current situations or the results of past events would be tabled. With the above outlined, stakeholders would be able to make decent predictions on how the next phase of their business would take off. However, missing vital lagging indicators, stakeholders might lose sight of opportunities to be explored. This may result in weak performance and waste of resources if they do not pinpoint achievable goals and objectives derived from the lagging indicators for their teams to target and for stakeholders to hold on to.
Using Leading Indicators in a Contextual Example
Just as the scenario painted above, a similar stage sets where stakeholders have to brainstorm for plans to improve Product A as it moves into Q3. However, the difference in scenarios appears here when one confronts the reality that actionable performance indicators cannot be arrived at without stakeholders obtaining metrics from ongoing situations and using them to calculate prospects. Therefore, at this meeting, stakeholders are charged to seek leading measures that would help in enhancing lagging indicators.
At such a meeting, some tabled data would include:
- Current sales in the pipeline
- The daily rate of product pre-order
- Number of leads available
From the daily rates of pre-ordered products, stakeholders can get an idea of the sales rate at the launch of the third quarter. The number of leads available could also help the sales department predict a confident rate of conversions.
It is important to reiterate that leading indicators lead to current results. This means that it signals from past leading indicators that have helped products have arrived at their current stage. The current stage or achievements is hitherto referred to as lagging indicators which will forthwith be enhanced by leading indicators to produce even more results. And this is the combination of gears that pull the concept of key performance indicators.
Making the Most of Leading and Lagging Indicators
Do not misconstrue indicators
To counter confusion between leading indicators and lagging indicators, proffering names that give more perspective to their meanings should be encouraged. Managers should make use of defining terms and phrases in referring to them. For example, leading indicators can be referred to as “performance indicators,” while lagging indicators could be called “results indicators.”((Elizabeth Harris. The Advantages of Leading and Lagging Indicators. Resultist Consulting Retrieved on August 29 2021. https://www.resultist.com/blog/leading-indicators-vs.-lagging-indicators))
Notably, common error managers commit when setting performance indicators is setting goals on the wrong indicators. Performance goals and objectives can only be measured by achievements, therefore, goals and objectives should be set on lagging indicators.
Invest in effective analysis
Always take note of recurring elements in your analysis and watch out for them in subsequent ones. Leading indicators are more accurately grasped with the right tools, so it is a good investment for managers to obtain and make use of the best analytic tools and resources.
Use incentives
Achievable set goals may also be incentivized. Incentives are known to inspire motivation in stakeholders and their departments, and this could bring implementation of ideas a long way, and help achieve set goals in no time.
Rely on new opportunities for growth
While it is advisable to do both leading and lagging indicator analyses, some managers often find themselves at a junction of choosing what analysis to majorly invest in.
For all businesses, the endgame of all performance analysis and improvement efforts is an increase in sales. In that case, at the end of the day, focusing on lagging indicators may lead to redundancy in results.
On the other hand, a sales department stands a better chance of increasing its figures with new prospects, ideas, and targets in sight.
You have learned that since lagging indicators set a precedent for leading indicators to enhance, best practices lean towards the use of both leading and lagging indicators. The takeaway should be that they are both important for product development and business growth, but more resources should be extended on analyzing leading indicators than is spent on analyzing the output.
