Keeping track of business performance is critical to success. It's how we know if we're winning, where to improve, and what strategies work. At the heart of this scoring system are two types of indicators: leading and lagging.
But here's the thing: finding the right balance between these two types of indicators isn't always easy. Sometimes we focus too much on what's ahead and miss what's happening now. Other times, we get so caught up in looking back that we forget to plan for the future.
In this post, we will examine why you must strike the right balance between leading and lagging indicators when measuring performance. We'll explain what each indicator contributes and walk you through creating a performance framework that balances leading and lagging indicators to give you a more comprehensive view of your business performance.
What are leading indicators vs lagging indicators?
Leading indicators are like car headlights—they show us what's coming down the road. Think of them as clues about the future. They help you stay ahead of the game by giving you an early warning of what's coming up. For example, if you're in sales, you might look at things like how many people are visiting your website or how many leads you're generating
Lagging indicators, on the other hand, are more like rearview mirrors, giving us a look at where we've been. Think of them like a report card for how well you've been doing. They tell you how things have gone in the past and help you figure out if the things you've been doing have been working. For example, you might look at how much revenue you generated, how much profit you earned, or how happy your customers are. These things can help you figure out what you need to do differently if you want to improve your performance.
The power of balancing leading and lagging indicators in performance measurement
Focusing too much on just one type of indicator, whether leading or lagging, can lead to some problems. These include short-term thinking, making reactive decisions, not getting a full understanding of performance, misinterpreting data, and not being able to adapt quickly. The best way to avoid these risks is to have a balanced approach that considers both types of indicators. Here are some other reasons why balancing indicators is important:
1. Early warning signals
Knowing what's coming next can be helpful in any business. That's why leading indicators exist. They work like an early warning system, giving you a heads-up on potential trends, opportunities, or risks before they become real problems. By paying attention to these signals and taking action, you can be proactive and stay ahead of the game. This can help you adapt to changing circumstances more easily.
2. Validation and confirmation
Looking back on how something went is what lagging indicators are all about. They show how well a plan, decision, or action worked out after the fact. This helps us feel good about the direction of the business. Plus, it proves that our strategies and initiatives are on the right track.
3. Strategic decision-making
Making smart decisions for your business requires a balanced approach that considers both future possibilities and past experiences. This means looking at both leading and lagging indicators to get a complete picture of what's going on. By doing this, you'll be able to use data to make informed decisions that are more likely to lead to success.
4. Continuous improvement
Using both types of indicators can help you improve continuously. Leading indicators help identify areas that need attention and innovation, while lagging indicators help provide feedback on how effective your improvement efforts have been. This allows you to keep refining and optimising your processes.
Crafting a winning performance framework: Balancing leading and lagging indicators
To achieve sustainable growth and long-term success, you must develop a robust performance framework that incorporates both leading and lagging indicators. By striking the right balance between these two types of metrics, you can gain a comprehensive understanding of your past performance, current state, and future potential. Here’s a step-by-step guide on how to develop an effective performance framework that leverages both:
Step 1: Define your SMART goals
First, figure out your goals and what you want to achieve. Make sure your goals are SMART - Specific, Measurable, Achievable, Relevant, and Time-bound.
Example:
Let's consider a specific example of a software-as-a-service (SaaS) company called “SMB Navigator” that provides customer relationship management (CRM) solutions to small and medium-sized businesses.
SMB Navigator’s goals for the next financial year are:
- Increase annual recurring revenue (ARR) by 30% Year-over-Year (YoY).
- Improve customer retention rate from 80% to 90%.
- Launch two new major product features to address customer needs and stay competitive.
- Achieve an average customer satisfaction score (CSAT) of 4.5 out of 5.
To align performance indicators with these objectives, SMB Navigator can consider the following:
Leading indicators
- Sales pipeline value and velocity for monitoring progress towards the ARR goal
- Product development milestones for ensuring timely launch of new features
- Customer engagement metrics (e.g., product usage, support interactions) for predicting retention
Lagging indicators
- ARR growth rate for confirming the achievement of the revenue goal
- Customer retention rate for measuring the effectiveness of customer success efforts
- Number of new features launched for verifying the completion of the product development objective
- Average CSAT score for assessing overall customer satisfaction
Step 2: Establish leading and lagging KPIs
Simplify your list of indicators and focus on the KPIs that matter most.
Example:
Building on the SMB Navigator example, let's establish a set of leading and lagging KPIs that are most relevant and impactful for achieving the company's objectives.
Step 3: Set baselines and targets
To benchmark your performance, you must first set baselines and targets. This includes determining the average performance of each key metric you are monitoring. Then, you must establish what you want to achieve and what is feasible based on your company's objectives, industry benchmarks, and past performance. Ensure that your targets are ambitious yet realistic.
Example:
We’ll now add baselines and targets to each KPI for SMB Navigator.
Step 4: Implement measurement and data collection processes
Set up easy ways to gather and study data for each KPI and use tools or systems to make data collection and reporting simpler.
With Tability, you can automate data collection and reporting to save time and avoid mistakes. This makes it easy to keep track of your KPIs.
Tability’s dashboards make it easy to analyse all your data in one place.
Step 5: Monitor performance and trends
Remember to monitor progress by regularly checking against the goals and performance indicators you set. Weekly check-ins are a great way to keep everyone on the same page and analyse trends and patterns to find out what's working well and what needs improvement. Check-ins also keep people engaged and help with team accountability.
Use data to decide what resources you need to allocate where, and adjust your plans accordingly. Keep refining your strategies and tactics based on what you learn from the data, and always be ready to adapt to improve.
Step 6: Continuously evaluate and adjust
Regularly assess your performance framework to see if it's working well and make changes if needed. Get feedback from everyone involved to determine what's working and what needs improvement. Stay flexible and adjust to changes so the framework remains relevant and useful.
Step 7: Encourage responsibility and learning
Make sure everyone understands their job and how it helps the team and company. Talk about expectations and goals often and give feedback when people need it. Make sure everyone knows what they need to do to meet the targets.
Celebrate people when they do well. If someone does a great job, recognise them so everyone knows. Give rewards like bonuses, promotions, or public recognition to motivate and engage people. Share stories of success and how people achieved them to inspire others.
Try new things and learn from them. Encourage everyone to think of creative ideas to make things better. Don't be afraid to take risks and make mistakes - it's all about learning from them. Share what you've learned with others so everyone can benefit from it.
Retrospective meetings allow team members to celebrate successes, identify improvement areas, and create a shared understanding of progress so they can set more effective and realistic goals.
Conclusion
Measuring business performance is crucial for long-term success. A performance framework helps balance leading and lagging indicators by providing a structured approach to setting goals, selecting relevant metrics, and monitoring progress. By looking at both future and past measures, you can anticipate trends, see how you've done, and make data-driven decisions. Check in and adjust things regularly to make sure you're staying on track and that the framework still fits with your goals. By doing all this, you'll get a good idea of how your business is performing and can make improvements over time.
Glossary
Examples of leading and lagging indicators by department
We’ve put together a detailed list of leading and lagging indicators by department. Note that some metrics are shown as both leading AND lagging indicators. This is because they can provide both predictive insights and confirmatory results. For example, CSAT and NPS - when used as a leading indicator - can provide insight into the likelihood of future customer behaviour and loyalty - but can also be seen as a reflection of past performance and the effectiveness of the company's strategies, products or services (lagging indicator).
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