Why and how to define leading and lagging indicators

Measuring performance is at the heart of corporate management. Two main types of indicators are used for this purpose: leading indicators and lagging indicators.
It is important to understand the difference between the two types, but above all how the complementary use of the two is at the heart of effective company management.

What are leading and lagging indicators?

A Leading indicator (or leading KPI) is a measure that signals future changes. It is predictive in nature and offer a glimpse of the company's future performance. For example, the number of new leads obtained by a sales team is a leading indicator, as it predicts future sales.

A Lagging indicator (or lagging KPI), on the other hand, is a measure of past performance. It reflects the results obtained by the company following the actions taken. For example, last quarter's sales are a lagging indicator, because they measure the results of efforts made in the past.

The link between leading and lagging indicators

It is important to understand that leading and lagging indicators are not isolated. Rather, they are closely linked and complement each other as part of a comprehensive and effective performance measurement strategy.

Lagging indicators generally relate to the overall objectives of the company and of individual teams, departments or services. They measure results, whether in terms of turnover, number of products sold or customer satisfaction. These objectives, although crucial, are the fruit of past actions and efforts.

This is where leading indicators come in. These indicators are used to identify and activate the various means and levers that will enable the objectives measured by the lagging indicators to be achieved. For example, a high click-through rate on an advertising campaign (leading indicator) may presage an increase in the number of customers (lagging indicator).

In short, leading indicators are indicators of the means to achieve the objectives measured by lagging indicators, which are indicators of results. They work in tandem to provide a comprehensive view of performance, enabling the company to anticipate trends and react to the results obtained.

Examples of leading and lagging indicators for different areas of the business

To illustrate this relationship, here are some examples of leading and lagging indicators in different areas of a business:
Sales

• Leading indicator: Number of new leads obtained
• Lagging indicator: Turnover for the last quarter

Marketing

• Leading indicator: Click-through rate on an advertising campaign
• Lagging indicator: Increase in the number of customers following a marketing campaign

Human resources

• Leading indicator: Employee satisfaction rate
• Lagging indicator: Employee retention rate

Production

• Leading indicator: Production costs
• Lagging indicator: Synthetic machine efficiency rate

Benefits  and disadvantages of leading and lagging indicators

Leading and lagging indicators each have their benefits sand disadvantages.

LAGGING INDICATORS

Benefits :

• Accuracy: Lagging indicators are generally accurate because they are based on hard data rather than predictions.
• Measurement of results: They provide a clear, quantifiable measure of the results achieved.
• Validation of strategies: They make it possible to validate the effectiveness of the strategies implemented.

Disadvantages :

• Reactivity: They do not allow problems to be anticipated. By the time a problem is identified using a lagging indicator, it may be too late to take effective corrective action.
• Complexity: They can be influenced by a large number of factors, which can make it difficult to identify the causes of changes in performance.
• Lack of control: lagging indicators can give a false impression of control. For example, a company may focus on increasing sales (a lagging indicator) without understanding or managing the factors that lead to this increase.

LEADING INDICATORS

Benefits :

• Predictive: Leading indicators provide insight into future performance. They enable companies to identify potential problems before they become serious, giving them the opportunity to take corrective action.
• Change management: They act as levers to drive action and change. By focusing on the factors that positively influence lagging indicators, companies can proactively improve their performance.
• Target achievement: Leading indicators help implement actions to achieve future goals, which can increase the likelihood of achieving those goals.

Disadvantages:

• Difficult to identify: It can be difficult to identify which leading indicators are most relevant to a specific objective.
• Uncertainty: Given the previous point, there is uncertainty about the relationship between the leading indicator and the associated target result. And therefore uncertainty about the real effort that needs to be devoted to this point compared with another.
• Resistance to change: They can lead to resistance to change if the actions needed to improve the indicators are difficult to implement or if their necessity is not clearly justified (in particular because of the uncertainty mentioned above).

In reality, we can see that the disadvantages of one are often offset by the advantages of the other, or vice versa. In particular, this shows the value of managing them jointly. 

Conclusion

In conclusion, the joint use of leading and lagging indicators provides a comprehensive view of a company's performance. Leading indicators, which reflect resources, guide actions to achieve the objectives measured by lagging indicators, which reflect results. A good understanding of these two types of indicators and how they complement each other is therefore essential for effective management of company performance. For example, you need to know how to question the leading indicators and the associated actions in order to maximise the impact of these actions. This will enable the company to be more agile and more efficient. With less effort and more committed and motivated employees.