Are Lead and Lag Indicators Important?
All too often we concentrate on measuring results, outputs and outcomes, why? Because they are easy to measure and they are accurate. If we want to know how many sales have been made this month, we simply count them. If we want to know how many accidents have occurred on the factory floor, we consult the accident log.
If however, we want to increase the number of sales in a month or decrease the number of accidents then these measures are of very little help. Yes they provide a benchmark to determine month on month improvement, but they do not help make the improvement itself. This type of measure is referred to as a Lag indicator. It is an after-the-event measurement, essential for charting progress but useless when attempting to influence the future.
To influence the future, a different type of measurement is required, one that is predictive rather than a result. For example, if we want to increase sales, a predictive measure could be to make more sales calls or run more marketing campaigns. If we wanted to decrease accidents on the factory floor we could make safety training mandatory for all employees or force them to wear hard-hats at all times. Measuring these activities provides us with a set of lead indicators. They are in-process measures and are predictive.
Lead indicators are always more difficult to determine than lag indicators. As they are only predictive, they do not provide a guarantee of success. This not only makes it difficult to decide which lead indicators to use, it also tends to cause heated debate as to the validity of the measure at all. To fuel the debate further, lead indicators frequently require an investment to implement an activity prior to a result being seen by a lag indicator.
What has become clear over years of research is that a combination of lead and lag indicators result in enhanced business performance overall. To provide a couple of specific examples, “satisfied and motivated employees” is a (well-proven) lead Indicator of “customer satisfaction”. “High-performing processes” (e.g. to 6 Sigma levels) is a good lead indicator for “cost efficiency”.
When developing a performance management strategy or system, it is always good practice to use a combination of lead and lag indicators. The reason for this is obvious; a lag indicator without a lead indicator will give no indication as to how a result will be achieved and provide no early warnings about tracking towards a strategic goal.
Equally important however, a lead indicator without a lag indicator may make you feel good about keeping busy with a lot of activities but it will not provide confirmation that a business result has been achieved. In much the same way a Balanced Scorecard requires a ‘balance’ of measures across organisational disciplines, so a ‘balance’ of lead and lag indicators are required to ensure the right activities are in place to ensure the right outcomes.
There is a cause and effect chain between lead and lag indicators, both are important when selecting measures to track toward your business goals. Traditionally we tend to settle for lag indicators, however, do not underestimate the importance of lead indicators.
Examples of Lead and Lag Measures
The following table provides some examples of lead and lag indicators used in the production of a typical business scorecard.