Setting the right strategic goals and keeping a close eye on your business performance is fundamental to reaching your desired outcomes. Understanding your key metrics and how you will measure their progress is the first thing you should do—because if you don’t know where you’re going, how can you understand if you’re progressing in the right direction?
It sounds obvious, but in our many years of experience looking at thousands of strategies of different types, we found that effective performance management often comes up as a challenge.
One best practice we’ve seen and usually suggest is setting different types of indicators to measure these business metrics: leading indicators and lagging indicators.
In this article, we’ll explore what each of these are, when to use them, their benefits and weaknesses, and show you some examples so you can ensure you nail the right balance that will help you achieve those ambitious strategic goals. We’ll also show you how Cascade can help you manage them in one place and provide you with a free KPI reporting template (spreadsheet format) you can use if you're not ready to jump into Cascade just yet!
What Are Leading Indicators?
A leading indicator, often referred to as a leading metric, is a type of performance measurement or data point that offers insights into future performance and predictability.
Leading KPIs (key performance indicators) are forward-looking, and help organizations anticipate future trends and developments. These metrics are instrumental in guiding proactive decision-making by providing early signals and predictive information that can influence future performance and outcomes.
When to use leading indicators?
In the world of decision-making, leading indicators step into the spotlight, delivering predictive insights and valuable guidance.
Let's explore some scenarios where they could be implemented:
- Forecasting Trends: Leading indicators are valuable for predicting future economic or market trends, empowering the company to adapt to the changing context.
- Strategic Planning: Businesses can use leading indicators to inform their strategies and set realistic goals based on early insights.
- Risk Management: They can help organizations identify early warning signs and manage risks before it’s too late.
- Monitoring Economic Health: They offer valuable insights into an economy's overall well-being and how it might affect your business.
✅Benefits of leading indicators
Using leading metrics brings numerous benefits, such as:
They provide early signals of potential trends or changes, enabling proactive decision-making.
Using leading indicators can help companies anticipate market shifts and customer trends to adjust their products, services, and strategies ahead of competitors.
Leading indicators help organizations focus on factors that drive future outcomes, allocating resources more effectively, ultimately leading to improved performance and profitability.
Improved stakeholder satisfaction
By adjusting operations and strategies in response to leading indicators, organizations can better meet customer and stakeholder expectations.
❌Weaknesses of leading indicators
Although leading metrics can help organizations anticipate the future and become more adaptable, they have some cons to consider:
Leading metrics can sometimes produce false signals or “false positives”. A seemingly predictive indicator may not always accurately forecast future outcomes.
Limited historical data
Since leading indicators focus on the future, they often lack a substantial historical dataset for validation. This can make it challenging to assess their reliability and accuracy over time.
Complexity & interpretation
Some leading indicators can be complex to interpret, requiring expertise and careful analysis. Misinterpretation or misunderstanding of these metrics can lead to incorrect decisions.
Examples of leading indicators
- Growth in new markets: This KPI helps predict potential expansion and increased future revenue. This early signal can lead to proactive decisions, such as allocating resources for further market penetration, expanding product lines, or adjusting marketing strategies.
- Safety training for employees: Safety training for employees serves as a leading indicator for workplace safety. An effective safety training program with high employee participation rates helps prevent future accidents and incidents.
- Sales pipeline: This metric used in the sales cycle represents the potential future sales opportunities a company is actively pursuing. If the pipeline is robust and consistently growing, it suggests a healthy sales process and the potential for increased sales in the future.
❗Important: Just because a leading KPI is positive, it doesn’t mean the future outcome will be positive. Take the sales pipeline as an example – if the company can't turn those potential sales into actual ones, the leading indicator might not be as accurate as it seems.
What Are Lagging Indicators?
Lagging indicators are metrics or data points that provide insights into past events, performance, or outcomes. These indicators are often used to assess the results and impacts of past actions, strategies, or decisions.
Lagging metrics are valuable for analyzing past performance, evaluating the effectiveness of initiatives, and making retrospective assessments.
Unlike leading indicators, which offer forward-looking information, lagging indicators are historical in nature and reflect events or trends that have already occurred.
When to use lagging indicators?
Lagging indicators offer a unique perspective, one rooted in the past but rich in insights.
Here's when they come into play:
- Assessing historical performance: Organizations use lagging indicators to assess and evaluate past performance and learn for the future.
- Benchmarking & comparison: Lagging indicators can be used to compare a company’s past performance against industry benchmarks or competitors and identify areas for improvement.
- Validating strategies: By analyzing lagging indicators such as customer satisfaction and return on investment (ROI), companies can determine whether their strategic decisions have yielded the desired outcomes and adjust their future plans.
- Confirming trends: Lagging indicators are valuable for confirming trends or changes that have already happened. If leading indicators suggest a potential shift in the market, lagging indicators can validate whether that shift took place.
✅Benefits of lagging indicators
The main advantage of lagging indicators is that, different from leading metrics, they’re rooted in reality. This brings various benefits:
By analyzing lagging indicators, organizations can hold individuals, departments, or teams accountable for their past performance, creating a culture of responsibility and continuous improvement.
Lagging indicators offer concrete data and historical trends, which serve as a foundation for data-driven decision-making. Teams at every level can use this historical data to make informed choices about future strategies, resource allocation, and goal setting.
Looking back and learning from the past is where lagging indicators shine. Whether it's celebrating successes or dissecting failures, they offer invaluable lessons that can shape future strategies and decision-making.
❌Weaknesses of lagging indicators
Even though they have amazing benefits, there’s a “dark side” to them:
Lagging indicators are inherently backward-looking, reflecting past events and outcomes. They don’t provide information about current or future trends, making them less suitable for proactive decision-making.
Since lagging metrics measure events that already happened after a certain amount of time, the opportunity to intervene or adjust strategies in real time may have passed. This can result in missed opportunities or inadequate risk mitigation.
Risk of complacency
An overemphasis on lagging indicators may lead to a sense of complacency, as organizations may believe that past success guarantees future success without adapting to changing circumstances.
Examples of lagging indicators:
- Annual revenue: The total revenue generated by a company over the past fiscal year is a lagging indicator that reflects its historical financial performance.
- Sales cycle length: The historical average length of time it takes to close a sale from the initial contact to the final deal reflects the efficiency of the sales process and can highlight areas for improvement.
- Customer churn rate: This KPI indicates the historical percentage of customers who discontinued their subscriptions or services during a specific period. It’s a lagging indicator of customer satisfaction and retention efforts.
- Conversion rates: Historical data on the number of social media users who completed desired actions, such as signing up for a newsletter or making a purchase, helps assess the performance of your social media marketing efforts.
❗Important: Lagging metrics represent facts about the company or organization. But remember: past success doesn't guarantee future success.
How Leading And Lagging Indicators Work Together
When you bring together leading and lagging metrics, it's like getting the best of both worlds and sidestepping some of their individual limitations:
- Relying only on leading indicators can be risky. While they offer valuable insights into potential future trends and opportunities, they come with risks of inaccuracy, false alarms, and a narrow focus on the short term.
- On the other hand, depending exclusively on lagging indicators might result in overlooking opportunities and responding late to changing circumstances, potentially fostering a reactive, complacent, and risk-prone decision-making approach.
Leading and lagging indicators are complementary components of a robust performance management system and team up to provide a holistic view of performance and decision-making.
🏻🏼 This partnership lets organizations adapt to changes, learn from the past, and make smart decisions based on both future possibilities and past experiences, all while fostering a culture of improvement and risk management.
Leading & lagging indicators examples
Let’s see some practical examples of how these two types of indicators work together.
Example 1: Financial investment
- Leading indicator: Market sentiment index—Analyzing sentiment data from social media can offer insights into future market trends.
- Lagging indicator: Portfolio returns—Historical returns on investments give an overview of actual financial performance.
Example 2: Customer satisfaction
- Leading indicator: Customer feedback sentiment analysis—Analyzing customer feedback in real time can predict shifts in overall satisfaction levels.
- Lagging indicator: Quarterly net promoter score (NPS)—NPS scores collected over a quarter reflect historical customer satisfaction trends.
Example 3: Healthcare resource planning
- Leading Indicator: Emergency room patient arrivals forecast—Predictive models can estimate the number of patients expected to arrive at the emergency room, allowing hospitals to allocate staff and resources in advance.
- Lagging Indicator: Monthly admissions—Historical data on the number of patients admitted to a hospital over the past month can inform future planning.
🗝️Key takeaway: As you can see, both lagging and leading metrics work together to achieve the same strategic goals but tackle them from different perspectives.
📚 Recommended reading: we have several articles on KPIs for different industries and functions you can use for inspiration to set your own!
Create & Track Your Leading And Lagging Indicators With Cascade 🚀
By spanning the entirety of your business ecosystem, Cascade enables full visibility and centralized observability—both fundamental to setting and tracking your leading and lagging KPIs, connecting team-level metrics right up to your high-level strategic goals.
Cascade’s planner feature allows you to build your strategy at every level of the organization and assign objectives, projects, and KPIs. Creating a culture of transparency by setting your lagging and leading KPIs at a high level and cascading them down to the individual level builds accountability within your teams.
👀 Don’t know where to start? Check out our template library with over +1,500 planner templates pre-filled with examples and fully customizable, ready to use!
You can enhance visibility and reinforce responsibility with Cascade’s update templates, easily defining the type of information you want your team to provide each time they submit an update in Cascade. This way, you’ll get quality updates and context every time. You can also set the frequency for these updates so you ensure teams input the information on a regular basis.
Visual representation of your KPIs will allow you to draw insights faster. Cascade’s dashboards and reports allow you to easily see how your leading and lagging metrics are progressing in real-time. Not only that, you can share these reports with internal and external stakeholders to ensure alignment.
With +1,000 integrations, you can connect Cascade with the tools your teams already use and consolidate your business systems under one roof. Do your teams track their leading and lagging indicators in Excel or Google Sheets? They can integrate them with Cascade and access the information there in real time.