Leading and Lagging Indicators

Execution

Using metrics to drive your business in the right direction

leading indicator visualWhen you drive your car, do you spend most of the time looking in the rear view mirror? Here’s hoping not.

You look forward, so you can take corrective action and control the course of your vehicle. This same concept applies to your business. You need to be looking at the leading indicators – the things you can easily alter to change the outcome of a project or activity – in order to steer your business in the direction you want and avoid potential threats.

Studying the numbers is critical to understanding why you do or don’t make money. The metrics (or numbers) you choose to look at can be divided into two categories – leading and lagging.

• Leading indicators GUIDE you. They help you see what lies on the road ahead so you can make adjustments.
• Lagging indicators REPORT the results and are visible only after you have reached your destination. These metrics let you know where you ended up; however, they are driven by your leading indicators.

For example

You are a builder and have a job that was priced on 100 hours. A quarter of the way into the job, you study the numbers and find you have spent 40 percent of your hours. Continue on this path and you will have a budget blowout. This is a leading indicator and there is time to take corrective action and change the outcome of the project. If you wait until the project is complete and find it took 140 hours – this is a lagging indicator. It’s useful for back costing and planning for the next project, but has no bearing on the project that has just lost you money.

Keep in mind; the hours in this scenario represent just one of the indicators you need to study. Budget and timelines are also important. Getting the right balance is critical when looking at metrics – it’s a matter of looking at the big picture and identifying which numbers you need to watch and the relevance of each to the desired outcome.

In his book number one bestseller, Mastering the Rockefeller Habits 2.0: Scaling Up, Verne Harnish sums it up, “The balance between leading and lagging indicators should reflect the 80/20 rule; 80% leading to 20% lagging. This balance ensures your eyes stay firmly fixed on the road in front and will protect you against driving into a brick wall.”