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What will Move the Needle? Leading vs Lagging Indicators

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It’s that time of the year when most companies with fiscal year starting January 1st are engaged in or done with their 2015 planning – bookings forecasts, budgets for investments and personnel, at the company level and broken down by business units and major product lines. It starts with defining what success means and translating that into specific initiatives and actions to achieve it. It is also the time of the year when people usually start to think about their new year resolutions, and dropping a few pounds is always a perennial favorite. It is time to figure out what will move the needle in 2015.

Each company will obviously have its own specific plans and initiatives to drive growth. It is a highly strategic exercise that engages the executive team to figure out what will move the needle and by how much. Every business has a set of key performance indicators (KPIs) to measure performance to plan. I have seen KPI dashboards include a lot of metrics. Every organization in the company has things they track, and it is very tempting to put a lot of things on a dashboard, just because we can measure them. The key is knowing what to track. What are the leading and lagging indicators of the business?

Leading & Lagging Indicators

Let’s come back to the our favorite new year resolution as an example. We define a goal of being more healthy, and losing a certain number of pounds or inches around the waist to get to our desired weight. We can easily measure our weight by standing on a scale. We can track it week over week and make sure it is trending in the right direction. The reading on the scale, or our waist measurement, is a lagging indicator. The data is readily available at the end of the measuring period, we simply have to measure and report.

If we only step on the scale at the end of a week however, how do we measure our performance during the week, between two measuring periods? Specifically what do we measure so that we know we are on the right track and where we stand vis-a-vis our forecast, say of losing 2 lbs per week? How do we know if our forecast is achievable or are far off the plan? What are the leading indicators of our performance?

In order to reach our personal health goals, we typically break it down into things we will do, e.g., workout more, eat better, etc. These are our key initiatives. We need to measure how well we perform them. These metrics become our leading indicators. If done correctly, and if we aren’t our own worst enemy (we do have to contend with competitors), we are certain to meet our goal 🙂

So our leading indicators may be things like how often we workout (at least 3 times a week), how long we workout (at least 45 mins), and how many calories we consume during the day.

Tracking & Measurement

Then we find out, it is not very easy to measure how many calories we consume every day. But clearly what we eat impacts our weight. So how can we ensure we eat healthy and still have a way to measure that without too much effort? If something is not easy to measure, it only means we jeopardize our chances of performing that activity at the necessary level. So let’s say we decide we need to have a salad for at least one meal every day, eat at least one apple every day, and no tea or coffee (ok may be that’s too extreme!!). I am not a nutrition expert, so this is just illustrative, but you get the point. We now have more clarity.

So our leading indicators need to change to still align with our key initiatives but bring more specificity and deliberateness to our plan. We know exactly what we need to do. We can track our progress during the week, and use that as motivation for the way we want the needle to move at the end of the measuring period. Then at the end of the week, if we have continued to lose weight, that acts as motivation for the next period. If not, we re-evaluate, assess new opportunities and challenges, and re-plan.

The same is true for any business. If we don’t track the right metrics, dashboards simply become a way to admire the problem 🙂

Written by Rahul Abhyankar

Nov 16, 2014 at 3:47 pm

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