Lead and Lag Indicators

What are they and what are they not?

2010 Copyright ISC Ltd.

What are they?

People often ask whats the difference between a Leading and a Lagging indicator?. When developing a Balanced Scorecard (or any other performance management system), it is recommended to use a combination of Leading and Lagging Indicators. Kaplan and Norton call these Performance Drivers and Outcome Measures.

What do they tell you?

The idea is that Lagging Indicators without Leading Indicators tell you nothing about how the outcomes will be achieved, nor can you have any early warnings about being on track to achieve your strategic goals. Similarly, Leading Indicators without Lagging Indicators may enable you to focus on short-term performance, but you will not be able to confirm that broader organisational outcomes have been achieved. Leading Indicators should enable you to take pre-emptive actions to improve your chances of achieving strategic goals.

Cause and Effect

Implicit in the design of any balanced performance management framework, such as the Balanced Scorecard (BSC), is the cause and effect chain of goals and strategies. So, investing in organisational capability leads to efficient and effective processes, which deliver the products and services that satisfy customers and ultimately lead to profit in the private sector, or positive stakeholders/funders in the public sector.

The Balanced Scorecard Cause and Effect Chain

Financial perspective Process perspective

Customer perspective Learning and Growth perspective

Chain of Indicators

Because there is a cause and effect chain of objectives and strategies within a Balanced Scorecard, there is a corresponding chain of Leading and Lagging Indicators. For example, Satisfied/Motivated Employees is a (well-proven) Leading Indicator of Customer Satisfaction. Similarly, high-performing processes (e.g. to 6Sigma levels) would be expected to be a Leading Indicator of Cost Efficiency.

The Balanced Scorecard Cause and Effect Chain more links Financial Customer perspective perspective

Process perspective

Learning and Growth perspective

Leading and Lagging Perspectives

Arguably, the BSC perspectives that are focussed on Learning & Growth (or Organisational Capability) and Processes contain Leading Indicators of external performance that are contained within the Finance and Customer perspectives, containing Lagging Indicators . However, its not as easy as that because within each BSC perspective you will usually want a combination of Leading and Lagging Indicators.

For example, you are likely to want to measure Employee Satisfaction and could readily identify a Leading Indicator of this such as an index of Leadership Capability, or maybe No. of days training per employee.

Are Leading Indicators measured more frequently?

It is sometimes said that Leading Indicators will be measured more frequently than Lagging Indicators, but that may not be helpful as a definition

You could measure Complaints Received or Customer Satisfaction every day, both of which might usually be described as Lagging Indicators. Equally, you could measure process Error Rates, or On-Time Delivery every day and these are probably Leading Indicators.

Are Lagging Indicators too late to be useful?

The view that Lagging Indicators cannot be adjusted until it is too late is also not necessarily very helpful. In the previous example with the suggestion that Errors and Delivery Performance may be Leading Indicators, knowing that you have an error rate of 25%, or 15% Late Deliveries, is already too late!

Process or Organisation Indicators?

One definition that might help is that Leading Indicators are often captured at the level of individual processes, whereas Lagging Indicators may be the result of changes in a number of Leading Indicators. So, process cycle-time or error rate might be Leading Indicators, measured at the process level and Customer Satisfaction would be a Lagging Indicator, measured at the organisation level.

Activity or Outcome?

If you are measuring activity (i.e. at a process level), it is more likely that you are using Leading Indicators. The closer you move to process inputs and activities, the closer you get to Leading Indicators of downstream, (Lagging) performance. If you are measuring aggregated effects, or outcomes, at an organisational level, you are more likely to be using Lagging Indicators.

Conclusion

Remember, the overall purpose of selecting metrics is to enable you to track performance towards your goals. So, you should aim to identify and then control those metrics that help drive you towards your ultimate goals. First decide what you are trying to achieve, then decide what you need to measure.

 2010 Improvement Skills Consulting Ltd. Specialists in: Performance Management Process Improvement Project Management

www.improvement-skills.co.uk