Do you lead & lag: Powerful tools for generating better results!
Goals are critical to a successful business, as I have covered in a previous article, discussing the difference between Horizon Goals (representing our understanding of what ‘winning’ looks like) and Proximate Goals (representing desirable waypoints on the journey to winning).
Today, I want to explore another way of thinking about goals and how using leading and lagging indicators can help your business grow, if used in the right way:
A leading indicator is a type of measure that can be predictive of the future - they tell you how you’re progressing towards a goal. A simple example is when a car fuel-level warning light comes on. This is telling us that, unless we put more fuel in the car, it’s going to come to a halt very soon. It is not telling us that it will stop immediately - it is giving us an opportunity to think well in advance of the fuel actually running out and tine to work out exactly how to respond. We might respond by saying, “The reserve is plenty to get me home and to the garage tomorrow,” or “I’m not sure where the next fuel stop will be so I should take the next one I find”.
It’s possibly obvious from the name but a ‘lagging indicator’ follows from our actions and the events affecting our situation, and can be seen to be a consequence of them. To continue our car example ‘distance travelled’ or ‘reached destination’ would be lagging indicators. More interesting to us, perhaps, is that revenue is a lagging indicator of revenue-generating activities.
If we do these activities, and they work, we expect that revenue should come. If they don’t happen, it probably won’t. We may also be wrong about them working (about which more in a moment). But, in any case, by the time we see the result it may be too late to do anything about it. We have the revenue we have.
Imagine a business that makes a lot of sales calls. We could see the number of calls made as a leading indicator, and revenue as a lagging indicator. If the number of calls decreases, we could predict that the lagging measure, revenue, would also go down. Conversely, if we predict more sales calls, we would expect the revenue to be higher.
But what if it wasn’t? What would that mean?
Pairing leading & lagging indicators
A common difficulty for a business is when they know that things are not working but can’t point at which bit *exactly* doesn’t work. One of the reasons for trying to pair leading and lagging indicators is that it can help us to figure this out.
For example, if revenue is down can we pin-point which of the the actions we are taking that isn’t working?
We use a leading indicator to make a prediction about how our actions will play out. We use a lagging indicator to confirm our deny whether our actions are doing what we need. When things happen that we don’t expect, we then have the basis to try and understand why and change course.
For example, if sales calls went up but revenue went down, what would this tell us?
It could be telling us that we are not very effective at making sales calls, or that we are calling the wrong people, or that we are facing a new competitor. Subsequently, we could experiment with different approaches to improve our success rate. But if the response was simply, “Ok let’s make even more sales calls,” do you think this would be effective and get things back on track?
Something to acknowledge is that leading indicators are harder to measure in practice than lagging indicators. That’s because, as I’ll cover below, leading indicators are often about behaviours that we do, or don’t, execute. Sometimes the data is not being captured or is difficult to get at (think time sheets!), while lagging indicators often drop out of our systems naturally (think revenue).
What you need to remember is that the value of an indicator is often proportional to how difficult it is to measure. It’s not an infallible rule but if it’s really difficult to get it probably means it’s important and currently getting no sunlight. Get that data out into the open, baby!
Behaviour / output
An alternative way of looking at these metrics is to see them as metrics about behaviour (leading) and metrics about outputs (lagging).
Looking again at our previous example ‘making sales call’ is a behaviour, something we can do more or less of, or do in a different way. While ‘revenue’ is an output generated from these (and other) activities.
If you are trying to work out what you are dealing with ask yourself whether it’s a behaviour. If so, then it’s very likely its a leading indicator.
How to use indicators to full effect
So if you are looking to improve how you do something, ask yourself what the leading and lagging indicators are, i.e. how do you know if things are working? And what are the behaviours you are operating to achieve it. Then start measuring and comparing. If the results are not what you expect, start varying the behaviours until you understand which are actually governing your outputs and which are not.
A good reason to do this before you need it, is that when things go wrong you don’t want to be scrabbling around to work out what works and what doesn’t. A good system of leading and lagging indicators will help you quickly determine what’s broken/changed and start coming up with ideas to fix it.
So, do you have a system to measure how your business works? Do you pair leading and lagging indicators? Have you been able to use this to change behaviour? Do you have a different way of doing things.
I’d love to hear about your experience.
If you are interested in learning more in this area, I highly recommend High Output Management by Andy Grove, where he covers this and related management techniques in great detail.
The Art of Navigation Monthly Receive a selection of resources, opinions and latest articles from the world of tech and business (and coming soon, a chance to get your hands on an exclusive 30 Minute Guide to Hiring a CTO!)