(13) KPIs - leading and lagging indicators – why the distinction?

What information do you need to control your business?

You have objectives in terms of financial and other targets. Firstly you’ll track “results” against those targets.

But what are the root causes that drive these results? How can you control these?

Results such as revenues and profits inevitably arise as “outputs” from business processes and activities. The “inputs” that drive those processes determine the outputs. It’s actually only these input “drivers” you can directly control.

Therefore it’s important to monitor the inputs to the processes and activities. For example: How many qualified sales calls are being made? What’s the value of customer quotes submitted?

Indicators like these, across all areas of the business, can be monitored over time. Trends will provide early warning of whether you are on track to achieve your results objectives.

As outputs tend to lag behind inputs, measures of inputs are called “leading indicators”, and measures of outputs are “lagging indicators”.

The vital distinction is that it is the “drivers”, measured by leading indicators, that you can actually control. So it is appropriate to monitor both results and drivers, and focus on what’s most important:
• “Key Results Metrics” (KRMs) – the important lagging indicators
• “Key Performance Drivers” (KPDs) – the important leading indicators

In practice, a mix of 5-10 KRMs and KPDs are worth providing regularly to each director and manager, so they can take timely action on what’s important to their area of the business.

To determine the KRMs and KPDs for each person, the first step is to determine for each business process the appropriate leading and lagging indicators. What drives each stage of each process? Of these which are the most important? What’s practical to measure? How can these be provided on a frequent and timely basis?

This is best done with the help of an experienced independent outsider, who can challenge ideas, make suggestions, and help ensure all key areas of the business are adequately covered.

If you would like to discuss these ideas further, please contact Chris Challis on +44(0)1628 632914