Performance Management Using Lead and Lag Indicators

"What gets measured, gets managed" - Peter Drucker

Measurement is an important part of managing any business, however often in small business we focus on measuring outcomes and results.

We do this because outcomes are accurate, and easy to track and quantify. For instance, if we want to know the ROI of a marketing campaign, the total number of new customers who purchased, sales revenue, or the number of support calls received for the month - we can quickly count or calculate the results.

These measures are known as lag indicators because they occur after-the-event, and they indicate how the business has performed from a historical perspective. Lag indicators are great to show you whether goals have been met, or outcomes achieved - but aren't as helpful when you need to be proactive (instead of reactive) and adjust changes in order to create outcomes.

So how else can we measure business performance?

Another way in which we can measure performance is through lead indicators. Lead indicators are predictive and in-process measures that occur before-the-event. For instance - the number of sales calls made to customers is a lead indicator (pardon the pun), as is customer satisfaction, or the number of support cases currently open.

The challenge in using lead indicators is that they can be difficult to determine and measure - and there is no guarantee of a result, they simply provide information that allows you to make better decisions before the outcome is clear.

"Awareness precedes choice, and choice precedes results" - Robin S. Sharma

The best use of indicators is a mix of lead and lag indicators paired across a specific strategy to track cause and effect.

For instance - if your strategy is to increase sales, then the sales calls made to customers (lead) can have its output measured by the total sales for a period (lag). If your strategy is to minimise customer support requests - then your articles posted to the knowledge base (lead) can be measured against the total hours spent customer support (lag).

By measuring both the input (lead) and output (lag) of a strategy you have the ability to manage the performance of a business more effectively.

Quick steps to determining the right indicators for a strategy -

• What is the strategy you wish to implement? eg. Increase revenue
• What is the outcome or output measure of the strategy? eg. Total sales ( = lag indicator)
• What activities need to take place to achieve the outcome? eg. Spend on advertising, generate leads through cold calling, email marketing
• Can those factors or activities be measured in a meaningful way? Yes. For example the number of cold calls made in a period can be measured
• Do the factors or activities influence the output? and are they the best measure to use? (representing the strongest causal relationship) Yes. All sales activities have a direct impact on revenue