Leading and lagging indicators are two types of measurements used when assessing performance in a business or organisation. A leading indicator is a predictive measurement, for example; the percentage of people wearing hard hats on a building site is a leading safety indicator. A lagging indicator is an output measurement, for example; the number of accidents on a building site is a lagging safety indicator. The difference between the two is a leading indicator can influence change and a lagging indicator can only record what has happened.
All too often we concentrate on measuring results, outputs and outcomes. Why? Because they are easy to measure and they are accurate. If we want to know how many sales have been made this month, we simply count them. If we want to know how many accidents have occurred on the factory floor, we consult the accident log. These are lag indicators. They are an after-the-event measurement, essential for charting progress but useless when attempting to influence the future.
A different type of measurement is required to influence the future, one that is predictive rather than a result. For example, if we want to increase sales, a predictive measure could be to make more sales calls or run more marketing campaigns. If we wanted to decrease accidents on the factory floor, we could make safety training mandatory for all employees or force them to wear hard hats at all times. Measuring these activities provides us with a set of lead indicators. They are in-process measures and are predictive.
Lead indicators are always more challenging to determine than lag indicators. They are predictive and, therefore, do not guarantee success. This not only makes it difficult to decide which lead indicators to use, but it also tends to cause heated debate as to the validity of the measure at all. To fuel the debate further, lead indicators frequently require an investment to implement an initiative before a lag indicator sees a result.
What has become clear over years of research is that a combination of indicators results in enhanced business performance overall. To provide a couple of specific examples, “satisfied and motivated employees” is a (well-proven) lead Indicator of “customer satisfaction”. “High-performing processes” (e.g. to 6 Sigma levels) is a good lead indicator for “cost efficiency”. When developing a business performance management strategy, using a combination of lead and lag indicators is always good practice. The reason for this is obvious; a lag indicator without a lead indicator will not indicate how a result will be achieved and provide no early warnings about tracking towards a strategic goal.
Equally important, however, a lead indicator without a lag indicator may make you feel good about keeping busy with many activities. Still, it will not confirm that a business result has been achieved. Similarly, a Balanced Scorecard requires a ‘balance’ of measures across organisational disciplines, so a ‘balance’ of lead and lag indicators is required to ensure the suitable activities are in place to ensure the right outcomes.
There is a cause-and-effect chain between lead and lag indicators; both are important when selecting measures to track toward your business goals. Traditionally, we tend to settle for lag indicators; however, do not underestimate the importance of lead indicators.
Examples of Lead and Lag Indicators
The following table provides some examples of lead and lag indicators used in producing a typical business scorecard.
FAQs
What are leading or lagging indicators? Leading indicators look ahead and attempt to predict future outcomes, whereas lagging indicators look at the past. Some people fixate on leading indicators, arguing that what happened in the past is useless. However, that's not true.
Are leading or lagging indicators better? ›
Leading and lagging indicators are metrics that tell you about the health of your organization. Leading indicators help predict future performance, whereas lagging indicators give insight into past outcomes. It's important to track both because they help identify product and business improvement opportunities.
What is an example of a lead and lag indicator in HR? ›
For example, employee satisfaction surveys are useful as a leading indicator for employee turnover rates. Lagging indicators are reactive (ex-post) and occur after the fact. They provide information about past events and performance, often used to evaluate the success or failure of a project or a strategy.
What are leading and lagging indicators in OKRS? ›
Leading indicators simply measure inputs to a system, lagging indicators measure outputs. Or put another way, lead measures are within your control, lag measures aren't. For example, take the human body.
What is an example of a lead and lag? ›
For example, if Activity A takes 5 days to complete and Activity B has a lead time of 2 days, then Activity B can start 2 days before Activity A finishes. On the other hand, lag time refers to the amount of time that you must delay a successor activity relative to a predecessor activity.
What are examples of lag indicators? ›
Some general examples of lagging indicators include the unemployment rate, corporate profits, and labor cost per unit of output. Interest rates can also be good lagging indicators since rates change as a reaction to severe movements in the market.
Can a KPI be both leading and lagging? ›
Consider using both Leading and Lagging KPIs to give you a comprehensive view of your progress. Make KPIs actionable: KPIs should be actionable and provide information that can be used to make strategic decisions. Focus on KPIs you can influence and act on, such as Leading KPIs.
How do you identify key leading and lagging indicators? ›
A leading indicator is a predictive measurement, for example; the percentage of people wearing hard hats on a building site is a leading safety indicator. A lagging indicator is an output measurement, for example; the number of accidents on a building site is a lagging safety indicator.
Why are lagging indicators bad? ›
The drawbacks of lagging indicators
The major drawback is that they don't tell you how well your company is doing at preventing incidents and accidents. The reactionary nature of lagging indicators makes them a poor gauge of prevention.
What are the 5 key performance indicators in HR? ›
Some of the most common HR KPI metrics include employee turnover rate, time to hire, cost per hire, absenteeism rate, training and development metrics, employee engagement, time to productivity, diversity and inclusion metrics, employee satisfaction, employee retention, and many more.
For example, the “Employee Turnover Rate” is a lagging KPI. Lagging KPIs tell us story about the current state of your HR, but they don't tell you how to change this state, while leading KPIs are focused on the future.
What is an example of a leading indicator? ›
Some examples of leading indicators include tracking the number of workers who attend monthly safety meetings or keeping data on the routine maintenance of work vehicles (such as on time oil or brake pad replacements).
Can something be a leading and lagging indicator? ›
The terms “leading indicator” and “lagging indicator” have become standard terminology in performance measurement and management. But the distinction between the two can sometimes be a bit opaque – some indicators are a bit of both, for instance.
What are leading and lagging indicators in balanced scorecard? ›
Leading indicators are those that are more immediately measurable, lagging indicators are those that are a result of implementing and continuously monitoring the activities which impact leading indicators.
How to determine leading and lagging? ›
For lagging power factor, the phase angle of current is negative with respect to the phase angle of voltage. In case of leading power factor, the phase angle of current is positive with respect to the phase angle of voltage.
What are leading and lagging health indicators? ›
They measure events leading up to injuries, illnesses, and other incidents and reveal potential problems in your safety and health program. In contrast, lagging indicators measure the occurrence and frequency of events that occurred in the past, such as the number or rate of injuries, illnesses, and fatalities.
What are examples of leading indicators? ›
Leading indicator examples include the Consumer Confidence Index, Purchasing Managers' Index, initial jobless claims, and average hours worked. Lagging indicators are metrics that can confirm change rather than predict it.
What are leading and lagging stock indicators? ›
Leading indicators attempt to predict where the price is headed while lagging indicators offer a historical report of background conditions that resulted in the current price being where it is. Trend indicators (lagging) analyze whether a market is moving up, down, or sideways over time.
What are leading and lagging key risk indicators? ›
A lagging indicator is a measurable outcome that informs us about what has already happened, e.g., accident rates. A leading indicator is a predictor of future outcomes – for example, the extent of employee compliance with a company's safety standards may correlate with future accident trends.
