Okay, this is going to sound really technical. But it will make sense. At least when we get to the cookies. Let me start by explaining what leading and lagging indicators are.
Lagging indicators are the ones we’re most familiar with. The easy ones. When we measure our business performance and report on how we did, that’s a lagging indicator. For instance, we measure things like:
- Open rates by percentage of those who open a sales letter or email
- Conversion rates by percentage of people who make a purchase in response to sales copy
- Total number of sales in a period
- Customer satisfaction
- Total revenue, etc.
We measure (or should do so) all kinds of things as indicators of how we’re doing.
Lagging indicators provide us with a scorecard on our performance. We need lagging indicators both for reporting reasons and to gauge our progress from month-to-month and year-to-year.
But lagging indicators have a weakness — a HUGE one! They only report what happened in the past, so we cannot manage lagging indicators or even manage from them. Oh, they may wake us up to do things differently, or maybe to try something new, but what? How do we know that what we’re going to try will improve last quarter’s performance? What if our efforts worsen performance?
This is where leading indicators come into play and this is where many of us struggle. Leading indicators are those measures or metrics that we have laid down in the form of processes that we know work. We know for instance that if we follow an established process, we’ll get a predictable result.
It’s vital that we document our procedures. We need to know exactly what our leading indicators are and follow them religiously to produce the desired outcome (favorable lagging indices).
Another reason leading indicators are so important is when we need to change a process. As our business grows or changes, or the market changes, we need to change with it. As a result, we don’t want to hold onto processes that are no longer effective. But if we attack our business processes helter-skelter or tornado-like, who knows what the outcome will be? Even if the outcome is good, how would we know which change improved it?
But if our leading indicators (our processes) are well documented, we can focus on one leading indicator, change it and measure its effectiveness (with lagging indicators). If the results are favorable, we can establish this new way of doing things as our new protocol. And if we sense that other procedures need to be changed, we can tackle them too. But we do so in a systematic, predictable way.
Baking as an illustration
Let me illustrate the interplay between leading and lagging indicators using a simple baking analogy. Perhaps you love chocolate chip cookies. In fact, you’re a connoisseur of chocolate chip cookies, so not just any old chocolate chip cookie will do. You won’t even look at a store-bought chocolate chip cookie, much less eat one.
Fortunately, years ago, your grandmother passed down her amazing chocolate chip cookie recipe to your mother and now you’re carrying on the tradition. You always carefully follow her recipe to the “T” in order to get a predictable outcome—delicious, mouth-watering, chocolate chip cookies.
Both the ingredients and the instructions found in her recipe provide you with your leading indicators. You know that if you follow her recipe exactly as she handed it down, you’ll always get the same tasty result. And that tasty result is your lagging indicator—your scorecard—mmm, warm, mouth-watering chocolate chip cookies right out of the oven!
But what if someone in your family has developed an intolerance to gluten. For that person, the original recipe for grandma’s amazing chocolate chip cookies is no longer acceptable. So, you set out to find alternatives in the recipe to make the cookies glute-free, yet still delicious. You start by only replacing the flour with an appropriate substitute. In so doing, you’re only changing one leading indicator at a time and then testing the outcome.
If the end-product is what you hoped for, then you’ve got your new solution—delicious, gluten-free, chocolate chip cookies. But if that one change didn’t work, you can tweak one of the other ingredients or processes in the directions to see if that works.
I think you get the picture! Your leading indicators are like the ingredient list and instructions for baking faultless chocolate chip cookies every time.
To both maintain and improve on good performance we need both leading and lagging indicators. The one shows us how we did after the fact. The other helps us while in the process of doing so we get results every time.
Take inventory of your current practices: What are your leading and lagging indicators? How well documented are they and how faithfully do you follow them?