Lagging and leading indicators are the two primary categories used to gauge an organization’s success. If managers want to develop a precise picture of performance, they must ensure that both types of metrics are in place and grasp the differences between them. However, it is crucial to distinguish between indicators and KPIs since an organization may utilize a variety of indicators at all organizational levels, not all of which will accurately reflect the company’s performance (Medne & Lapina, 2019). A lagging indicator is simple to measure but difficult to modify, whereas a leading indicator is volatile but challenging to track. Combining the knowledge from the two categories of indicators listed above can be the most effective strategy for managing performance.
In order to predict future performance, lagging indicators assess output that has already occurred, such as profit, costs, sales, or consumer involvement. Leading indicators offer benchmarks that, if attained, will indicate that overall KPIs and goals have been achieved. The primary distinction between leading and lagging indicators is that although lagging indicators will disclose performance trends, leading indicators may be utilized to monitor if specific actions really affect an organization’s performance (Moldavska & Welo, 2019). For instance, past revenue is not a reliable indicator of future income. However, a measure of customer happiness does predict future sales since happy clients are more likely to make repeat purchases and recommend a business to others. As a result, client satisfaction is a leading indicator, while revenue refers to lagging.
Leading and lagging indicators are now routinely used in many different businesses and across industries. For instance, lagging indicators in aviation are safety outcome measurements since they assess safety-related occurrences, whereas leading indicators support the choice of safety-improving activities (Kaspers et al., 2019). In this case, leading indicators may be an event, an accident, a close call, or a dangerous safety condition. Conversely, lagging indicators are assessments of a system made after occurrences, which assess outcomes and incidents. Thus, in aviation, leading and lagging indicators assist in addressing the long-term or macro-level status of safety and informing efficient safety decision-making.
One can also look at sustainability businesses as another example of successfully integrating leading and lagging indicators. Lagging indicators, like the CO2 indicator or the indicator for climate change, are frequently used by many companies because they are suitable proxies for remedial activities (Kravchenko et al., 2019). Leading indicators in sustainability companies include things like how much it costs to recycle used goods, how many hazardous elements are in a product, how many fasteners are used overall, and more. Leading environmental performance indicators seek to create more straightforward assessments of environmental factors that might motivate successful efforts to enhance environmental efficiency (Kravchenko et al., 2019). It demonstrates the idea that whereas lagging indicators are more strongly tied to results accomplished, leading indicators are more inextricably related to operations, products, and modifications.
If one solely looks at lagging indications, a problem will likely occur. For instance, experts in sales note that if something goes wrong with revenue, one will not know until the end of the quarter, at which point it will be too late to take corrective action (Peesker et al., 2019). Contrarily, by measuring both leading and lagging indicators, one can work with the salesperson to solve performance issues much earlier in the quarter, which will be much more helpful and will ultimately enhance performance. Due to how simple it is to measure lagging indicators, some corporate companies depend too heavily on them. Nonetheless, using both would be a recommended approach.
In performance evaluation and management, the concepts of leading indicators and lagging indicators have come to be considered conventional language. To conclude, the key contrast between leading and lagging indicators is that, whereas lagging indicators reveal performance patterns, leading indicators may be used to determine whether practical steps impact KPI. It has been determined that integrating both leading and lagging indicators is the optimum method for an enterprise. Many sectors and enterprises, like sustainability and aviation, have effectively used both measures.
References
Kaspers, S., Karanikas, N., Roelen, A., Piric, S., & Boer, R. J. D. (2019). How does aviation industry measure safety performance: Current practice and limitations. International Journal of Aviation Management, 4(3), 224. Web.
Kravchenko, M., Pigosso, D. C., & McAloone, T. C. (2019). Towards the ex-ante sustainability screening of circular economy initiatives in manufacturing companies: Consolidation of leading sustainability-related performance indicators. Journal of Cleaner Production, 241, 118318. Web.
Medne, & Lapina. (2019). Sustainability and continuous improvement of organization: Review of process-oriented performance indicators. Journal of Open Innovation: Technology, Market, and Complexity, 5(3), 49. Web.
Moldavska, A., & Welo, T. (2019). A holistic approach to corporate sustainability assessment: Incorporating sustainable development goals into sustainable manufacturing performance evaluation. Journal of Manufacturing Systems, 50, 53–68. Web.
Peesker, K. M., Ryals, L. J., Rich, G. A., & Boehnke, S. E. (2019). A qualitative study of leader behaviors perceived to enable salesperson performance. Journal of Personal Selling and Sales Management, 39(4), 319–333. Web.