07. Lead vs Lag Indicators
Most businesses spend too much time reporting what's already happened and comparatively little time preparing for what's about to happen. 🤔
In most monthly IBP/S&OP reviews, often more than 80% of KPIs discussed are lag indicators—those historical measures showing actual performance. Revenue, profit margins, market share, etc. Important—yes. These metrics matter, but it's like driving while only looking in the rearview mirror.
Understanding the Indicators
Lag Indicators: Measures of historical performance.
Lead Indicators: Predictive metrics that signal future outcomes.
The Lag Indicator Comfort Zone
Everyone loves lag indicators. They're concrete, tangible, and understandable. They fit nicely into reporting cycles and provide a sense of certainty about performance.
But to succeed in the future, which is what IBP is driving you to try to do, you need to focus on what's ahead; this is where lead indicators become crucial. Knowing your Q2 profit margin was below target doesn't help you fix Q3, especially when you're already partway through it.
The Lead Indicator Opportunity
Lead indicators are your early warning system—the forward-looking metrics that give you a chance to change course before hitting a problem. For example, if you're running a restaurant, your advance bookings for next month anticipate revenue. Customer satisfaction scores predict repeat business.
Finding Your Lead Indicators
Good lead indicators are 'PAME':
Predictive (they correlate with future performance).
Actionable (you can influence them).
Measurable (even if not as precisely as lag indicators).
Early enough to act on.
While the term SMART goals (Specific, Measurable, Achievable, Relevant, Time-bound) is the common standard for effective goal setting, it doesn't specifically address the forward-looking nature required for lead indicators. PAME fills this gap by focusing exclusively on what makes a metric valuable for predicting future performance.
Strong examples include:
NPD pipeline fill-rate (new products in development).
Customer satisfaction (predicting future sales).
Inventory velocity (indicating potential stockouts or excess).
Supplier delivery performance (signalling future operational issues).
The Real Challenge
Lead indicators often feel "softer" than their lag counterparts. Key measures of future success include employee engagement or Delivery in Full on Time (DIFOT), yet they may not immediately resonate with your CFO. Nevertheless, businesses transform their performance by getting this balance right. Good manufacturers track their suppliers' quality metrics as rigorously as their own—catching potential issues months before they impact production.
Getting The Balance Right
To move from lag-heavy to a more balanced approach:
Audit your current KPIs—categorise them as lag or lead.
Identify the critical outcomes you want to influence.
Start small—pick one or two lead indicators to add.
Enjoy the challenge of changing indicators—have some fun doing it.
Don't throw out your lag indicators entirely—that would be like removing the rearview mirror in your car. Perhaps aim for a 50/50 split between lead and lag indicators. Remember: lag indicators tell you if your strategy worked; lead indicators give you a compass for where you're heading.
Taking Action
In your next business review, count how many of your KPIs tell you about the future versus the past. That's a simple place to start. You can't change yesterday's results, but you can start to influence tomorrow's performance.
As an IBP practitioner that believes in a balanced suite of performance metrics, I’ve witnessed many organisations improve when they shift from exclusively historical reporting to proactive measurement systems.
Want to discuss practical ways to implement lead indicators in your business? Contact me through www.planninglab.co.nz
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