Over-Indexing On Lagging Indicators
Every business relies on multiple indicators (sometimes referred to as KPIs) to monitor performance and decide what steps are necessary to move forward. They are generally classified as either leading or lagging.
From the outset, I think companies over-index on lagging indicators and pay too little attention to leading indicators. This is because it’s easier to get your hands on lagging indicators than leading, but that’s now changing.
What are lagging indicators?
According to Investopedia, “A lagging indicator is?an observable or measurable factor that changes sometime after the economic, financial, or business variable with which it is correlated changes.”
Business outcomes are good examples of lagging indicators. These are the things we’ve all seen and experienced and provide executives and investors with regular language to track progress. Some common examples include:
They measure performance after the fact and can be difficult or impossible to influence directly, but can clarify and confirm a pattern as it occurs over time.
For example, a company may note its quarterly revenue declining over the last three quarters – in this case there is a clear pattern emerging about revenue (value, % and direction) – but the revenue result is itself a lagging indicator and won’t reveal the underlying variable(s) with which it is correlated that influenced that outcome.
It's no surprise that many of these business outcomes closely align with our way of measuring financial performance using generally accepted accounting principles. After all, the profit and loss statement and balance sheet keep score of what the business outcomes were, based on rules that are designed to consistently reflect those outcomes (accounting standards).
By the time we see lagging indicators, it’s too late to do anything about them. What has already happened can’t be undone, but the result can inform decisions about the future.
When you think about it, all business is a bet on future human behaviour, so if the company is focused on generating more revenue, for example, management needs to define whose behaviour will change, how, and how that will lead to more revenue. ?It’s their responsibility to set and articulate a theory about which humans and/or which behaviours will change, resulting in an increase in revenue.
Some human changes could include:
Some behavioural changes could include:
In the case of both expected human and/or behavioural changes, management would do well to consider leading indicators that provide them with confidence about their expected future.
What are leading indicators?
Again, according to Investopedia, “a leading indicator is any measurable or observable variable of interest that predicts a change or movement in another data series, process, trend, or other phenomenon of interest before it occurs. Leading economic indicators are used to forecast changes before the rest of the economy begins to move in a particular direction and help market observers and policymakers predict significant changes in the economy.”
Leading indicators measure a specific change in behaviour and eventually drive lagging indicators.
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Recognising that the business outcome (e.g. increased revenue) won’t happen without the anticipated change in human behaviour is a powerful way to align the thinking of management and the unmet needs of the humans (e.g. customers) they want to behave differently.
A good way to bring this into focus is to ask the question “What are the customer behaviours that drive business results?”
For many companies, Net Promoter Score (NPS) is treated as a leading indicator, but it needs to be understood that NPS is a lagging indicator. It tells you how well you’ve done?after?you’ve done it. But it doesn’t have any predictive power. It can’t tell you what you?should do?in order to increase customer satisfaction or encourage advocacy and actual referrals. For that,?you need to identify your leading indicators.
As an example, let’s assume you manage an eCommerce company. At the end of the day, you measure sales, revenue, profitability, and NPS. These are all lagging indicators. They tell you if things went well or not. But they don’t predict future sales, or future satisfaction. So, what can you measure that?predicts?increased sales?
Perhaps you observe that when people read testimonials on your web site, they are more likely to buy things. So, the rate at which people read testimonials is a?leading indicator. Knowing this, you’d want to do everything in your power to increase the rate of testimonial reading. Or maybe you discover that when people save an item into their shopping cart, they are more likely to proceed to checkout. In this case, moving things into the cart becomes a leading indicator.
In both cases, you can measure the rate at which people do these things (behaviours), and then you can start changing things in order to encourage these behaviours.
The critical word here is?behaviour.?Your leading indicators are?customer behaviours that you can measure and influence.
Universal leading indicators - trustworthiness and trust
I mentioned earlier my view that companies tend to over-index on lagging indicators. And it’s evident they also rely too heavily on what they believe are leading indicators but are really lagging e.g. NPS.
In my experience, trustworthiness and trust rarely feature in company performance monitoring, despite the obvious importance of both. This is usually for one simple reason – people don’t think either can be measured. Our current ‘industrial age’ accounting standards ignore trust as an asset, even though it is essential to business success, and this also sends a clear signal to companies that it doesn’t need to be measured.
But trustworthiness is a condition precedent of trust which is a condition precedent of everything.
It's impossible to imagine a situation where someone would say to a company, “I really like your product/service, but I just wish you could be a bit less trustworthy”. Everything produced and sold that is consumed or used, relies on trust.
Both company trustworthiness and the resulting trust of its stakeholders can be measured.
In fact, we’re developing a solution to uncover, measure and amplify trust performance between businesses and their stakeholders. An important part of the process is engaging with people (and companies) who value trustworthiness/trust to help us:
1.?????Discuss & identify specific use cases for our service
2.?????Arrange opportunities to undertake a Proof of Concept
If trust is on your priority list and you would like to learn more about what we're doing, please get in touch.
?Finally, make sure you don’t over-index on lagging indicators. Consider what behaviours you want to generate to reach your business objectives and focus on how you can influence them. I think you’ll find that trust should be at the top of your list if it isn’t already.