Leading And Lagging Indicators: Understanding Their Importance, Characteristics, and Differences

Every business or organization uses various performance measurements to determine its performance in various segments of its operations, as well as its overall performance. In the business world, those metrics are divided into two categories, namely leading and lagging indicators.

What is a leading indicator?

This is any type of measurement in business operations that is expressed in the form of an estimate or prediction. In other words, this type of measurement is all about making estimates of future performance and that is why leading indicators are performance estimates. The fact that these types of measurements are estimates means that they are difficult to measure. Leading indicators are ideal especially in cyclical markets where most of the factors especially both internal and external are known, therefore allowing for a high degree of predictability.

Companies like Apple or Samsung use leading indicators to estimate smartphone sales based on market share, historical performance, and other factors. Note that often times the actual outcome usually comes close to the estimated figure either by a slightly lower or higher margin. This highlights the focus on predictive measurement.

This type of information allows a company to decide whether to distribute more of its products or less depending on the anticipated level of demand. This means that a leading indicator allows for the change of behavior in the observed aspect of a business or organization. This also means that it somehow facilitates some flexibility.

What is a lagging indicator?

Lagging indicators are typically any type of measurement in an organization or business that provides information on something that already happened. This type of metric is ideally used to measure or compare the performance of one organization or its product with other rival organizations. This is the type of indicator that is used to measure a company’s output.

One of the most notable things about the lagging indicator is that it is can easily be measured. The fact that it measures things that have already taken place means that it is a more accurate measure of the organization or business’s performance. On the downside, since it measures past events, this means that a lagging indicator does not allow for a behavioral change. This means that the outcome of the measurement is fixed and cannot be changed since it already took place, thus I cannot be changed to fit particular criteria.

Why are lagging and leading indicators important?

Both lagging and leading indicators are important metrics for most businesses out there and for good reasons despite some of their individual shortcomings. The two indicators are important measurements because they help the management to understand how the business is really performing. This also helps them to develop strategies through which they can improve the performance of the business in the future.

It makes sense to use both the leading and lagging indicators when planning on future improvements. This is because you need to look at the past performance to determine whether it was a good performance or a lacking one, thus the need for lagging indicators. You also need the leading indicators so that you can project the future performance based on various input adjustments.

A business that is able to integrate leading and lagging indicators is better positioned to achieve success. Note that some indicators can be both lagging and leading indicators. A good example of such is where a company’s human resources department is able to hire highly skilled individuals. In this case, it would be considered a good lagging indicator because the HR department managed to secure the top talent.

On the other hand, it is a leading indicator because it is a step aimed at facilitating better success in the future. Hiring the best manpower means that the company is on the right path for cost efficiency especially relative to the value or quality of work that the employees deliver, assuming they perform as expected.

The two indicators are ideal for anyone that is building a strategy for business performance management. The latter should focus on a variety of aspects for it to reach peak efficiency levels. For example, cost efficiency and customer satisfaction are two important aspects of any business and leading indicators happen to be the best indicators when aiming to achieve those two aspects. However, leading indicators do not show how the business will achieve its objectives or warnings that the strategy is deviating from the objectives. This is why it is important to combine both indicators for the optimal view.

Both lagging and leading indicators are important when picking the measures that will help the business owners to keep track of their business objectives. Each has a cause and effect and this helps to achieve some balance. Often times people choose lagging indicators because they are measurable and they act as a good reference point since they highlight the past performance. However, the leading indicators are just as important and thus the need to make sure that both indicators are considered in the business management process.

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