Leading and Lagging: Meaning
Leading and lagging are two different forms of indicators that help in the assessment of the current state of any business and the prediction of its future conditions. The lagging indicators assess the current state of the business, whereas the leading indicators predict the future state of affairs. The two indicators help in the measurement of performance and management in an organization. They help any organization to achieve what the management has planned or predicted. The management gets to know the current business environment and trends. It also helps them analyze if the company is on the right track in converting its goals and plans into reality.
A company uses leading and lagging indicators to create an optimum mix of backward-looking indicators and indicators that are future-oriented or forward-looking. We assess whether the plans were achieved or not by using the lagging indicators. The leading indicators are forward-looking and focus on future events and results. In other words, they are the indicators that result in the performance of lagging indicators sometime in the future. Leading indicators are the drivers of key results and decide the future performance of any business.
Key Lagging Indicators?
Lagging indicators are usually focus-oriented. They focus on results that the company can achieve at the end of a certain period of time. They are the Key results indicators or KRI, focusing on making the business faster, better, and more efficient. We can easily identify and capture them. They lack the power of prediction because they are based on current and past events. Also, we cannot easily improve them or influence them since they usually occur/derived/calculated after the happening of an event or an activity.
The Lagging Indicators
Companies use metrics like revenue and profits, consumer behavior and participation, expenditure, renewals, etc., to arrive at the lagging indicators. We can undoubtedly say that the key lagging indicator is revenue that the company manages to generate over a period of time. We can use key performance indicators or KPIs such as net revenue, EBITDA or EBIT, ARR, ROI, ROCE, ROE, etc., to measure the company’s financial performance.
In terms of measurement of performance, we can use indicators such as number of customers attended, number of calls completed over a particular time period, number of leads and contacts generated, no. of conversions from the leads, etc. We can use brand recall and recognition as a metric to evaluate the results of our marketing efforts.
Lagging indicators do not tell us how the management or teams are handling a current project. These indicators only give us results after the completion of a project. And therefore, it is basically a postmortem of the activity. But these measures are an accurate way to determine the actual impact of the business. Also, they tell us how successful and effective the policies and programs of the business are. But they also take time to give results or measure, and the answers are not spontaneous. Also, these indicators give us the final outcome of a project or an event. They do not tell us anything about the variables that have led to the particular outcome. Thus, they may not help us in problem-solving without going in for a detailed analysis of all the ingredients.
Key Leading Indicators
Leading indicators act as “leads” to help us meet our business goals and objectives. They define the requisite actions that the management needs to take to meet its goals. They set benchmarks, and businesses should meet them to be in line with achieving their KPIs. These indicators are predictive in nature. Organizations can make adjustments on the basis of results so that they do not deviate from the correct path, and any deviation could be rectified immediately.
Leading indicators are not absolutely accurate, being predictive in nature. They tell us what can and may happen, but not with complete surety. These indicators do not guarantee the occurrence of any future event or outcome; instead, they talk about the likely outcome based on the sample data of performance. Also, they are usually unique to businesses and vary from one company to another. Hence, they are difficult to understand and identify. It is hard to benchmark them across companies or industries.
In terms of revenue generation for a company, the leading indicators can be the volume of sales or deals about to be finalized, the number of customer complaints, customer footfall, new market development, the introduction of new products, new applications development, etc. These indicators can affect the future performance of any organization. We can adjudge customer loyalty and their retention by the metric of customer satisfaction. Similarly, staff retention activity can be gauzed by employee satisfaction and motivation. This directly impacts the productivity levels within the organization and, subsequently, its revenue.
Summary: Leading and Lagging
Any organization uses both the lagging and leading indicators in tandem or simultaneously. For example, revenue from sales in an organization is a lagging indicator as it is a measure of what has already occurred in the form of sales. Lagging indicators usually become the base or reference pointers. And on those lagging indicators, we build further plans and budgets using the Leading Indicators. We continuously work to improve our sales revenue to improve our leading indicators. We will focus on methods to improve our sales pipeline. Also, it will be an indication of whether we will be able to achieve our future goal of sales targets or not. Especially looking from the past experience and current developments going on. If the management feels that the target is tough to achieve, it can take corrective steps to increase sales.
Leading indicators keep changing frequently. Hence any organization has to check and keep track of them often. Lagging indicators are more stable and change relatively less often; hence, the company need not frequently track and check them. Companies need to develop a framework for performance management. On the one hand, they need to assess whether the company is on its path to achieving the quantifiable metrics such as sales targets, profits, etc. On the other hand, the management needs to ensure that they pay attention to indicators such as customer satisfaction, employee satisfaction, market penetration, etc. A company can perform well and develop achievable KPIs only when we have a balance between the leading and lagging indicators.
Apart from organizations Leading and Lagging Indicators are extensively used in the stock, security, currency, and commodity trading universally. In trading terminology, it is called part of the Technical Analysis.
Frequently Asked Questions (FAQs)
The current state of the business is assessed by the lagging indicators, whereas indicators for prediction of the future state of affairs are leading indicators.
The leading indicators include:
– The volume of sales or deals to be finalized
– The number of customer complaints
– Customer footfall
– New market development
– The introduction of new products
– New applications development, etc.
Metrics used by the company as lagging indicators are:
– Revenue and profits
– Consumer behavior and participation
– KPIs such as net revenue, EBITDA or EBIT, ARR, ROI, ROCE, ROE, etc.