leading-indicator-vs-lagging-indicator

Leading Indicator Vs. Lagging Indicator

Business / By /

Leading indicators are also called inputs because they define what actions are necessary to achieve a measurable outcome. Lagging indicators are outputs that measure the performance of leading indicators (inputs). Therefore, a leading indicator is forward-looking (driving change), whereas a lagging indicator is primarily backward-looking (recording the past).

AspectLeading IndicatorsLagging Indicators
DefinitionLeading indicators are performance metrics that provide insights into future trends and outcomes. They help predict future performance based on current activities and behaviors.Lagging indicators are performance metrics that measure past or historical outcomes. They reflect the results of past activities and provide a backward-looking view.
Nature of MeasurementThey are predictive and forward-looking, focusing on activities and behaviors that are expected to influence future results.They are retrospective and backward-looking, reflecting past outcomes and performance results.
Timing of Data AvailabilityLeading indicators are typically available in real-time or near real-time, allowing for proactive decision-making and adjustments.Lagging indicators are reported after the fact, often with a time delay, making them less suitable for immediate decision-making.
Examples in Business– Website traffic and engagement metrics (e.g., page views, click-through rates)– Annual revenue – Customer churn rate – Employee turnover rate – Net profit margin – Stock price
Examples in Manufacturing– Production lead times – Supplier performance metrics – Work-in-progress inventory levels– Defect rates – Finished goods inventory levels – Overall equipment effectiveness (OEE) – Downtime hours
Examples in Finance– New customer acquisition rate – Customer lifetime value (CLV) – Sales pipeline metrics– Earnings per share (EPS) – Return on investment (ROI) – Price-to-earnings (P/E) ratio – Dividend yield
Use in Decision-MakingLeading indicators are valuable for proactive decision-making, enabling organizations to take preventive actions and optimize future outcomes.Lagging indicators are used to assess the historical performance and provide a basis for evaluating the effectiveness of past strategies.
Response to ChangeThey tend to respond quickly to changes in underlying factors or activities, making them suitable for monitoring short-term fluctuations.Lagging indicators change more slowly and may not reflect immediate shifts in performance or market conditions.
Risk ManagementLeading indicators can help organizations identify and mitigate risks before they impact the business, reducing potential negative consequences.Lagging indicators can highlight the impact of risks that have already materialized, making them more useful for post-incident analysis.
Strategic PlanningLeading indicators are often used in strategic planning to set targets, allocate resources, and make informed decisions about future directions.Lagging indicators play a role in evaluating the success of past strategies and adjusting future plans based on historical performance.
Performance AssessmentThey assess the effectiveness of actions and strategies in real-time, allowing for ongoing performance assessment and course corrections.They provide a retrospective view of performance and are more commonly used for performance evaluation at the end of a specified period.
Examples in Health and Safety– Near-miss incidents – Safety training completion rates – Employee safety perception surveys– Injury rates – Lost-time accidents – Days without a recordable incident – Compliance with safety regulations
Use in ForecastingLeading indicators are essential for forecasting future outcomes, enabling organizations to anticipate trends and make informed predictions.Lagging indicators are not suitable for forecasting but can be used to validate or refine forecasts based on historical data.
Real-world ApplicationIn sales, leading indicators might include the number of sales calls made, while lagging indicators include closed deals and revenue generated.In supply chain management, lead time for order fulfillment is a leading indicator, while on-time delivery performance is a lagging indicator.
In Project ManagementLeading indicators in project management may include task completion rates, while lagging indicators include project milestones achieved.In construction, leading indicators could be daily progress reports, while lagging indicators include project completion and budget adherence.
Human Resources MetricsLeading indicators could encompass employee training completion rates, while lagging indicators involve employee turnover and retention rates.In HR, lagging indicators might involve performance appraisal results or the number of employees who completed mandatory training.
Investor PerspectiveLeading indicators can be important for investors to gauge future growth potential and market sentiment toward a company.Lagging indicators are more commonly used by investors to assess a company’s historical financial performance and profitability.

What is a leading indicator and a lagging indicator?

A leading indicator looks forward to future outcomes or events. Conversely, a lagging indicator looks back at whether the desired result was achieved.

Understanding a leading indicator vs. a lagging indicator

Leading and lagging indicators have become standard terms in performance management and measurement. 

However, some businesses have trouble distinguishing between the two because many indicators have both leading and lagging characteristics at the same time.

Let’s look at both types in more detail to clarify the differences:

  • Leading indicators are indicators of performance that may predict future success. They are predictive measurements. For example, a certain percentage of workers wearing hard hats on a construction site is a leading safety indicator.
  • Lagging indicators are indicators of past performance that measure how a business has performed. They are output measurements. For example, the number of accidents on a construction site is a lagging safety indicator.

No matter the industry, there is one key difference between the two indicators.

A leading indicator has the power to influence change, but a lagging indicator can only record what has happened.

What’s the right mix between leading and lagging indicators?

Ultimately, the most successful businesses use lagging and leading indicators to determine if outcomes were met or to identify new trends.

They also use lagging indicators to create leading indicators that will accelerate growth.

For instance, motivated employees are a proven lead indicator of customer satisfaction.

High-performing processes are a lead indicator of cost-efficiency. 

Key Similarities between Leading and Lagging Indicators:

  • Measurement: Both leading and lagging indicators are used as performance metrics to evaluate the success and progress of a particular activity, process, or outcome.
  • Use in Performance Management: Both types of indicators are valuable in performance management and measurement systems to track and assess organizational performance.
  • Inform Decision Making: Both leading and lagging indicators provide valuable insights to inform decision-making and identify areas for improvement.
  • Complement Each Other: Leading and lagging indicators are often used together to create a comprehensive performance measurement system. Leading indicators help drive change and improve future outcomes, while lagging indicators provide historical context and validation of results.

Key Differences between Leading and Lagging Indicators:

  • Timeframe: The most significant difference lies in their timeframe. Leading indicators are forward-looking and aim to predict future outcomes or events. Lagging indicators, on the other hand, are backward-looking and assess past performance and whether the desired results were achieved.
  • Focus on Influence vs. Recording: Leading indicators focus on influencing change and driving desired outcomes. They are often associated with actions and inputs that can lead to specific results. In contrast, lagging indicators primarily record what has already happened and measure the outputs or results of actions taken.
  • Predictive vs. Historical: Leading indicators are often predictive and proactive, providing early signals of potential success or challenges. Lagging indicators are historical and reactive, reflecting past achievements or shortcomings.
  • Actionable vs. Descriptive: Leading indicators are typically more actionable as they guide decision-making and future actions. Lagging indicators are more descriptive, providing a retrospective view of what has already occurred.

Case Studies

1. Health & Fitness:

Leading Indicators:

  • Hours spent exercising per week.
  • Calories consumed daily.
  • Number of steps walked daily.

Lagging Indicators:

  • Weight lost or gained over a month.
  • Improvement in stamina or endurance after several weeks.
  • Reduction in cholesterol levels after months of a changed diet.

2. Education:

Leading Indicators:

  • Number of hours a student studies each day.
  • Attendance rate in classes.
  • Participation in extracurricular activities or additional courses.

Lagging Indicators:

  • Final grades at the end of the semester.
  • Graduation rate.
  • Employment rate of graduates within six months of completing their education.

3. Business (Sales & Marketing):

Leading Indicators:

  • Number of new leads generated in a week.
  • Amount spent on advertising campaigns.
  • Number of product demos scheduled.

Lagging Indicators:

  • Quarterly sales revenue.
  • Percentage increase in customer base annually.
  • Return on investment (ROI) for a specific marketing campaign.

4. Environment & Sustainability:

Leading Indicators:

  • Amount of money invested in renewable energy sources.
  • Number of trees planted in a year.
  • Implementation of waste reduction initiatives.

Lagging Indicators:

  • Reduction in carbon emissions over a year.
  • Increase in the percentage of energy derived from renewable sources after several years.
  • Decrease in landfill waste over a decade.

5. Finance & Investments:

Leading Indicators:

  • Amount of money saved or invested monthly.
  • Decisions to diversify investment portfolios.
  • Enrollment in financial literacy or investment courses.

Lagging Indicators:

  • Annual returns on investments.
  • Financial growth over a year.
  • Achievement of long-term financial goals, like buying a house or retiring.

6. Manufacturing & Production:

Leading Indicators:

  • Implementation of new production techniques.
  • Training hours provided to workers on new equipment.
  • Investments in quality control measures.

Lagging Indicators:

  • Percentage increase in product output annually.
  • Reduction in product defects or recalls over a year.
  • Profit margins at the end of a financial quarter.

7. Safety & Compliance:

Leading Indicators:

  • Number of safety training sessions conducted.
  • Implementation of safety equipment and protocols.
  • Regular safety drills and evaluations.

Lagging Indicators:

  • Number of accidents or incidents reported annually.
  • Compliance audit results.
  • Legal actions or penalties faced due to safety violations.

Key takeaways:

  • A leading indicator looks forward to future events and their outcomes. Conversely, a lagging indicator looks at past performance and whether the desired outcome was achieved.
  • Leading indicators are predictive measurements that have the power to cause change. Lagging indicators are output measurements that only record what has happened.
  • The most successful businesses will use a combination of leading and lagging indicators to measure outcomes, identify trends, and accelerate growth strategies.

Key Highlights:

  • Leading Indicators (Inputs):
    • Predictive and forward-looking.
    • Influence change and future outcomes.
    • Examples: Percentage of workers wearing safety equipment (predicts safety performance), employee motivation (predicts customer satisfaction).
  • Lagging Indicators (Outputs):
    • Backward-looking, measuring past performance.
    • Record what has already happened.
    • Examples: Number of accidents on a site (reflects safety practices), quarterly sales figures (shows past sales performance).
  • Differences:
    • Timeframe: Leading indicators are proactive, focusing on the future. Lagging indicators are reactive, focusing on past events.
    • Function: Leading indicators drive change; lagging indicators record outcomes.
    • Nature: Leading indicators are predictive; lagging indicators are historical.
    • Action Orientation: Leading indicators guide actions to achieve desired outcomes, while lagging indicators provide a retrospective view of achievements.
  • Complementary Usage:
    • Using both leading and lagging indicators provides a holistic view of performance.
    • Leading indicators can set the direction for desired outcomes, while lagging indicators validate if those outcomes were achieved.
    • For effective performance management, businesses should use both types of indicators to drive growth and assess past strategies.
  • Successful Businesses:
    • Blend both leading and lagging indicators to gauge performance, foresee trends, and establish robust growth strategies.
    • Use lagging indicators to derive new leading indicators for continuous improvement.

Connected Business Concepts

Double-Entry

double-entry-accounting
Double-entry accounting is the foundation of modern financial accounting. It’s based on the accounting equation, where assets equal liabilities plus equity. That is the fundamental unit to build financial statements (balance sheet, income statement, and cash flow statement). The basic concept of double-entry is that a single transaction, to be recorded, will hit two accounts.

Balance Sheet

balance-sheet
The purpose of the balance sheet is to report how the resources to run the operations of the business were acquired. The Balance Sheet helps to assess the financial risk of a business and the simplest way to describe it is given by the accounting equation (assets = liability + equity).

Income Statement

income-statement
The income statement, together with the balance sheet and the cash flow statement is among the key financial statements to understand how companies perform at fundamental level. The income statement shows the revenues and costs for a period and whether the company runs at profit or loss (also called P&L statement).

Cash Flow Statement

cash-flow-statement
The cash flow statement is the third main financial statement, together with income statement and the balance sheet. It helps to assess the liquidity of an organization by showing the cash balances coming from operations, investing and financing. The cash flow statement can be prepared with two separate methods: direct or indirect.

Capital Structure

capital-structure
The capital structure shows how an organization financed its operations. Following the balance sheet structure, usually, assets of an organization can be built either by using equity or liability. Equity usually comprises endowment from shareholders and profit reserves. Where instead, liabilities can comprise either current (short-term debt) or non-current (long-term obligations).

Capital Expenditure

capital-expenditure
Capital expenditure or capital expense represents the money spent toward things that can be classified as fixed asset, with a longer term value. As such they will be recorded under non-current assets, on the balance sheet, and they will be amortized over the years. The reduced value on the balance sheet is expensed through the profit and loss.

Financial Statements

financial-statements
Financial statements help companies assess several aspects of the business, from profitability (income statement) to how assets are sourced (balance sheet), and cash inflows and outflows (cash flow statement). Financial statements are also mandatory to companies for tax purposes. They are also used by managers to assess the performance of the business.

Circle of Competence

circle-of-competence
The circle of competence describes a person’s natural competence in an area that matches their skills and abilities. Beyond this imaginary circle are skills and abilities that a person is naturally less competent at. The concept was popularised by Warren Buffett, who argued that investors should only invest in companies they know and understand. However, the circle of competence applies to any topic and indeed any individual.

What is a Moat

moat
Economic or market moats represent the long-term business defensibility. Or how long a business can retain its competitive advantage in the marketplace over the years. Warren Buffet who popularized the term “moat” referred to it as a share of mind, opposite to market share, as such it is the characteristic that all valuable brands have.

Buffet Indicator

buffet-indicator
The Buffet Indicator is a measure of the total value of all publicly-traded stocks in a country divided by that country’s GDP. It’s a measure and ratio to evaluate whether a market is undervalued or overvalued. It’s one of Warren Buffet’s favorite measures as a warning that financial markets might be overvalued and riskier.

Price Sensitivity

price-sensitivity
Price sensitivity can be explained using the price elasticity of demand, a concept in economics that measures the variation in product demand as the price of the product itself varies. In consumer behavior, price sensitivity describes and measures fluctuations in product demand as the price of that product changes.

Price Ceiling

price-ceiling
A price ceiling is a price control or limit on how high a price can be charged for a product, service, or commodity. Price ceilings are limits imposed on the price of a product, service, or commodity to protect consumers from prohibitively expensive items. These limits are usually imposed by the government but can also be set in the resale price maintenance (RPM) agreement between a product manufacturer and its distributors. 

Price Elasticity

price-elasticity
Price elasticity measures the responsiveness of the quantity demanded or supplied of a good to a change in its price. It can be described as elastic, where consumers are responsive to price changes, or inelastic, where consumers are less responsive to price changes. Price elasticity, therefore, is a measure of how consumers react to the price of products and services.

Economies of Scale

economies-of-scale
In Economics, Economies of Scale is a theory for which, as companies grow, they gain cost advantages. More precisely, companies manage to benefit from these cost advantages as they grow, due to increased efficiency in production. Thus, as companies scale and increase production, a subsequent decrease in the costs associated with it will help the organization scale further.

Diseconomies of Scale

diseconomies-of-scale
In Economics, a Diseconomy of Scale happens when a company has grown so large that its costs per unit will start to increase. Thus, losing the benefits of scale. That can happen due to several factors arising as a company scales. From coordination issues to management inefficiencies and lack of proper communication flows.

Network Effects

network-effects
A network effect is a phenomenon in which as more people or users join a platform, the more the value of the service offered by the platform improves for those joining afterward.

Negative Network Effects

negative-network-effects
In a negative network effect as the network grows in usage or scale, the value of the platform might shrink. In platform business models network effects help the platform become more valuable for the next user joining. In negative network effects (congestion or pollution) reduce the value of the platform for the next user joining. 

Connected Video Lectures

Read Next: SWOT Analysis, Personal SWOT Analysis, TOWS Matrix, PESTEL Analysis, Porter’s Five Forces.

Main Free Guides:

More Resources

Scroll to Top

Discover more from FourWeekMBA

Subscribe now to keep reading and get access to the full archive.

Continue reading

FourWeekMBA