leading-indicator-vs-lagging-indicator

Leading Indicator Vs. Lagging Indicator

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).

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 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.

Connected Business Concepts

AARRR Funnel

pirate-metrics
Venture capitalist, Dave McClure, coined the acronym AARRR which is a simplified model that enables us to understand what metrics and channels to look at, at each stage for the users’ path toward becoming customers and referrers of a brand.

North Star Metric

north-star-metric
A north star metric (NSM) is any metric a company focuses on to achieve growth. A north star metric is usually a key component of an effective growth hacking strategy, as it simplifies the whole strategy, making it simpler to execute at high speed. Usually, when picking up a North Start Metric, it’s critical to avoid vanity metrics (those who do not really impact the business) and instead find a metric that really matters for the business growth.

Profit Margin

profit-margin
The profit margin is a profitability financial ratio, given by the net income divided by the net sales, and multiplied by a hundred. That is expressed as a percentage. That is a key profitability measure as combined with other financial metrics, it helps assess the overall viability of a business model.

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).

Business Analysis

business-analysis
Business analysis is a research discipline that helps drive change within an organization by identifying the key elements and processes that drive value. Business analysis can also be used in Identifying new business opportunities or how to take advantage of existing business opportunities to grow your business in the marketplace.

Cash Flows

cash-flow-statement
The cash flow statement is the third main financial statement, together with the 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 and indirect.

Comparable Analysis

comparable-company-analysis
A comparable company analysis is a process that enables the identification of similar organizations to be used as a comparison to understand the business and financial performance of the target company. To find comparables you can look at two key profiles: the business and financial profile. From the comparable company analysis, it is possible to understand the competitive landscape of the target organization.

Cost Structure

cost-structure-business-model
The cost structure is one of the building blocks of a business model. It represents how companies spend most of their resources to keep generating demand for their products and services. The cost structure together with revenue streams, help assess the operational scalability of an organization.

Financial Moat

moat
Economic or market moats represent 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.

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 for companies for tax purposes. They are also used by managers to assess the performance of the business.

Marketplace Business Models

marketplace-business-models
A marketplace is a platform where buyers and sellers interact and transact. The platform acts as a marketplace that will generate revenues in fees from one or all the parties involved in the transaction. Usually, marketplaces can be classified in several ways, like those selling services vs. products or those connecting buyers and sellers at B2B, B2C, or C2C level. And those marketplaces connecting two core players, or more.

Network Effects

network-effects
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.

Platform Business Models

platform-business-models
A platform business model generates value by enabling interactions between people, groups, and users by leveraging network effects. Platform business models usually comprise two sides: supply and demand. Kicking off the interactions between those two sides is one of the crucial elements for a platform business model success.

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. 

Virtuous Cycles

virtuous-cycle
The virtuous cycle is a positive loop or a set of positive loops that trigger a non-linear growth. Indeed, in the context of digital platforms, virtuous cycles – also defined as flywheel models – help companies capture more market shares by accelerating growth. The classic example is Amazon’s lower prices driving more consumers, driving more sellers, thus improving variety and convenience, thus accelerating growth.

Amazon Flywheel

amazon-flywheel
The Amazon Flywheel or Amazon Virtuous Cycle is a strategy that leverages on customer experience to drive traffic to the platform and third-party sellers. That improves the selections of goods, and Amazon further improves its cost structure so it can decrease prices which spins the flywheel.

Read Next: Eisenhower Matrix, BCG Matrix, Kepner-Tregoe Matrix, Decision Matrix, RACI Matrix, SWOT Analysis, Personal SWOT Analysis, TOWS Matrix, PESTEL Analysis, Porter’s Five Forces.

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