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Lead and Lag Indicators

What are they and what are they not?

© 2010 Copyright ISC Ltd.


What are they?

 People often ask “what’s the difference between


a Leading and a Lagging indicator?”.
 When developing a Balanced Scorecard (or any
other performance management system), it is
recommended to use a combination of Leading
and Lagging Indicators.
 Kaplan and Norton call these “Performance
Drivers” and “Outcome Measures”.

© 2010 Copyright ISC Ltd.


What do they tell you?

 The idea is that Lagging Indicators without Leading


Indicators tell you nothing about how the outcomes will
be achieved, nor can you have any early warnings about
being on track to achieve your strategic goals.
 Similarly, Leading Indicators without Lagging Indicators
may enable you to focus on short-term performance, but
you will not be able to confirm that broader
organisational outcomes have been achieved. Leading
Indicators should enable you to take pre-emptive actions
to improve your chances of achieving strategic goals.

© 2010 Copyright ISC Ltd.


Cause and Effect

 Implicit in the design of any balanced


performance management framework, such as
the Balanced Scorecard (BSC), is the cause and
effect chain of goals and strategies.
 So, “investing in organisational capability” leads
to “efficient and effective processes”, which
deliver the products and services that “satisfy
customers” and ultimately lead to “profit” in the
private sector, or “positive stakeholders/funders”
in the public sector.

© 2010 Copyright ISC Ltd.


The Balanced Scorecard Cause and
Effect Chain

Financial Customer
perspective perspective

Learning
Process
and Growth
perspective
perspective
© 2010 Copyright ISC Ltd.
Chain of Indicators

 Because there is a cause and effect chain of


objectives and strategies within a Balanced
Scorecard, there is a corresponding chain of
Leading and Lagging Indicators.
 For example, “Satisfied/Motivated Employees” is
a (well-proven) Leading Indicator of “Customer
Satisfaction”.
 Similarly, “high-performing processes” (e.g. to 6-
Sigma levels) would be expected to be a
Leading Indicator of “Cost Efficiency”.
© 2010 Copyright ISC Ltd.
The Balanced Scorecard Cause and
Effect Chain – more links

Financial Customer
perspective perspective

Learning
Process
and Growth
perspective
perspective
© 2010 Copyright ISC Ltd.
Leading and Lagging Perspectives

 Arguably, the BSC perspectives that are focussed on


Learning & Growth (or Organisational Capability) and
Processes contain Leading Indicators of external
performance that are contained within the Finance and
Customer perspectives, containing Lagging Indicators .
 However, it’s not as easy as that because within each
BSC perspective you will usually want a combination of
Leading and Lagging Indicators.
 For example, you are likely to want to measure “Employee Satisfaction”
and could readily identify a Leading Indicator of this such as an index of
“Leadership Capability”, or maybe “No. of days training per employee”.

© 2010 Copyright ISC Ltd.


Are Leading Indicators measured
more frequently?
 It is sometimes said that Leading Indicators
will be measured more frequently than
Lagging Indicators, but that may not be
helpful as a definition…
 You could measure “Complaints Received” or
“Customer Satisfaction” every day, both of which
might usually be described as Lagging Indicators.
 Equally, you could measure process “Error
Rates”, or “On-Time Delivery” every day and
these are probably Leading Indicators.

© 2010 Copyright ISC Ltd.


Are Lagging Indicators too late to be
useful?
 The view that Lagging Indicators cannot be
adjusted until it is too late is also not
necessarily very helpful.
 In the previous example with the suggestion
that Errors and Delivery Performance may be
Leading Indicators, knowing that you have an
error rate of 25%, or 15% Late Deliveries, is
already too late!

© 2010 Copyright ISC Ltd.


Process or Organisation Indicators?

 One definition that might help is that Leading


Indicators are often captured at the level of
individual processes, whereas Lagging
Indicators may be the result of changes in a
number of Leading Indicators.
 So, process cycle-time or error rate might be
Leading Indicators, measured at the process
level and Customer Satisfaction would be a
Lagging Indicator, measured at the
organisation level.
© 2010 Copyright ISC Ltd.
Activity or Outcome?

 If you are measuring “activity” (i.e. at a


process level), it is more likely that you are
using Leading Indicators.
 The closer you move to process inputs and
activities, the closer you get to Leading
Indicators of downstream, (Lagging)
performance.
 If you are measuring aggregated effects, or
outcomes, at an organisational level, you are
more likely to be using Lagging Indicators.
© 2010 Copyright ISC Ltd.
Conclusion

 Remember, the overall purpose of selecting


metrics is to enable you to track performance
towards your goals.
 So, you should aim to identify and then
control those metrics that help drive you
towards your ultimate goals.

 First decide what you are trying to achieve,


then decide what you need to measure.

© 2010 Copyright ISC Ltd.


© 2010 Improvement Skills Consulting Ltd.
Specialists in:
 Performance Management

 Process Improvement

 Project Management

WWW.IMPROVEMENT-SKILLS.CO.UK

© 2010 Copyright ISC Ltd.

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