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Leading Indicator

SMART goals are very important. They set the direction and tone. How they will be achieved (strategy) is equally, if not more, important. The best way to think of strategy is to focus on the leading indicators that produce the results you want to achieve. Otherwise, any strategy will do.

Leading indicators change quickly and are generally seen as a precursor to the direction something is going. For example, changes in building permits may affect the housing market, an increase in new business orders could lead to increased production, interest rate changes will impact spending and investments, a diminishing of demands for natural resources will often indicate work slowdowns, and aging baby boomers may indicate future stresses on the healthcare system. Because leading indicators come before a trend, they are considered business drivers. Identifying specific, focused leading indicators should be a part of each business’s strategic planning.

Source: Projectimes.com

What produces the best results? This isn’t easy to figure out. It will probably take some time, effort and painful conversations to figure out. It may also involve some false starts. There will be lots of ideas. Not all of them will be valid.

It is important to consider strategy alternatives. There are many ways to get to the goal. How do we decide which ones are must useful?

In addition to identifying the impact on people, process and technology for each proposed strategy, we will also need to work with the senior leadership teams from the Business Unit to qualify the strategies. Some areas to think about are:

  1. Expected timeframe for the strategy
    1. “Is this realistic based on the technology requirements?”
    2. Does the timeframe dictate a specific technology approach?
  2. Time to business impact:
    1. “Over what time period will the expected benefits be realized?”
  3. The customer impact
    1. “How will customers be impacted by this strategy?”
  4. Total Cost
    1. “Are there any anticipated costs around people or process?”
  5. Business Risk
    1. “What are the possible business risks of the strategy?”
  6. Strategy success?
    1. “How will we measure success?”
  7. Business Impact
    1. “What are the expected business outcomes of each strategy?”
  8. Other:
    1. “What are the people, process and technology implications of these strategies?”
    2. “What assumptions have been made?”

The focus of leading indicators to drive strategy is to agree on the measurable indicators that will produce the results. Typically the leading indicators can be measured in very short time increments, ideally weekly or even daily.

Equally important however, a lead indicator without a lag indicator may make you feel good about keeping busy with a lot of activities but it will not provide confirmation that a business result has been achieved. In much the same way a Balanced Scorecard requires a ‘balance’ of measures across organizational disciplines, so a ‘balance’ of lead and lag indicators are required to ensure the right activities are in place to ensure the right outcomes.

There is a cause and effect chain between lead and lag indicators, both are important when selecting measures to track toward your business goals. Traditionally we tend to settle for lag indicators, however, do not underestimate the importance of lead indicators. Source: Intrafocus

Many employees should be involved in agreeing on leading indicators for strategy. As much as possible, the closer the employee or group is to the customer, the better the feedback for strategy will be. At the end of the day though, senior management is responsible for setting the strategic direction and being willing to be accountable for the results.

Here are some ideas around requirements and constraints.

  1. Though are some guidelines that can be used, there is no “one” way to define the key performance indicators for any particular business. It is as unique as your approach to strategic planning.
  2. Review your strategic planning process, in particular the assessment section of the various questionnaires and the environmental scan. Identify what you are already measuring and determine if it provides value to your business in your backward and forward thinking.
  3. Review your strategy map and roadmap to identify the key areas of focus. Identify the indicators that will tell you whether you have achieved your desired outcome(s) (lagging), as well as the indicators that tell you the direction of the market and where you should focus (leading). Be specific.
  4. Step outside your core senior management team and get additional leadership and external business stakeholders involved. An outside perspective can often help you determine what your lagging and leading indicators are, as well as help in recognizing the key leading indicators for your market that will drive your business.
  5. Always keep an eye on your lagging indicators–they will continue to provide insight into your business. Poor lagging indicators generally translate into poor leading indicators. A performance indicator survey might assist you in the process of ensuring the indicators are appropriate. The challenge is to ensure you have the correct indicators, and that your management team understands how they can be used to align your business impact zones.
  6. Choose your leading indicators carefully. The leading indicators should be unique to your business environment, originate from your key strategic initiatives and work elements, and ultimately be used to drive your business. Try not to be too ambitious. Keep focused on the business key impact zones represented in your strategic plan.
  7. Train your leadership team in understanding key indicators and how to use them to improve the business. It is important that your team can not only identify KPI’s, but also recognize the potential business impact indicated by them.

Here are the key ideas:

  1. Start with clear lag indicators.
  2. Begin with alternatives for what leading indicators will produce the results you are looking for.
  3. Encourage brainstorming but use a framework to narrow them down.
  4. Be rigorous in establishing 1 or 2 leading indicators.
  5. The emphasis for leading indicators as strategy is on how to achieve the results from the affected business team.
  6. Involve as many employees who are actually responsible for implementing the strategy as possible.
  7. For large geographic companies, be as inclusive as possible in the areas already producing the best results.
  8. Recognize that you don’t have the resources, particularly people, to do everything.