Why Leading and Lagging Indicators Are a Business Owner's Best Friends

Here's a simple guide on how to use leading and lagging indicators.

To make it sweet, short, and actionable, I will cover the three most important questions:

What are leading and lagging indicators?

How do leading and lagging indicators help me?

How do I use them to my benefit?

Let's dive right into that.

What are leading indicators?

They give me insights into future performance.

That's because they capture things before you can measure the ultimate result.

Let's face it, most everything we desire is the result of some input-output relationship.

I know, I know, we'd all love to just have the output. But let's stick with reality.

And here's where the leading indicators come into play:

They enable me to measure the input!

And because the output follows the input, my leading indicators help me to look into the future.

Think of them like the best substitute to a ... glass that you will get.

What are lagging indicators?

As you might have already guessed from my input-output image, the lagging indicators tell me about the output.

They reflect past performance and confirm what has already happened.

Examples are profit, revenue, market share.

How do leading and lagging indicators play together?

We still want to wrestle down the world with its harsh law of input and output to get some nice little carrot that we head out for.

And by using leading and lagging indicators, we can improve our chances to get this carrot effectively and efficiently.

Just as a reminder, roughly speaking, effectively means THAT we get the carrot, efficiently means that we get it with the least possible effort.

The leading indicators help us to stay on track while we not yet have the carrot.

The lagging indicators again tell us when we've finally gotten hold of our carrot, how big it is, and so on.

Think of it like a combination of a glass ball and a rearview.

The glass ball helps us to reduce uncertainty and have some kind of idea where we're heading to.

The rearview again tells us when we have arrived.

Using both helps you to measure how well you're steering towards your carrot and to realize, once you've grabbed it.

How do leading and lagging indicators help me?

First and foremost, if you use these indicators wisely, they help you to get more and bigger carrots.

Additionally, they are a brilliant tool to make other people get carrots for you, which is also called delegation.

Finally, they help you to get your carrots with more certainty and less effort.

Of course, you have realized that you can substitute "carrot" with whatever you currently wish to achieve:

More clients, more revenue, world-piece or world-domination - it doesn't matter.

They are all desired outputs that need some input to materialize.

And using leading and lagging indicators cleverly helps you to do so.

If you're with me so far, the next logical question, of course, is:

HOW do I use these great tools to get my carrots?

First, let me show you the overall strategy:

Step 1: Define your carrot

Step 2: Understand carrot-getting process

Step 3: Define indicators

Step 4: Set up measurement system

Step 5: Measure indicators

Step 6: Act on your measurement

Having these 6 steps in place, you will be able to get more and bigger carrots, delegate the carrot-getting process better, AND do the whole thing with more certainty and less effort.

So let's look at each step in more detail:

Step 1: Define your carrot

"And as they had lost sight of their goal, they re-doubled their effort"

This is still one of my favorite quotes - supposedly by Mark Twain, but that is in doubt.

In other words, I first need to know which carrot I strive for, before I should head out getting it.

So, in my carrot-defining step I list all the relevant criteria: volume, size, quality, and time.

"I want 10 brilliantly crispy, nicely orange carrots, without any foul spots, each one at least 10 inches long, with a minimum diameter of an inch at the thickest part, until next Sunday on my plate."

Now, the above goes for a pretty specific (and sufficient) carrot definition.

Step 2: List the carrot-getting process

Now, unfortunately, having these 10 carrots on my plate is currently just a juicy dream.

As long as I haven't got a tight carrot-getting process set up, my chances for having anything on my plate next Sunday are nil.

That's because of the input-output law, remember?

So in this step, I map down the important STEPS to get to the desired carrots.

What do I need to do first, what second, what then, then, and what finally?

These are my guiding questions.

In our example, I will have come up with something like: find a carrot field, obtain a license to dig, dig for carrots, check for criteria, deliver to the table.

(Now this was truly just from the top of my mind - I am sure you will come up with a much tighter carrot-getting process ... never mind.)

Step 3: Define indicators.

Now that we have our defined our carrot AND the carrot-getting process, we can define our indicators.

Luckily, the lagging indicators have already defined themselves.

Because they are just the specifics we have used to define our ideal outcome in the dimensions of volume, quality, time, price.

Having our process mapped out, we can define our lagging indicators as follows:

We just look for the most critical step and turn it into a number.

The decision criteria is: "When seeing this number, how good of an indicator will this be to tell me about the certainty to get my carrots as desired?"

In other words, we look for the indicator that gives me the best glass-bowl.

In our example, this could be the number of licenses obtained.

Why? Because it includes having found carrot fields already, and it is the most difficult and therefore critical step.

Digging and delivery are rather easy, no bottlenecks, here.

So, here we have it: We monitor the number of licenses obtained per week.

Step 4: Set up measurement system

In a next step, we must ensure to collect the correct data and make it accessible.

We should do this as stupidly simple as possible.

Because if we set up anything complex, this will just make using this indicator so much more difficult on all ends.

A simple chart, that's accessible by everyone, where the license-obtaining numbers will be filled in is all that it takes.

I won't go into detail, here. But our system needs to ensure that the numbers are put in like a clockwork.

Step 5: Measure indicators

Once we have set this up, everybody involved in our carrot-getting project, will be able to see the status of our license-obtaining step.

And the head carrot-sourcer as well as each carrot-field-sourcing manager can monitor, where they stand and what's to come in terms of carrots on plate (which is our lagging indicator).

Step 6: Act on your measurement

Now, the whole indicator-finding, and monitoring-system-settting-up thing would be pretty useless, if we wouldn't do something with the information we get out of it.

So OF COURSE we need to ensure that we ACT on our beautiful carrot-getting data.

Because we have found so well-thought-of indicators, acting upon them is rather simple.

If the number of sourced licenses is under target, we just need to dig deeper (- not on carrots, but on causes, dummy!)

Does our sourcing team find too few new carrot-fields? Is our conversion from newly found field to obtained-licence under par? Or do we have too few, carrot-licence-obtaining managers in place?

With a good leading indicator, digging for causes should be straight-forward.

Then it's implementing the fixes for the causes, and on it goes with successful carrot-getting.

Additionally, we measure our lagging indicator, of course.

So that we constantly monitor how many carrots of desired volume, quality, and cost have arrived at our plate by Sunday.

How can you use this to get more of what you want?

Now, all YOU have to do is to

Replace "carrots" with your desired outcome.

Then, follow the steps that I've laid out.

Find your own leading and lagging indicator.

And, finally start measuring, acting, and being happy about your outcome.

... To then set out and look for further carrots.