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What’s leading vs lagging indicators? With Examples!

What if you had the power to predict the future? Well, it might be closer than you think! Today I wanted to talk about a relatively complex topic: leading vs lagging indicators.


The purpose of this article is to go a little deeper. What are leading indicators and why is it important to have them in your goal setting toolkit?


What Is a Leading Indicator?


In plain english, a leading indicator is a short-term measure that predicts a future outcome. Think of it like the speed of your car towards a destination. While you don't know the exact time you'll arrive for sure, you can make an educated guess based on how fast you're driving.


What is a lagging indicator?


Lagging indicators are longer term measures that show what has happened in the past. Back to the car example. Your distance traveled (odometer) is a lagging indicator. It shows you how far you've come, but it won't tell you when you'll arrive.


What's the benefit of using Leading Indicators?

It is important to note that you should be using leading indicators when you start setting your goals. We might be very clear on the end state we need to achieve. That is, what does success look like. You might even be clear on the work you think you need to do to achieve it. But how do you really know?


Well once you have identified what "success" looks like, you'll want to identify leading indicators which give you confidence you're making progress along the way. In other words, you want to get a quick, easy read of whether your trajectory is following your desired course.


It's also a major enabler of executing on the right plan. Execution is everything. A core part of execution is validating our ideas before we spend too much time on them.


The worst part is once you're overly committed on an idea, the Sunk Cost Fallacy and Confirmation Bias take over. Sunk cost fallacy is a trap we all fall into at work. It's where we can't let go of the effort or money spent on a project, and feel like we need to keep putting more into it to get the desired value. The reality is sometimes we just need to let that idea go. Confirmation Bias is its evil twin. This is where we downplay data that contradict our own ideas. So if I'm committed to a project, I'm likely to ignore any data that tells me that it's a bad idea. At best I'll find other data that somehow justifies this idea.


Just don't fall into this trap! This is where the OKR (Objectives & Key Results) framework is amazing. It forces you to think about the idea outcome, and use Key Results to measure your success using Leading indicators.


Committed on the destination. Flexible on the path to get there.


What's The problem with using lagging Indicators for OKR goal setting?


The problem with using lagging indicators is that, they take a very long time to accumulate useful information. What's more, you can get totally lost in trying to track every single lagging indicator.


As a consequence, lagging indicators often fail to give you the confidence you need to continue driving towards your desired destination. We end up asking a lot of questions along the way without really knowing if we're going to achieve the desired outcome. Not good!


What are some examples of Leading vs Lagging indicators?

It can be a little tricky identifying the right leading vs lagging indicators. It really depends on the outcome you're trying to achieve. For example, the leading indicator of speed at which a customer can complete an activity predicts the lagging indicator of customer satisfaction (CSAT). What you need to remember however is CSAT is a reading indicator of referrals (happy customers = more referrals). So bearing that in mind, here's some examples you can use as a rough guide.

Output (what you do)

Leading indicator

Lagging indicator

End Result

Better experience

Average time to complete

Higher retention

Profit

Marketing

# of leads

Signed deals

Sales

Staff quality training

Checklist  Usage (behaviour)

Reduce work defects

Reduce expenses

Software deployment  automation

Time to deploy

Monthly deployments

New feature sales

Conclusion

In conclusion, using lagging indicators isn't the answer for your goal setting. The right answer is to look for more granular leading indicators. You'll start to be able to make decisions about your level of commitment much quicker, and really start to understand whether you're on course.


It's really important to see how your path works against your desired outcome.