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Lagging indicators are typically “output” oriented, easy to measure but hard to improve or influence while leading indicators are typically input oriented, hard to measure and easy to influence.Now lets try to translate this to business. Most financial indicators such as revenue, profit, costs are “lacking indicators”. They are results of the activities of the company.
Now lets imagine you are managing an IT outsourcing company and your goal is to be compliant with the service level agreements (SLA’s) you agreed upon with your customers. For instance the maximum allowed time to resolve high priority incidents is 48 hours.The output is easy to measure: You either solve your incidents in 48 hours or not. But how do you influence the outcome? What are the activities you must undertake to achieve the desired outcome?For instance: Make sure staff start working on incidents immediately when they occur. Make sure that incidents are assigned to the right people with the right skillset and that this person isn’t already overloaded with other work.This could be translated into the following “leading” indicators- % of incidents not worked on for 2 hours.- % of open indicents older then 1 day.- % of incidents dispatched more then 3 times.- Average backlog of incidents per agentWhen you would start measuring these KPIs on a daily basis and focusses on improving these KPIs, I would think it is extremely likely to see an improvement in SLA compliance.Leading indicators are often related to activities undertaken by employees.
Lagging indicators look back at historic performance. They are the traditional focus of reporting and analytics initiatives. We base lag indicators on outcomes. They are easy to measure. For example: sales revenue, number of calls made, or headcount. They tell us how we are doing as an organization. They ensure we are heading in the right direction.
Leading indicators look forward. They aim to predict some aspect of our future performance. For example: forecast revenue for next 2 quarters. Predict new sales opportunities for the next 3 months. Or, estimate maintenance spend until year end.
