Friday, October 28, 2011

Is it a lag or a lead indicator?

Lag and lead indicators both have their place, but ultimately it's more important to build lead indicators. So what's the difference?  Lag indicators tell tell you 'after the fact' if your risk treatments have been effective.
Lag versus lead KPIs
By way of example, consider Lost Time Injury Frequency (LTIF) data. They are important to track but ultimately are only telling you what has happened in the past. That's good to know, but if your safety initiatives aren't working (or are making things worse), you'll only find out after you've injured several more people than you might have otherwise. By which time of course, you're already in the hurt locker and no wiser about how to fix things.  You can probably think of (and are probably using) any number of lag indicators but here are a few very common ones. Quarterly profit statements, house fire data, motor vehicle accident rates, cancer cases, return on equity... and the list goes on.

Far better to look at lead indicators that tell you if things are working and can give you some information about the future. In the safety example, you might like to track the level of hazard reporting, or incidents of non-compliance with safety procedures. If hazard reporting is increasing, and/or non-compliance is dropping, then (other factors being equal) it's likely that will see a reduction in lost time injuries.  Some other examples of lead indicators might include speeding tickets, hours per year of driver training, forward sales, blood sugar levels, etc.

The difference between lag and lead indicators is crucial, yet sadly too often overlooked. You might have an organizational objective of making a profit (not unusual in modern business) but if you only track profit, it can be way too late to do anything about things, if you have an unprofitable year. Some lead indicators that might help would include:
  • customer satisfaction
  • employee turnover
  • gross margins on new contracts
  • number of contracts won
  • risk exposures
The trick of course is to define which ones are relevant to you - and then refine that number downward. As a general rule, the less KPIs you're tracking the better. You might be able to identify 100 KPIs that are relevant but if one single KPI can give you the information you need, then stick with that one - but by now, I'm hoping you'll be a fan of making it a lead KPI.

1 comment:

  1. Employee turnover can also be a lag metric if the goal or objective is staff retention. A lead metric for the goal of staff retention would be absenteeism or staff satisfaction. What I am saying is that lead or lag depends on the goal.