Leading vs Lagging Indicators: What’s the Difference?

Key performance indicators (KPIs) are values that measure your organization’s success at meeting its objectives. KPIs provide insight into business conditions like:

• Predictability
• Early return on investment (ROI)
• Product quality
• And more

In practice, KPIs measure how a company will strategically grow.

However, behind every KPI is the implication that current conditions influence trends and inform predictions for future growth. Leading and lagging indicators are qualifiers that assess a business’s current state (lagging indicator) and predict future conditions (leading indicator), so companies can achieve accurate projections.

In the following article, we’ll discuss leading and lagging indicators: what they are and how to use them.

What are leading & lagging indicators?

Leading and lagging indicators help enterprise leaders understand business conditions and trends. They are metrics that inform managers that they are on track to meet their enterprise goals and objectives.

Leading indicator

Leading indicators are sometimes described as inputs. They define what actions are necessary to achieve your goals with measurable outcomes. They “lead” to successfully meeting overall business objectives, which is why they are called “leading”.

A leading indicator encourages business stakeholders to ask:

• What processes can I employ to achieve this goal to higher levels of success?
• What skills can the team improve to better achieve the desired outcome?
• What steps can be taken to speed up product development?

Leading indicators do this by providing benchmarks that, if met, will be indicative of meeting overall KPIs and objectives. Some examples of leading indicators for an enterprise business software company with an annual subscription fee might be:

• Percent of customers that sign up for two-year agreements
• Number of customers that renew software at or before mid-term alerts
• Number of customers that purchase software add-ons

Lagging indicator

If a leading indicator informs business leaders of how to produce desired results, a lagging indicator measures current production and performance. While a leading indicator is dynamic but difficult to measure, a lagging indicator is easy to measure but hard to change. They are opposites, and as such a lagging indicator is sometimes compared to an output metric.

A lagging indicator encourages business stakeholders to ask:

• How many people attended an event?
• How much product was produced?
• What response did it receive?

Lagging indicators measure output that’s already occurred to gain insight on future success. They do this by measuring things like:

• Profit
• Expenses
• Customer participation
• Renewal rates
• Revenue

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How to use lagging indicators

Lagging indicators are always triggered by an event that has just occurred, and, in that sense, are a little more self-explanatory than leading indicators.

If you’re measuring the outcome of an event, product release, sales training program or what have you, you’re using lagging indicators to determine, in retrospect, who attended, what was produced, or how it was received by attendees.

Lagging indicators are best used in conjunction with leading indicators to determine trends and if outcomes were met. This can be made simple with the right technology infrastructure that compares leading and lagging indicators, offering insight.