Leading vs Lagging Indicators

Have you ever wondered why some companies can feel changes on the horizon before they arrive, and others continue to chase changes? Envision looking forward through a notice board-sized windshield and seeing signs well before they show up, or squinting through a rear window at your past, hoping to figure out where you experienced it.

That's leading and lagging indicators. In this article, you will learn how these tools will deepen your awareness, inform your decision-making, and maintain a performance toolbox that is forward-looking and based on reality.

What Are Leading Indicators?

Leading indicators act like an early warning system or can give you insights about what is coming next. These forward-looking measures often change before your actual results change. There are ways to track trends, simplifying the choices you'll need to make going forward.

In economics, business, or product development, these indicators help you monitor observable trends and adjust your path promptly. Instead of noticing consequences and reacting to those outcomes, you get to drive proactively.

What Are Lagging Indicators?

Conversely, lagging indicators tell you what has happened already. Lagging indicators are like your rearview mirror - precise, reliable, and real. Revenue, churn rate, completed projects, and quarterly sales figures are all examples of lagging indicators.

Lagging indicators show if your strategies worked or provide an indication as to where to make the changes you want; however, they don't offer the opportunity for course correction in real time.

Why You Need Both

You need both types; think of leading indicators as a place to look forward, and lagging as a way of looking back. Leading indicators can help navigate what's to come, and lagging indicators tell you how well you've done.

With lagging indicators, you can look back and assess the previous target, but it doesn't give you a pivot opportunity. Looking forward, you can make new predictions, but they lack validation. Together, leading and lagging indicators give you a fuller picture of performance and provide a pathway forward that's both wise and attentive.

Real-Life Examples of Leading and Lagging Indicators

Economics & Policy

In economics, leading indicators such as housing starts, yield curves, or consumer sentiment can foreshadow changes in direction, like a recession or boom. Lagging indicators, such as employment rates, inflation, or GDP, confirm events that have already taken place.

Product Management

In digital product teams, leading indicators can be more specific. User engagement, such as time-enhanced app engagement or feature usage, is a leading signal of possible future revenue. Monthly Recurring Revenue (MRR) is a lagging indicator because it shows the result of your work, which is visible, but you're unable to make a pivot without a little more effort.

Sales and Marketing

Sales calls or lead inquiries can also serve as leading indicators or things you can affect through activity. Revenue achieved or quotas met are lagging indicators because they show the results of what was invoked, but you can't go back in time to redo the results.

The Benefits and Limitations: Let's Compare

Benefits of Leading Indicators

• Provide early indications so you can react sooner.

• Force a proactive management style and quicker adjustments.

• Help you plan and be experimental and future-focused.

Limitations of Leading Indicators

• Less tangible - there tends to be more guesswork and potential for false positives.

• Harder to define and lacks a direct tie to an outcome.• Require a little more nuance and context to determine correctly.

Benefits of Lagging Indicators

• Clear, definable, and trustworthy,

• Excellent mechanism to hold people accountable and report performance

• Easy to communicate and benchmark.

Drawbacks of Lagging Indicators

• Too late to act in the moment to correct course,

• Little insight into why it happened,

• Allows teams to operate in a reactive pattern.

How to Use Them Together Effectively

1. Know Your Goal

What is the result you desire – for example, a 10% increase in revenue in Q3?

2. Pick the Lagging Indicator

In this case, revenue generated, or MRR.

3. Pick a Proxy Leading Indicator

For example, you could focus on free trial signups and the number of active users.

4. Act and Observe

Engage in behaviours that cause leading indicators to shift, such as improving onboarding, launching a new campaign, or encouraging feature adoption. Then, observe how leading indicators shift before revenue does.

5. Validate and Change

Check those lagging metrics to validate whether your actions were even successful. If revenue hasn't shifted, then you need to rethink your assumptions or leading strategies.

Practical Tips for Getting it Right

• Hypothesis Driven Indicators: Choose leading metrics you actually believe created the results.

• Flexibility: If a leading metric is not tied at all to results (or is just a random number), you won't do anyone any good if you just continue to test and cling to that leading metric, but be flexible to test and adapt.

• Correlation, not causation: Leading signals will likely only share trends, not actual results you are guaranteed to obtain. In the spheres of metrics and indicators, correlation does not cause a resulting reaction.

• Co-mingle, simulate, adapt: Use leading and lagging indicators together to conduct mini experiments and accelerate your learning.

Conclusion

Leading indicators and lagging indicators are not competitors. They are partners. Think of leading indicators as an antenna that is picking up the next signal you want to steer to, and think of lagging indicators as confirmations you need to let you know you are headed in the right direction.

By combining the two well-through goals, metrics, and optimistic actions, you have created a loop that will keep feeding back. You can see ahead, learn, validate, and iterate in real-time. This is where you can find honest and thoughtful agile performance management.

Once you understand this balance, it reframes your mind and encourages a shift away from reactive thinking to one that is thought out, anticipatory, and resilient. If you do this, even the uncertain roads become less daunting.