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Balanced Scorecard, Performance Management

Lead vs. Lag Indicators

People often ask “what’s the difference between a Leading and a Lagging indicator?”.

When developing a Balanced Scorecard (or any other performance management system), it is recommended to use a combination of Leading and Lagging Indicators.  Kaplan and Norton call these “Performance Drivers” and “Outcome Measures”.

The idea is that Lagging Indicators without Leading Indicators tell you nothing about how the outcomes will be achieved, nor can you have any early warnings about being on track to achieve your strategic goals.

Similarly, Leading Indicators without Lagging Indicators may enable you to focus on short-term performance, but you will not be able to confirm that broader organisational outcomes have been achieved.  Leading Indicators should enable you to take pre-emptive actions to improve your chances of achieving strategic goals.

Implicit in the design of any balanced performance management framework, such as the Balanced Scorecard (BSC), is the cause and effect chain of goals and strategies.  So, “investing in organisational capability” leads to “efficient and effective processes”, which deliver the products and services that “satisfy customers” and ultimately lead to “profit” in the private sector, or “positive stakeholders/funders” in the public sector.

Because there is this cause and effect chain, there is a corresponding chain of Leading and Lagging Indicators.  For example, “Satisfied/Motivated Employees” is a (well-proven) Leading Indicator of “Customer Satisfaction”.  Similarly, “high-performing processes” (e.g. to 6 Sigma levels) would be expected to be a Leading Indicator of “Cost Efficiency”.

Arguably, the BSC perspectives focussed on Organisational Capability (or Learning & Growth) and Processes contain Leading Indicators of external performance that are contained within the Finance and Customer perspectives.

However, it’s not as easy as that, because within each BSC perspective, you will usually want a combination of Leading and Lagging Indicators.  For example, you are likely to want to measure “Employee Satisfaction” and could readily identify a Leading Indicator of this such as an index of “Leadership Capability”, or maybe “No. of days training per employee”.

It is sometimes said that Leading Indicators will be measured more frequently than Lagging Indicators, but that may not be helpful as a definition.   You could measure “Complaints Received” or “Customer Satisfaction” every day, both of which might be described as Lagging Indicators.  Equally, you could measure process “Error Rates”, or “On-Time Delivery” every day and these are probably Leading Indicators.

The view that Lagging Indicators cannot be adjusted until it is too late is also not necessarily very helpful.  In the example above, knowing that you have an error rate of 25% is already too late!

One definition that might help is that Leading Indicators are often captured at the level of individual processes, whereas Lagging Indicators may be the result of changes in a number of Leading Indicators.  So, a process cycle-time or error rate might be Leading Indicators, measured at the process level and Customer Satisfaction would be a Lagging Indicator, measured at the organisation level.

If you are measuring “activity” (i.e. at a process level), it is more likely that you are using Leading Indicators.  The closer you move to process inputs and activities, the closer you get to Leading Indicators of downstream, (Lagging) performance.  If you are measuring aggregated effects, or outcomes, at an organisational level, you are more likely to be using Lagging Indicators.

Remember, the overall purpose of selecting metrics is to enable you to track performance towards your goals.  So, you should aim to identify and then control those metrics that drive you towards your ultimate goals.

Read more articles on our Performance Management page.

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