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Leading and Lagging Indicators: A Practical Guide for Leaders

Success in business requires not only setting objectives but also measuring the right metrics. OKRs (Objectives and Key Results) involve both leading and lagging indicators. It's important to balance them well. This article will explain what these indicators are, why they matter, and how to use them well.

Defining Leading and Lagging Indicators

Leading indicators are predictive signals that provide insights into future outcomes.Think of them as early signals. These are the metrics you can influence now to shape future outcomes. For instance, the number of new loan applications processed today may predict future revenue for a bank.

Lagging indicators, on the other hand, show you what has already happened. They are the results. These metrics confirm whether or not you’ve reached your goal. Revenue, customer satisfaction scores, or project completion rates are typical examples of lagging indicators.

In short, leading indicators help you steer the ship, while lagging indicators tell you if you’ve reached the destination.

Why Are Both Important?

Leaders often focus too much on lagging indicators. It’s understandable — these are the results that stakeholders care about. But only focusing on outcomes leaves you blind to what’s coming. Without leading indicators, you’re flying without radar.

Consider a bank’s loan approval process. Monitor daily application counts and application review time. These leading indicators reveal bottlenecks early. Act fast to stay on track. Lagging indicators show past results. Useful, yes. But they can't change what's already happened. To shape the future, look ahead.

In business, lagging indicators reflect past performance. They are useful, but they don’t provide the insights needed to change the outcome. If you want to improve results, you need to focus on leading indicators that are within your control right now.

How to Apply Leading and Lagging Indicators in OKRs

Let’s take a simple OKR example:
Example 1: Objective: Increase New Loan Approvals by 10% by Q4 ( context of a bank)
  1. Lagging Indicator: Total number of loans approved in Q4.
  • This indicates whether or not you have accomplished your objective but doesn’t give insights during the process.
2. Leading Indicators:
  • Weekly loan applications
  • Average time to process a loan application.
  • Number of customers asking about loan products.
  • Conversion rate of loan inquiries to formal applications.
These leading indicators help you monitor the factors that influence loan approvals. If you notice a drop in applications or slower processing times, you can adjust marketing efforts or streamline internal processes before Q4 ends.
Example 2: Objective: Increase In-App Purchases by 12% in Six Months (for a mobile game)
  1. Lagging Indicator: Total revenue from in-app purchases by the end of six months.
  2. Leading Indicators:
  • Number of players engaging with special in-game events or promotions.
  • Number of players viewing the in-app purchase options or unique promotions.
  • Conversion rate of free-to-paid items (e.g., how many players purchase premium items after earning free samples).
Tracking these indicators in real-time allows you to adjust strategies early. For instance, if many players engage with events but aren’t making purchases, you might reconsider the way offers are presented or enhance the value of premium items
You can check these in real-time and see early alerts if something isn't going as planned. So you can modify your plans right away, rather than wait for the quarter to end only to find out that you'd missed your objective.

From Insight to Action

To make the most of leading and lagging indicators, here are some immediate actions you can take:
  1. Identify Key Drivers: Know what moves your objectives forward. What steps are you taking that are directly responsible for your desired outcomes? These are your leading indicators.
  2. Balance Your Focus: Ensuring leading indicators are focused on, yet not forgetting lagging indicators, means the whole process is balanced. Spend as much time monitoring and adjusting leading indicators as you do tracking results.
  3. Set Up a Feedback Loop: Make leading indicators part of your regular reviews. Weekly check-ins on these metrics can help you adjust before it’s too late.
  4. Communicate Clearly: Ensure your team knows both what success looks like (lagging) and what steps will get them there (leading). When everyone understands the process, they can be more proactive in improving performance.
  5. Be Flexible: Your leading indicators can shift as you go. Be open to changing them based on what you learn over time.

Common Pitfalls to Avoid

  1. Relying too much on lagging indicators. These may make you feel secure, but by the time you get the results, it's too late to take action. Make sure you have a balanced focus.
  2. Choosing irrelevant leading indicators. Not every activity is a predictor of success. Pick metrics that have a direct correlation with your desired outcome. For example, tracking app downloads may not be as relevant as tracking retention rates for players after their first week.
  3. Overcomplicating your metrics. Keep it simple. Choose one or two leading indicators per objective. Too many metrics can overwhelm teams and dilute focus.

Common Pitfalls to Avoid

Leading and lagging indicators are two sides of the same coin. Leading indicators keep you on track while lagging indicators confirm your success Right now, identify your key drivers, tracking progress, and making data-driven adjustments in real-time. By doing so, you’ll ensure your team doesn’t just hit their targets — they’ll understand how to do it repeatedly.

Remember, the best leaders don’t wait for results; they shape them.