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Lead versus Lag; Future versus Past

Guest post by: Steve Major

Article Overview: Businesses are often encouraged to have an array of Key Performance Indicators (KPI’s) to ascertain how they are progressing. Steve sees KPI’s as important, but also encourages businesses to widen their scope. He discusses the difference between lag and lead indicators and how we might drive and build future value within the business.

Lead versus Lag; Future versus Past

Businesses are encouraged to have a myriad array of Key Performance Indicators (KPI’s) to ascertain how they are progressing. KPI’s are built into the performance reviews of staff. KPI’s are used in government to justify what they have been doing.

Let’s look at the words behind the acronym KPI, ‘Key Performance Indicator’. The central word here is ‘Performance’. Performance infers a past tense or at best, a present tense. The indicators of performance therefore are measuring history or at best what is happening now. Now in saying this I realise the trend of an indicator can possibly point to the future but we are still measuring the past.

If you do a Google search for KPI’s you will find a myriad of resources listing thousands of Key Performance Indicators that could be used in your business. I have encountered many examples of businesses having a lot of these indicators.

Unfortunately these are useless, yes useless. All they are doing is recording history, and often with a bad memory. We need to lead our businesses with indicators that are giving us information about where the business is headed, not where it has been. We need to have measures and judgements of what the business is doing now, that will affect the future outcome of the business.

Ron Baker in his book “Measure What Matters” says that ‘Key Predictive Indicators’ is what we need. Now that is at least a step forward, that we need to have those measures in place that will predict the future, not just record history.

Within this though, I would like to explore the issue of lead versus lag. Key Performance Indicators are often lagging indicators; they are coming after the event and are in no way giving any clue as to the future performance. The lead indicators give us the picture of what could be.

The lead indicator, or the lead measure allows us to lead the business. The lead indicator ensures we are making better decisions. Decisions about services, product, costings, pricing, employees rely on having good information. This information gives us the opportunity to make alterations and understand the impact.

Key Performance Indicators are useful in their place, but you cannot lead a business by them. They have a place in the overall management, but a much lesser place than is presently being granted to them.

Using KPI’s is like looking at the rear-vision mirror whilst driving the car. It’s alright while you’re reversing; but it is certainly no use while you are driving forward, you need to look out through that front windscreen. So KPI’s have a place, but a minor place, the revision mirror is only used a small percentage of our time in the vehicle.

Looking out through our front windscreen allows us to make assessment of what is happening in the road in front and all through our course, taking into account the dangers, but also to appreciate the opportunities that are in front of us. Lead measures allow us to take into account the threats, but also to take advantage of the opportunities that are presented to business.

It is necessary to understand what is driving the future value of the business, not just what has happened.

3M group are renowned for 20% of staff’s time is to be on R&D of their choice. They understand that whilst this is wildly inefficient and whilst the KPI would say that this should be eliminated as a cost cutting measure, they understand that it is through this 20% investment in R&D that the future of the company is built. It was through this 20% that post notes came about, it is through this 20% that most of the new products that 3M have made significant profits from has come through.

It is an important builder of value to 3M. If they were to remove that 20%, the KPI’s would look better, the accountants would see it as a cost saving. Profit in the short-term would rise, but in the long-term, looking out in the future, the business is likely to fail. The business would not be investing in what is driving future value and fail.

The focus cannot be only on the financial statements and the KPI’s associated. We need to have those value building measures in place for the future of the business. This is true leadership.

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Article Tags: business leadership, future value, key performance indicators, lead indicators, measure what matters, value
Referred by: http://www.dglong.com



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