Indicators can help your organization keep a pulse on current conditions, trends, and outcomes. By helping to inform the design of performance measurement, they serve as a key ingredient for operational resilience. Organizations with resilient operations are better equipped to overcome process-related challenges with disciplined execution that helps drive the business towards its strategic objectives.
In applying indicators to design performance measurement and strengthen operational resilience, a manufacturer that produces and sells low-cost goods at high volumes may focus on production line speed. In contrast, another producer that sells in smaller quantities with high-cost components may focus on reducing production line errors resulting in defective units.
In this blog, we explore how you can put leading and lagging indicators into practice to strengthen operational resilience and drive towards strategic objectives.
To ensure indicators are configured to meet intended business objectives, your targets should adhere to the tried-and-true SMART construct: specific, measurable, achievable, realistic, and time-bound.
- Specific and measurable: To improve a process, you must be able to measure it.
- Achievable: Set ambitious targets that will motivate and inspire employees. Avoid setting the bar too high and running the risk of deflating and discouraging employees.
- Realistic: Be fair to the people who will be accountable for reaching the targets. In other words, seek performance improvements in areas that staff can influence.
- Time-bound: People will progress towards a goal more quickly if they have a clear sense of the deadlines on which they will be evaluated.
Confirming Patterns with Lagging Indicators
Lagging indicators capture current business conditions and typically follow an event or point in time. They focus on results at the end of a time period, often characterizing historical performance. Also known as a Key Results Indicator (KRI), these indicators can help you confirm that patterns are taking place. While easier to measure, they are tougher to influence. Examples include:
- Cycle time per feature
- Numbers of features in “done” status
- Number of bugs or defects observed
- Customer satisfaction
Uncovering Future Insights with Leading Indicators
Unlike lagging indicators, leading indicators provide insight into the future and measure change. They deal with immediate progress and help convey the likelihood that you will achieve your goals. These indicators are easier to affect but can be more challenging to measure. By focusing on improving leading indicators over time, you will, in turn, help to improve lagging indicators. Examples include:
- Team velocity
- Amount of backlog in “ready” state
- Percentage of open incidents older than one day
- Percentage of team availability
As depicted above, lagging metrics tend to focus on outputs of the process, while leading metrics can be generated for all parts of the process.
Driving Towards Strategic Objectives with Key Performance Indicators (KPI)
Combining both leading and lagging indicators, KPIs demonstrate how effectively a company is achieving key business objectives. KPIs hold two important characteristics: (1) they can be quantified, and (2) they tie directly to a key business driver. Performance measurement will be a more powerful management tool if you focus on those areas that define your overall business success. Examples include:
- Return on marketing investment
- Lifetime value of a customer (LTV)
- Customer acquisition cost (CAC)
- Monthly sales bookings
- Quote-to-close ratio
- On-time delivery (OTD)
In an on-time delivery (OTD) example that illustrates these elements in practice, suppose a manufacturer ships product directly to customers. The company needs to constantly monitor whether it is fulfilling demand as promised. The company uses metrics to indicate whether it is meeting customer and operational performance expectations. After all, if it promises to deliver an order in three days, then it has implicitly created a contract with customers based on delivery date as opposed to ship date.
If a customer orders 150 units of product for delivery on Wednesday the fourth, and shipping takes three days, then the order must ship by Monday the second. If the company ships the items overnight on Tuesday the third, and it is received on Wednesday the tenth, should the company count the shipment as being “on-time?” The answer depends on what the leadership team is measuring and the behaviors it wants to drive.
It is plausible that the leadership team would be interested in the following metrics: shipment costs and number of shipments. Lagging indicators would be total shipping costs per week and total number of orders per week. These indicators would help paint an accurate picture of performance.
Consider adding another order into the picture: A different customer orders 50 units to be delivered that same week, but the order is partially received on the date promised. Additionally, the company did not ship the order in time to prevent the need for expedited services. In fact, it shipped 10 units one day late.
How is the company performing? Some organizations may report 95 percent on-time delivery (190 units shipped on time out of 200 total units ordered). That figure would make it seem as though the company is performing well. Instead, it should be reporting zero percent on-time delivery (zero orders shipped on time out of two orders total). This would be a more accurate and better key performance indicator (KPI). The additional costs of the expedited services would be captured in shipping costs per week, which is a lagging indicator or key results indicators (KRI). A leading indicator in this case may be the amount of orders in the pipeline, resource utilization, or lead time. Thus, by tracking the leading indicators, the company can adjust business processes as needed to overcome its operational challenges.
Improving Resilience through Performance Measurement
Strengthening operational resilience through effective performance management starts by defining the areas of focus within your organization and then deciding how best to measure performance in those areas.
There are eight key steps to designing an effective performance measurement process:
- Understand and outline business structures and processes.
- Define your priorities and objectives for business performance.
- Make sense of the current performance measurement system to help inform how you design the new system.
- Identify the performance indicators that you’ll use to measure business performance.
- Determine how to collect the necessary data in support of performance management.
- Design the reports and dashboards that will convey performance data.
- Test and refine the performance measurement system, applying a focus on continuous and incremental improvement.
- Roll-out the performance measurement system, emphasizing workforce training and adoption.
To embed continuous improvement and strengthen operational resilience, learning organizations must evaluate past or actual behaviors (lagging indicators), while adjusting key behaviors to transform the business and uphold organizational competitiveness (leading indicators). By applying a focus on leading and lagging indicators, your organization will be better equipped to understand current conditions and trends, crucial to designing effective performance measurement. These metrics can continuously inform your leadership team, managers, and front-line employees around progress towards enterprise goals and objectives, enabling you to overcome operational challenges with more disciplined execution.