Leading Indicators: (Preemptively) Smacking Lagging Indicators in the Face
One of the challenges of successfully running a business is paying attention to the metrics that matter the most. I think a lot of business owners are drawn to lagging indicators. These are representations of the results of your actions and arrive on your desk after the fact (hence, the “lagging” portion). A good example of a lagging indicator is the net profit for a given month.
It’s nice to see a lagging indicator (if you have a profit, that is, it’s certainly reassuring to see it on paper)…but you can’t do anything about it if the results aren’t what you’d hoped for. Running a business by your lagging indicators is an example of that classic turn of phrase, “shutting the barn door after the horses have run out.”
So, how are leading indicators more valuable to you, particularly when you’re trying to continuously improve your business?
What are leading indicators?
Leading indicators are metrics that (typically) arrive before an economic change. Because of their timing, you can use them to predict the course that your business is currently taking…and make changes accordingly. A good example of a leading indicator is the number of Accounts Receivable that are over 30 days past due (or, as we call it, “money on the streets”). The money you have left on the streets helps you foresee (and hopefully sidestep) future cash flow issues.
Simply put, lagging indicators keep you in a reactive posture. Leading indicators allow you to be reactive.
In our above example, the leading indicator allows us to “crack heads” and get cash flow back in order before things get out of hand and there’s a real problem.
Now that we’ve briefly explained what leading indicators are and why they’re important to your business, let’s talk about practical applications, using examples from common business functions/departments:
Retention – Looking at your retention on a weekly basis allows you to quickly identify customer service issues and enables you to make adjustments on the fly.
Customer/Client Sentiment – A bit subjective, but by considering your clients’ sentiments (i.e., their feelings towards you, happy, angry, indifferent, etc.), your account managers can make a more informed decision about how frequently a client needs “touches.” Quite frankly, if a client goes “dark,” we consider them angry on the sentiment scale and see what we can do to rein them in and calm them down. It’s a binary approach: they’re either happy or they’re not.
Conversely, net promoter score is a common indicator of client sentiment. However, net promoter scores are typically sent on a monthly or even quarterly basis; at that point, it may be too late to salvage a client relationship. There’s still a place for lagging indicators like this, but they’re a result, not a predictor.
SQLs (Sales-Qualified Leads) – Looking at SQLs on a weekly basis allows you to see if the marketing lead generation activities have been fruitful. This is especially important when you consider how costly some marketing efforts (such as PPC, media buys, or television advertising) can be.
Proposals – Looking at proposals on a more regular basis can help in two areas.
First, you can see if you’ve done an adequate job in the exploratory phases (setting expectations, qualifying results). If the leading indicators for proposals aren’t where you’d like them to be, this is indicative of a failure to reach a conceptual agreement in the exploratory phase.
Secondly, proposals as leading indicator is helpful in forecasting cash flow and budget. If you aren’t sending proposals, you aren’t signing clients.
Channel-Based Leads – As mentioned in our example above, you can review leads on a weekly basis to make quick adjustments to your marketing channel’s budget. If you see one channel is performing stronger than another, you can reallocate resources and take advantage of that momentum.
Publishing – You can also track actions to potentially make process improvements or to hold yourself accountable for particularly important duties. Take, for example, an initiative to improve your website’s content. It’s vital to have fresh, thorough content, so you might track a publishing leading indicator to ensure that the editorial process is up to snuff and able to generate quality content with the frequency needed to meet your goals.
Cash On-Hand – Everyone knows that cash is king. It allows you to make favorable adjustments in terms of business expenditures, without being at the mercy of a bank. Tracking cash on a weekly basis allows you to keep your finger on the financial pulse of your business and prepare for payroll and upcoming expenses.
AR>30 – As we mentioned above, it’s crucial to track the state of your accounts receivable. This is particularly important if you accept cash or checks as payment, as these deposits are contingent on the client (as opposed to having a client on retainer).
Utilization – It’s imperative for a company’s project managers to track their utilization. Without an eye on this, it’s all too easy for staff to fall behind, meaning you all miss out on production. We use Harvest to track hourly fulfillment goals; a solid leading indicator is 75% (i.e., 30 hours of billable work per week).
Granted, I know that some of you may want to push for a higher percentage. We simply use 75% as a floor; below that, and there’s a definite problem.
Error Tracking – With any process, you obviously want to minimize errors. However, realistically, errors are just a part of owning a business. Having said that, it’s important to track the number of errors committed, as they can indicate a failure of proper training or process documentation.
Ahrefs Traffic Value – Being the owner of an SEO agency, I would be remiss if I didn’t rep for my homie, Tim Soulo, and the Traffic Value indicator that we get from his platform, Ahrefs. The Traffic Value figures allow us to quickly and succinctly gauge the efficacy of a given campaign, enabling on-the-fly adjustments to keep things moving in the right direction. Most of our competitors just look at Google Analytics or end-of-the-month reports, but Ahrefs Traffic Value allows us to review the bottom-of-the-funnel, direct-intent pages that are more likely to impact conversions.
Example of why this matters: Google may release an algorithm update in the middle of the week, or a website architecture change might have recently occurred. It’s better to see the impact of these changes on a shorter span of time, as this allows you to remain agile and make adjustments (if needed).
Qualified candidates – This is almost the inverse of sales. If you are using multiple avenues for employee recruitment, it’s important to track which is generating the best qualified candidates for your company. For example, if you’re advertising through both Indeed and ZipRecruiter, tracking the number of qualified candidates in real-time will save you valuable dollars…and time.
Leading indicators keep your finger on your business’s pulse. Lagging indicators certainly have a place in your overall view, but they largely show you things that are already in your rear-view mirror; leading indicators keep you focused on the road ahead.