Leading vs Lagging indicators: What’s right for your startup? (Part two)
Hello and welcome back to Part two of our series on Leading and Lagging indicators. In the first part, we covered what leading KPIs are, looked at how they work numerically, discussed why they are a powerful tool for startups, and shared the nuances startup founders should keep in mind while working with leading KPIs
Now, let’s shift our focus to the other side of the coin — lagging indicators (also called lagging KPIs).
In focus — What are lagging KPIs?
Lagging startup KPIs are typically used to monitor how well a startup (or a project or team) performed in the past for example in the past month, quarter, or year. A most common application of lagging KPIs is to determine if a startup hit its goals. These goals could be across a variety of functions within the company.
For example, a startup may have financial goals such as revenue targets or growth goals such as number of customers. Lagging startup KPIs measure the results of an event (or an initiative) after it has already taken place and presents the outcome of a strategy or approach taken - hence the term lagging.
Unlike leading indicators, lagging indicators don't tell you about the future trajectory of the events. Instead, they provide a firm picture of what has happened already so that results can be compared against targets and “current state” analysis can be carried out.
Examples of lagging KPIs
- Revenue and profit generated are common lagging KPIs that help you assess the performance of your startup. Actual numbers are not a factor in predicting future revenue or profit. Instead, these help you baseline the current state of the business and enable you to judge if your past decisions were effective in achieving your targets.
- Sales reports — sales numbers are also a good example of lagging startup KPIs, which are useful for understanding the market performance of your products or services, channel performance, win rates, interest-to-sale conversion ration, and more.
- For early-stage startups, financial KPIs such as cash on hand and monthly burn are really useful lagging KPIs. These help with determining runway and informing fundraising strategy.
Drawbacks of lagging KPIs
- The biggest drawback of lagging KPIs is that they don't provide insights into how things will play out in the future —they only measure what happened in the past. Lagging KPIs can be used as a baseline, a starting point to plan the future. They do not offer any assurances that the future results will be the same (or better or worse) than the past performance.
- Lagging KPIs become available after the event or relevant time period, which means that little can be done to impact the outcome of past decisions. Bernard Marr uses an interesting example to highlight this. He says — by the time you find out the number of customers that have defected to a rival competitor, it’s too late to do anything about it.
- Lagging indicators usually don’t provide any insights on why certain trends are appearing and what variables impacted performance.
- Since lagging indicators measure long-term trends, they take a significantly long time to track. If you have a yearly paid subscription target of 10,000, you’d have to wait for 12 months to determine if your customer acquisition strategy is working as expected.
Leading and lagging KPIs should complement each other
For most potent insights, it is best to utilise lagging KPIs in unison with leading KPIs to give your deeper insights into what's happened within the startup and also what may happen in the coming period and unearth the factors that must be tweaked to get a different outcome.
If you are using only lagging startup KPIs to monitor performance, it will not help you make adjustments to ongoing processes. Similarly, focusing only on leading KPIs will not give you a measure of the true impact and outcome of your strategic decisions.
In essence, leading and lagging KPIs must be used together to improve the quality of insights and overall chances of success