How to Turn a Performance Dashboard into a Crystal Ball
As appeared in Chief Executive Magazine.
Several years ago, I wrote an article called “What’s on Your Company’s Dashboards?” At the time, I had been thinking quite a bit about how best to measure my company’s performance and ensure that it practiced team-wide accountability. In the article, I listed scores of quantitative measures that we were monitoring to make objective assessments of our overall effectiveness (what we now commonly call key performance indicators or “KPIs”).
Among the 25 or so measures I listed, I included many that are standard fare in most company dashboards I see: revenue, employee count, profit per client, etc. I also noted that, despite our continuous search for mathematical validation, numbers cannot tell us everything about how a company is doing. It’s important to think about various subjective considerations as well in assessing a company’s performance, such as the extent to which it is operating within its value system or what employees, clients, and other stakeholders are saying about the company.
I stand by what I wrote in that article, but I’ve learned over the years that it was missing a critical insight that I, as a chief executive officer, failed to grasp: it was mostly backward-looking. While assessing current and past performance is critical, business dashboards too often neglect the forward-looking metrics that can help predict future performance. To borrow from economic principles, they are largely full of lagging and coincident indicators, and they are lacking in leading indicators.
Lagging Indicators
Lagging indicators reflect conditions that existed, or events that occurred, in the past. They are helpful in understanding the impact of historic decisions and circumstances and may suggest patterns that could carry into the future, but they are your rearview mirror. They are not going to show you what’s up ahead. Using our economic analogy, an example of a lagging economic indicator is the average duration of unemployment, which tends to reflect the state of the economy in prior periods.
Most business dashboard measures fall into this category. Examples include revenue, profits, and margins, along with most of the measures listed in my prior article. Despite their usefulness in evaluating previous decisions, they’re inherently rooted in the past.
Coincident Indicators
In economics, coincident indicators change simultaneously with the economy and are useful in understanding current conditions. Industrial production is one such example, as it tends to track the current strength of the economy.
Current client count is an example of a coincident indicator that might be found on a business dashboard. It’s a useful measure of the current state of the business, especially relative to prior points in time. Again, however, it offers less insight into the future – at least the longer-term future.
Leading Indicators
Leading indicators are measures that tend to precede economic conditions or events. They are therefore useful in predicting the future (though, of course, to varying degrees of accuracy). One well-known leading economic indicator is the S&P 500 Index, which reflects the sentiments of investors and is often said to be a “discounting mechanism” focused on the prospects for future economic activity.
Most business dashboards are lacking in leading indicators, perhaps because they are less obvious than lagging or coincident indicators. Yet, for any business that cares about its future (read: all businesses), shouldn’t a forward-looking window be of utmost importance? Indeed, the mere exercise of identifying the leading indicators of a business is itself helpful in thinking about what will make the business successful – or unsuccessful – in the future.
Broadly speaking, I’d like to offer three general categories of leading indicators for businesses:
- Budgeting and investments
- Satisfaction, engagement, and retention
- Pipeline health
With respect to the first category, capital allocation is perhaps the most impactful single action a business takes in determining its priorities and future direction. If you want to know what your business will be focused on in the future, look no further than where you are allocating your resources today.
In most businesses, satisfaction, engagement, and retention metrics don’t directly and immediately impact the bottom line, but rather foreshadow the businesses’ health. If, for example, clients are not engaging with your product or service, or not referring business, it likely speaks to future woes if left unaddressed.
Whether it’s for closing prospective clients, merger targets, or any other multi-step business process, the health of your pipeline (across all stages) is a clear and immediate indicator of your forthcoming success.
Using this framework, I’ve identified several specific leading indicators that businesses should consider adding to their KPI dashboards. I’m well aware that many of them won’t sound traditional; that’s the main point. They’re not traditional but should be. I also note that some of these indicators may be more difficult than others to gauge. My advice is to resist the urge to use only the metrics that are most familiar and easily measurable.
Examples of Leading Business Indicators
It’s important to keep in mind that indicators only exist in relation to a particular phenomenon of interest. What looks like a leading indicator in one respect may actually be a lagging indicator in another. Employee turnover, for instance, is a lagging indicator of employee satisfaction, but a possible leading indicator of profitability (depending on the nature of the turnover).
As businesses aim to outperform in an increasingly competitive world, they must strive for the best possible business intelligence – a thorough understanding of what is happening within their businesses and why. This task has been made easier by advances in technology, artificial intelligence, and improving measurement systems. The most successful businesses, however, and the ones that will lead their industries in the future, will be forward-looking—identifying, constructing, and monitoring their leading performance indicators.
Some of these leading indicators will not accurately predict the future. Such is the nature of any attempt to foresee what has not yet transpired. Collectively, however, these forward-looking indicators can be the elusive crystal ball all businesses seek, enabling those who are willing to look forward to create the future of their own choosing.