How to Use Leading Indicators to Predict the Future

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Thursday, June 3, 2021

Leading indicators can be excellent tools for managers, essentially allowing them to predict the future. However, they must be used correctly.

Article 3 Minutes
How to Use Leading Indicators to Predict the Future

While ‘leading indicators’ might sound like yet another bit of industry jargon, they’re actually something most of us use without thinking. Put simply, a leading indicator is a piece of data that points towards future events. This is contrasted with a lagging indicator, which confirms that events are already occurring.

To describe this, bestselling author Bernard Marr said:

“Think of your business as a car. When you are looking out the windshield, you are looking at what's ahead of you; those are leading indicators. Conversely, looking back at the road you just traveled, as you do in a rearview mirror, describes lagging indicators.”
 

Understanding the leading indicators in your industry is therefore key to predicting what’s coming up in your future. There’s no magic involved; it’s simply a matter of using data to anticipate events. That also means it isn’t foolproof. Clouds in the sky are a leading indicator that it’s going to rain, for example, but there’s no guarantee. However, when done right, the use of leading indicators can give you a significant advantage.

Choose your lead indicators

The first step is to work out what the leading indicators are for your business, which will depend on a range of factors. Ultimately, you need to decide what makes the most sense for your company.

For example, sales businesses might track the number of new business appointments, whereas if you’re looking for leading indicators in health and safety you might instead look towards risk assessments or hazard ID systems. However, you must make sure you’re actually measuring the right thing, and not accidentally looking at lagging indicators.

For example, B2C businesses might find that customer experience (CX) is a good thing to measure, but it’s a lagging indicator as the experience has already happened once it’s been measured. However, in order to improve CX, you could schedule more staff so lines at the checkout are shorter. Both the number of staff and the length of lines are leading indicators for retail CX.

Measure them as they’re happening

Measuring leading indicators isn’t always easy and requires real-time adjustments. For example, a typical leading indicator for online businesses is page load time. If your website takes a long time to load, you’ll lose visitors, which in turn will cost you revenue. Getting a hold over this leading indicator therefore requires what Scaled Agile calls a “feedback loop”.

To set this up, all you need to do is work out how often you should be updated on your leading indicators. For page load time, you don’t want to leave it too long; measuring it weekly means it could be seven days before a problem is spotted. Hourly is a much better option, giving you time to react to any issues promptly.

Understanding success and failure

How do you know whether your predictions came true? There’s no point using leading indicators if you’re not looking at the results, and this is where lagging indicators become extremely important. To continue the above example, if you manage to keep your page load time low, does that actually result in more website visitors and more sales?

You might need to transform those lagging indicators into something more measurable. For example, how do you measure customer experience? HubSpot recommends surveying customers to create a net promoter score, providing you with a numerical set of data you can utilize.

Always remember that no leading indicator is 100% accurate. If your leading indicators predict success but this doesn’t come, you may have to look at other factors to see what else has impacted your performance.

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