Whilst on holiday in the New Forest last week my family and I spent a day exploring the National Car Museum at Beaulieu. I am in no way a petrolhead, but even I really enjoyed exploring the collection, which includes everything from examples of the earliest cars right through to a Bugatti Veyron!
One car particularly caught my eye - a 1965 AS Cobra. Beautiful in every way. After having a good look around the car’s exterior, I took a look at the cockpit - and saw this dashboard:
What struck me were two things - firstly the number of dials, and secondly which dials were given most prominence. Both these were very different to my car. When I looked closely at what the dials were for I realised that they were nearly all related to how the car's 'system' was performing - oil temperature, oil pressure, water temperature, battery voltage, RPM - whilst only one related to the result - speed. The speedo is tucked away in the bottom left of the dashboard, whilst the other dials are positioned centrally for easier monitoring by the driver.
This made me think of the difference between 'leading' and 'lagging' measures, and the different purposes they serve.
Leading measures seek to predict outcomes by measuring activity and behaviour (oil pressure, battery charge etc), whilst lagging measures are typically results based (speed), and backwards looking - they tell how well you have performed, but not why. Lagging measures for organisations like revenue, growth or jobs created are the result of other actions.
Most organisations I have worked in or with focus their performance measurement almost exclusively on lagging measures, usually in the form of KPIs (Key Performance Indicators). Indeed, most companies are compared and valued on their ability to create favourable KPI results like revenue growth, profit margin, earnings per share etc.
The problem with this approach is that it doesn't tell you if you're doing the right things to produce the result you want. Complementary to KPIs are Key Result Indicators (KRIs) - these are the leading measures that track the activity that will deliver your KPIs.
Why are lagging measures favoured? Quite simply because they are far easier to determine, understand and compare across organisations. In comparison leading measures are harder to determine as they require a deeper understanding of what activities are key in driving outcomes.
The best solution for most organisations is a balanced scorecard of leading and lagging measures, and a strong understanding of the relationship between the two i.e. which of your leading measures drive which lagging measure result? The effort required to derive the right set of leading measures for your organisation can be an exercise in trial and error, but the effort is worth it to develop a better understanding of the dynamics of your business model, and to focus effort and resources on the right activity to deliver the result you desire.
There are more tools and data available to measure business activity and its impact on results than ever before. There is even a new job title for people using a combination of metrics, creativity and analytics to rapidly design and implement tests to find the right activity to drive business expansion - growth hackers. More organisations should adopt the approach of the growth hacker and focus on identifying the link between activity and the outcomes you want to deliver.
So, when deciding how to measure the performance of your organisation remember the dashboards of classic cars - focus on looking after your engine, and your speed will look after itself.