I’m a huge fan of performance indicators. The notion of using specific metrics to assess how well an organisation is doing and to better understand the environment in which it is operating can be incredibly powerful. Provided, of course, that we’re looking at the right metrics. But too many organisation focus on historic data. This means that they’re looking backwards, when they should be looking ahead.
The crucial distinction here is between lagging and leading indicators. Lagging indicators look to the past. They tell us about what has already happened. Staff turnover, quarterly revenue, customer feedback – that sort of thing. Most organisations have in place mechanisms to monitor certain lagging indicators. And they do play a useful role in assessing organisational performance.
Leading indicators look to the future. They tell us what is going to happen. When it comes to making decisions, this is the kind of information you need. Because you can use it to take action to influence the future course of events. You can use it to actually make a difference.
Let’s take as an example employee retention. We can measure the number or percentage of employees who leave each month, quarter or year. We can perhaps also do some exit interviews to find out why they’re leaving and to analyse our leaver data by relevant categories. This is all good stuff. But it’s a lagging indicator. Whatever we do with the information, the employees have still left.
Imagine, though, that we use the exit interviews to get into more detail about the factors that are leading people to leave the organisation. Some of these factors will, of course, be things we can’t do anything about. But some of them will, if we’re fortunate, be things we can actually address. And so we need to develop indicators that will flag up these factors when they become an issue. We can then act preemptively to retain our staff.
We might find, for example, that a significant number of people who leave have previously applied for flexible working arrangements – perhaps in response to childcare or other caring responsibilities – but have had their application denied. We might then look into the data around applications for flexible working, to see what proportion of people whose applications are denied then go on to leave the organisation. Let’s say, for the purpose of this example, that it’s 50%. That’s clearly a problem.
We can use this insight to create a forward-looking indicator relating to employee retention. An early-warning system, if you like. We might decide that the thing to do is to improve the approval rate for flexible working applications across the board, in which case we can measure and monitor both application and approval data (as well as taking action to improve approval rates, of course). If approval rates go up, ideally without application rates going down, then the outlook for employee retention is (hopefully) improved.
We can check this by continuing to monitor the number and proportion of staff who leave in any given period. If we’re on the right track, they should – all other things being equal – go down.
We might decide, though, that the best thing to do is to target individuals who we think might be planning to leave, so that we can work with them to find a way for them to stay. In such circumstances, we might want to monitor the number of people whose applications for flexible working are denied and to then work with each one to see what we might be able to do to keep them in the organisation. (In reality, we’d probably do this as part of a wider programme looking at other reasons people leave, too.)
In each of these cases, we’re using flexible working applications and approvals/denials as leading indicators of a potential employee retention problem. This is based on a detailed understanding of the factors contributing to poor employee retention and on a commitment to doing something about it. We can then use traditional ‘lagging’ indicators to measure the robustness of our analysis and the effectiveness of our actions.
From even this basic example, its evident that leading indicators have a lot of promise. They can help us to identify a potential issue before it becomes an actual issue and while we still have time to do something about it. But it takes a lot of effort to find the right leading indicators for the thing we’re interested in. And it does require an organisational commitment to taking appropriate action when a potential issue is identified. For organisations that use them carefully, though, leading indicators of performance can be a game-changer.