Tracking leading indicators can provide an “early warning system” that is invaluable to any business, giving it more time to react and increasing the probability of achieving breakthrough growth.
“Leading indicators are measures of progress on key variables that determine if the strategy is working,” says Margaret Reynolds, author of the new book “Reignite: How Everyday Companies Spark Next-Stage Growth” (Indie Books International, 2015). “The specific measures reflect the strategic choice made by the organization.”
A measure is a leading indicator if, by achieving the measure, the probability of achieving desired financial outcomes is significantly enhanced.
Sometimes as organizations track leading indicators and they anticipate being off at year end they will produce short-term heroics to supplement strategic results, such as holding a fire sale.
“While this may help in the short run, leading indicators suggest that implementation is not achieving the desired results and either the implementation effort is falling short or the strategy needs to be revisited,” says Reynolds.
Reynolds is the founder and owner of Breakthrough Masters Unlimited, a division of Reynolds Consulting, LLC. Reynolds is a recognized expert at helping middle-market companies identify and implement breakthrough growth opportunities which take them to the next level of performance.
Reynolds began her career at Hallmark Cards, Inc. where she held executive roles of general manager and lead strategic officer, and was known for her natural inquisitiveness and innovative inclinations, never resting with the status quo. She opened her business inKansas City in 2001 and by 2008 had added a second office inNashville.
According to Reynolds’ book, while there are many possible measures to choose from, the goal of leading indicators is to shed light on the strategy and its progress. That suggests the following guidelines:
- Indicators are important to the entire organization even if they are influenced mostly by one group within it. They need to be communicated across the entire organization.
- The number of measures to be tracked as leading indicators should be small enough as to convey the importance of each of them, make it easy to communicate them broadly and regularly, and to allow them to be memorable. Usually it is recommended that there be no more than 12 in total. That number is only a guideline.
- Leading indicators should connect with the basic tenets of the strategy. If the strategy calls for growth through new product development to meet a certain market need, then measuring the percent of revenue from new products is usually a good measure. It takes into account not just the number of new products but the relative success of new products and their importance to overall company performance.
- There needs to be some balance between outcome measures (like revenue and profit) with the indicators both inside and outside the four walls of the organization. Internal measures are those that an organization has complete control over. Training, hiring, new product development, or production goals are all internal measures. Whether or not a specific measure is a leading indicator of strategic performance depends on the role it plays in strategy.
- For the measures to have meaning they must be tracked and communicated throughout the organization. Ideally, they are tied to the performance management system and reflected in reviews and rewards.
- Finally, it is ideal to establish target metrics for multiple years. Most companies naturally plot next year’s target. What I suggest is to add the metric for the target in three to five years. This clarifies the rate of change expected and helps all to know where there will be slight movement and where there will be significant movement, providing another way to clarify the degree of expected change.
Reynolds provides many pragmatic examples and tools in “Reignite” to help executives, managers, and leaders see opportunity and discover the profitable connection between market needs and their organization’s unique capabilities.