leading vs. lagging indicators - part 1: definitions
Published April 2nd, 2007 in metrics.Following a (partly heated) discussion during a (too-)long after-ski-party this weekend there seems to be a need to touch on the subject of web metrics as leading indicators vs. lagging indicators and their meaning in the web analytics-space.
To start off: what are leading and lagging indicators, anyway?
The term “indicator” refers to a metric whose main task is to point towards a certain situation/aspect etc - in short: to “indicate” something. For example the metric “cost-per-click” indicates how much one has to pay for one click at a certain time on a certain link.
A “leading indicator” is a metric that mainly refers to future developments and drivers/causes . Examples of these would be:
1. number of booked impressions for a certain ad position for the coming quarter (e.g. 100000 ad impressions for REC booked for Q2 2007)
2. budget for specific keyword groups for the next quarter (e.g. 100.000 USD for keyword-group “fitness” booked for Q2 2007)
3. number of page impressions delivered by planned distribution contracts (e.g. 15 million additional page impressions delivered by contracts with publisher a, b and c)
4. number of leads referred by affiliate partner campaigns to a certain product (e.g. 500.000 leads monthly referred by campaign “X” to product “Y”)
A “lagging indicator” is a metric that mainly refers to past developments and effects/results, e.g. reflects history and outcomes of certain actions and processes. Examples of these would be:
1. number of page impressions for a specific product within the past month (e.g. 1 million page impressions for product “X” in August 2006)
2. number of unique users for a specific site (e.g. 100.000 unique users for the sports special “FIFA WM” in June 2006)
3. amount of revenue generated with a specific product
4. sum of costs spent on server maintenance for a specific country
The concept is based on the specific value chain of a business that is (in the best case) reflected in an interconnected system of metrics/indicators. The “value chain” itself can be seen as a number of business processes that are executed in a defined sequence.
Leading indicators mostly refer to the beginning of the value chain and reflect the drivers and/or causes of value whereas lagging indicators mostly refer to the end of the value chain and reflect the effect certain measures, decisions, actions had.
In the next post we will give an example of a value chain and the corresponding leading and lagging indicators - STAY TUNED
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Hi Kathrin,
sorry to ask this bluntly but is this just new jargon for “historical data” and “objectives” ?
or is there a deeper concept? If so, how do you see it integrate with our current standard of KPIs and dashboards?
Gruss,
Julien
Hi there,
no new jargon here, Julien. In fact the concept of leading vs. lagging indicators is quite common in the strategic planning/reporting world - e.g. it is widely used in the telco business where I have learned about it first after having studied it in university.
Re integration into current dashboards/KPIs the key is to develop a KPI-system that reflects the value creation chain of for example a certain product group. Then it is important to test the system and adapt it where necessary. The system should provide transparency re the key performance or revenue drivers (leading indicators) and show a clear cause-and-effect-relationship to the laggin g indicators one chooses (e.g. ROI or ROCE).
I admit it is somewhat difficult to set it up first time but I found that the initial effort is more than compensated by the transparency you create around the value chain.
Thanks for commenting,
Kathrin