Turning Lagging Indicators into Leading Insights: Predictive KPIs for Proactive Action

As senior executives, setting clear strategic goals and monitoring business performance can lead to desired outcomes. The first step is understanding your key metrics and establishing a framework to measure progress. With a clear destination, it's easier to gauge whether your progress aligns with the destination.

Furthermore, identifying and leveraging KPIs helps track the business processes integral to success. In project management consultancy, the perpetual quest revolves around deciphering the most effective means to realize your organization's objectives. Achieving goals requires the astute utilization of KPIs to steer critical business functions.

However, only some businesses use all available resources to identify and track the appropriate KPIs. A study by Boston Consulting Group and MIT Sloan Management Review reveals that over 50% of corporate executives acknowledge the need for improved KPIs. Despite the significant progress in AI capabilities, only one-third of businesses use it for KPIs.

Therefore, businesses must prioritize predictive and proactive KPIs to meet performance goals. These KPIs empower enterprises to transition from a reactive to a forward-thinking and anticipatory approach to performance evaluation. 

Examples of Lagging Indicators

Many see money as the best example of business success. More specifically, net profitability is the ultimate measure of a company's success. Assessing a company involves considering liquidity, solvency, and operational efficiency. 

Some companies can persist without being profitable. Yet, long-term survival means achieving and sustaining profitability. Regrettably, profit doesn't always accurately reflect progress. 

It can often convey deceptive messages.

Profits tend to rise during economic growth with minimal business improvements. If management isn’t tracking financials, they need more revealing metrics. The origin of these indicators differs depending on specific business objectives.

A startup may track how many new customers they acquire each quarter. However, a well-established corporation might prioritize revenue growth and customer retention. Each organization tailors KPIs to align with its unique strategy.

Though imperfect, KPIs are the closest quantifiable measures to track success in achieving strategic objectives. AI can address KPIs' inherent flaws and provide a more accurate and holistic picture of businesses' performance. 

Classification of Indicators

KPIs are essential for evaluating your business, including marketing, customer service, employee satisfaction, and financial health. Numerous KPIs are available to measure your business's performance. While companies typically track many indicators, such as qualitative, quantitative, practical, and actionable, we will only focus on two.

These distinct categories are leading and lagging indicators. Leading indicators can be likened to catalysts, while lagging indicators are the outcomes. Leading indicators are already instrumental in guiding proactive decision-making.

They provide early signals and predictive information that can influence future performance. Yet focusing on leading indicators may be a mistake.

Why Only Focusing on Leading Indicators is a Mistake

Leading metrics help project managers and consultants predict the future and increase adaptability. The benefits of leading indicators are closely intertwined with their drawbacks. Altering your strategy based on a faulty assumption could complicate the issue.

• Limited Historical References: Leading indicators focus on predicting future trends or events. However, historical data can validate their accuracy and reliability. Data is essential to assess the predictive power of leading indicators.

• Complexity Leads to Misinterpretation: Leading indicators can be multifaceted and influenced by various factors. This makes interpretation challenging. Social, political, and economic factors influence consumer sentiment, making it difficult to predict future consumer behavior.

• Misleading Financial Data: This false signal distorts a company's true financial health. It can erode trust among shareholders and the market. Lack of confidence can impact the company's ability to raise capital and grow.

While necessary for assessing business health, management should critically analyze these leading indicators to avoid misinterpretation. Without reliable benchmarks, consultants must turn to lagging indicators for decision-making.

Why Lagging Indicators Are Important For Leading Insights

Organizations should prioritize business resilience while navigating challenges and ensuring long-term success. However, 43% of construction firms prioritize immediate financial goals over building resilience. Doing this hinders their ability to withstand unexpected disruptions. Furthermore, 27% of business executives acknowledge the lack of knowledge as a barrier to achieving resilience and business continuity. Implementing predictive KPIs enables proactive action and helps organizations anticipate potential risks. Lagging indicators are indeed crucial for providing valuable insights into leading indicators. 

Here’s why they are essential:

• Historical Performance: Lagging indicators reflect a business's historical performance, providing a comprehensive view of past outcomes.

• Confirmation of Trends: They validate the trends identified by leading indicators, offering a complete picture of how a business moves.

• Evaluation of Strategies: Lagging indicators help evaluate the effectiveness of past decisions, allowing adjustments based on actual outcomes.

• Investor Confidence: They can enhance investor confidence by providing concrete evidence of performance, thereby influencing investment decisions.

• Risk Management: Lagging indicators help assess risks by highlighting the impact of previous changes, thereby aiding in better risk management.

• Regulatory Compliance: Management uses them as critical metrics for compliance and adherence to industry standards.

Lagging indicators are helpful when evaluating the progress of completed development work. Management categorizes development metrics into two types: functional metrics, which relate to product development budgets, and project-based metrics, which are directly associated with project profits and losses. Both types are essential for assessing performance but provide different perspectives.

Lagging indicators complement leading insights and provide a more holistic understanding of performance and trends. To turn these lagging indicators into leading insights, project managers must use AI. With AI systems, managers analyze lagging indicators to derive valuable insights. 

Here's how project managers can use AI for this purpose:

Predictive Analytics with AI

• Data Collection: AI can collect data from various sources to gather lagging indicators like project completion times, budget overruns, and safety incidents.

• Pattern Recognition: AI algorithms identify patterns within the lagging indicators to predict potential issues or successes in future projects. For example, they can determine if a delay often leads to cost overruns.

Decision Support

• Real-time Monitoring: AI systems monitor indicators in real-time for prompt action when deviations occur.

• Prescriptive Analytics: AI can analyze lagging indicators and recommend proactive actions based on historical data and current trends.

Continuous Improvement

• Feedback Loop: AI can analyze lagging indicators and provide insights into areas for improvement, enabling companies to continuously refine their processes.

Predictive KPIs That Lead to Proactive Action

Lagging indicators are essential for assessing the impact of previous actions on business performance. They are ineffective in predicting future trends. Yet, they provide valuable insights into the consequences of prior decisions.

Proactive Action Using Lagging Indicators

Proactive action involves using lagging indicators to implement informed strategies and impact future outcomes. Here's how proactive action can happen using lagging indicators in project management:

1. Incident Reports: Analyzing historical incident reports can help identify trends and patterns in workplace accidents. In response, proactive measures could be additional safety training, equipment upgrades, or process improvements.

2. Budget Deviations: Analyzing historical cost overruns or discrepancies can provide insights into unexpected expenses. Management can refine cost estimation processes, negotiate better contracts with suppliers, or implement stricter cost control.

3. Defect Reports: Reviewing past defects and rework data can identify recurring issues or weak points. Once identified, management can revise construction methodologies and enhance quality control.

4. Post-Project Surveys: Feedback helps identify satisfaction or dissatisfaction, prompting proactive measures to meet client expectations.

5. Project Timeline Analysis: Examining historical data on project timelines and deadlines can reveal delays or bottlenecks. Project managers can adjust scheduling methodologies, reallocate resources, or implement new project management tools.

Final Thoughts

The power of lagging indicators lies in their ability to provide a rich and insightful perspective rooted in historical data. By leveraging these metrics, organizations can foster a culture of accountability, make informed decisions, and learn from past successes and failures. The concrete data from lagging indicators are a solid foundation for data-driven decision-making.

Lagging indicators enable teams to shape future strategies and reinforce responsibility. Companies using AI for performance management can optimize legacy KPIs and create new ones. They should prioritize the KPIs they rely on to enable forward-looking management. 

AI can identify the intersections between KPIs with pattern recognition, addressing the trade-offs and discrepancies. Embracing the insights gained from lagging indicators enhances visibility and propels continuous improvement, making them an indispensable tool for organizations. However, hyper-focusing on lagging indicators means missing valuable opportunities to influence business outcomes.