In order to give themselves the best chance of delivering against key business goals, enterprise functions must carefully track against a broad variety of metrics. In this article we look at why leading metrics – frequently ignored in favour of more easily tracked lagging metrics – are absolutely critical for success.
We all understand why a business needs metrics: they allow owners and managers to track progress towards operational, strategic, and financial goals. Metrics also allow business leaders to make informed decisions about the effectiveness of processes, and to take action improving them on an ongoing basis. In turn, the information they provide should (in theory!) make an organisation more successful over time.
Metrics should be selected and reported against in every part of any business, including finance, marketing, and procurement. Although some numbers, like profit and loss or employee turnover, are common to all businesses, within each team different metrics may be tracked depending on business strategy or departmental priorities. And cross-departmental collaboration is also important in the process of assessing the outcomes of reporting – after all, some metrics mean nothing without context. A sales team's underperformance might be because the marketing team isn't delivering them enough leads, for example.
Overall, business metrics are a basic requirement for any organisation because they provide:
- Actionable insights about business performance;
- A view into the success rate of the business's strategy;
- Perspective on what's important to the business and its investors;
- Historical record of a company's performance over time.
The most common metrics a business will report on are known as “lagging metrics”.
A lagging metric is a metric that is easy to measure, but takes a long time to both measure and influence. Because of the time they take – often over long set periods like full calendar years – there's a degree of certainty over their accuracy; lagging metrics are often the best indicator of past performance.
However, they come with as many weaknesses as strengths. As we've noted, they take a long time to measure; at a minimum you're looking at weeks or months, or even over one or multiple years. Depending on what you're reporting on this might work fine (profit and loss doesn't need to be managed on a daily basis at large enterprises, for example) but if you're trying to see short-term trends and act more dynamically, lagging metrics aren't going to help.
The other problem with lagging metrics is that they're difficult to change, because they're normally both historical (they've already happened) and high-level, again, like revenue. Revenue is a key number for any business, but it doesn't even tell close to the whole story, and as a lagging metric, it alone doesn't provide enough detail for anyone to be able to act upon it.
In a similar vein, you can't draw conclusions from a summary lagging metric as there will have been many factors that have influenced the end result. When the number has been influenced by so many underlying variables, can you decisively say whether your actions have impacted it?
A good example of lagging metrics was seen during the height of the COVID-19 pandemic. A lot of the focus on reporting numbers associated with COVID was deaths; in some ways the ultimate lagging indicator. However, the doctors and scientists trying to curb the spread of the infection were far more interested in looking at metrics that might help them predict what might happen next week, or next month, so that they could give advice to governments on appropriate measures to take.
Rather than looking at purely hospitalisations and fatalities, they instead concerned themselves with new case numbers and local trends in the emergence of new cases, along with mask mandate compliance, compliance with social distancing requirements. These metrics, though far harder to acquire and to declare completely accurate, would give very clear indications of what was likely to come; for example, if you had data to suggest that people weren’t wearing masks or social distancing in a region, you could reasonably expect that cases, hospitalisation and deaths would increase in the same region over the coming weeks and months.
Since lagging indicators only really allow us to look back at historical performance, they aren't really a great way to make plans for the future. Since they only tell you what's already happened, they provide little context for performance, and little indication of what’s to come.
Any good portfolio of key performance indicators should include lagging metrics, of course. But the best course of action is to use them in combination with forward-looking indicators to plan actions towards desired lag metric performance. These are what's known as "leading" indicators.
Leading metrics show you ongoing performance, and early signs of things to come. The idea is that, by following them, they "lead" you to your lag metric performance – hence the name. They help to keep you on track, showing you trends and giving you strong clues on what actions you should take as you move through your reporting period and towards your eventual "north star" strategic objectives.
Procurement has historically had a portfolio of both leading and lagging metrics that centre primarily around cost, compliance, and ensuring they reliably source quality products and services from suppliers, on time.
Yet as the function is increasingly tasked with a broader mandate – one that includes delivering on business goals around resilience, sustainability, growth, and business transformation – procurement’s metric portfolio must expand in parallel.
For these strategic goals, lag metric performance is especially slow to be realised and to calculate. Revenue from new product introduction as a result of supplier innovations or overall reduction in supplier emissions, for example, are nearly impossible to measure on an agile, ongoing basis with any amount of precision, and attributing lag metric performance to work conducted by the procurement team is especially difficult. As a result, it is imperative that procurement looks towards leading indicators to guide their progress on these new challenges.
Just as these challenges require new lagging metrics, they also require a new approach to the procurement process. Whether it’s sourcing innovation from the supply base, maintaining continuity of supply for better business resilience, or driving increased supplier sustainability, this post-contract procurement work can only be accomplished through collaborative, mutually beneficial relationships with supplier stakeholders.
As a result, the leading metrics used to guide procurement towards success should measure how well the function is establishing “customer of choice” relationships with strategic suppliers, and how effectively the team is working in collaboration with the business’s extended ecosystem.
If we take the example of reducing supplier emissions (where our lag metric is megatons of scope 3 CO2e reduced), we could use the following leading metrics to guide us:
While these leading metrics would not give us a quantitative sense of GHG emissions reduction in megaton terms, they would be predictive of future success against our lag metric of GHG reduction.
Here's our CEO Mark Perera on the importance of these leading metrics in more depth:
To read more about how Supplier Collaboration is helping procurement functions embrace their broadened responsibility and deliver on strategic business goals, read our recent whitepaper Supply Management Becomes Supplier Collaboration.