Kurvv Blog

Setting KPIs : Leading Indicators

Sep 13, 2021 4:39:45 PM / by Ryan Lee

TL;DR

Leading Indicators are measurable outcomes or events that occur before a target outcome or event. Similar to thunder and lightening. If you see lightening, you know you will hear thunder. If the time to results for your target KPIs is long, you need to use KPIs that are leading indicators to shorten the feedback loop.

 

During a recent conversation with a would-be-startup-founder about business goals and KPIs(Key Performance Indicators), I said something like "identify Leading Indicators to measure and track (given your long sales cycle)." The gist of it was that if your sales cycle is (say) 10 months, you should not use 'revenue' as the primary metric to measure how well the new sales idea is working. Sure, you may want 'revenue' as the ground truth metric but you'll only be able to know if its working after 10 months. You need something that can tell you if you're heading toward the right direction within 10 days not 10 months. 

Here's the analogy I should have used to describe why using leading indicators was important. Say you're planning to drive to Vancouver B.C from Seattle (goal) and someone tells you that it will take around 3 hours (lead time). Not having a leading indicator is like, setting out in your car and driving in the general northern direction (executing new sales idea) and seeing if you are in Vancouver in 3 hours (after a full sales cycle). 

A leading indicator is a measurable outcomes or events that happens before a target outcome or event. So, crossing the US -Canadian border would be a great leading indicator in our driving analogy. But the border is still 2 hour away from Seattle, so maybe something like 'getting on freeway I-5 north' would be even better, since if you head north on I-5 you WILL reach the border.

So in practice, you would set the destination 'Vancouver BC' as your goal, with 'getting on I-5 north' as your first KPI to hit in your first 30 minutes of driving, and 'reaching US-Canadian border' as your second KPI to hit around your 2 hour mark. Translating this to a new Lead Gen referral program idea, you would set the goal of - using arbitrary numbers- '5 new recurring revenue customers' in 10 months, '8 signed contracts' in 5 months, and '20 active contract discussion' in 2 months and '50 engagements' in 4 weeks, 100 referrals in 1 week.

Now you have way to know if something will not work in 1 week rather then 10 months.

 

Note that a 'leading indicator' almost never has perfect correlation with goal 'KPI' . But the better the leading indicator the higher the correlation (e.g. 'Lightening' and 'Thunder') and sometime you need to have multiple KPIs to account for this. (e.g. CTR + Conversion rate)

 

 

Tags: startup, correlation, business analytics, educational, KPI

Ryan Lee

Written by Ryan Lee