Leading indicators deliver better business results

IT can provide tremendous value to those responsible for delivering business results by proactively identifying emerging problems and taking timely action to address them. ROI expert Dan Merriman offers advice on how to identify and implement leading indicators to improve business results.

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What ultimately matters when assessing the ROI of an initiative are the results. Did revenue increase? Were costs reduced?

 The actual bottom-line impact should be determined by measuring the revenue increased, or cost reduced, divided by some number of units that reflect the volume involved (e.g., revenue per sales rep, cost per order, cost per customer). However, these are all examples of "lagging indicators," which measure the ultimate results at the end of the project. While lagging indicators are very important to measure, they are of limited use to those responsible for delivering business results. They indicate what happened after the fact, therefore little if anything can be done to affect them. Information regarding "leading indicators," on the other hand, provides managers with valuable insight needed to take timely action and improve results.

But how does one go about identifying useful leading indicators that provide a clear picture of what is occurring without flooding users with too much information?  One technique is to work with management and initiative teams to identify and prioritize three categories of potential leading indicators:

  • Business indicators: The owner of the business entities can use indicators to measure changes in the efficiency and effectiveness of various aspects of the business. Examples include:
    • Steps of the business process (e.g., improvements in the lead generation, qualification, proposal, commitment and order steps of a sales process).
    • Major actions undertaken within the business process (such as analysis, problem resolution, customer interaction, deliverable development).
    • Customer and employee behavior (actions taken, level of proficiency achieved).
    • Key information used during the process (for example forecast accuracy).

     

  • Implementation indicators: Project managers can measure the progress being made with the deployment of each component of the solution. Examples include:
    • Level of performance and integration of the different systems involved.
    • Level of user adoption (such as percentage of users who have recently logged on, percentage of entries that have been updated).
    • Extent to which data has been converted to new systems.
    • Quality of the data (e.g., percentage of sample data items that have values, and/or are accurate).

     

  • Drill-down comparisons: These type of indicators provide relative comparisons of the efficiency and effectiveness of different communities using the solution (by region, user population, division, product or service). This helps identify the effective users, as well as those who need more assistance. Examples include drill-downs by geography, user group, product, sales/service territory and individual.

By using a mix of related leading and lagging indicators, IT helps the business understand how it is performing today and, even more importantly, how it can improve on future results.

Dan Merriman is president of Chapin Consulting Group Inc. in Needham, Mass. He helps corporate users and vendors maximize the business value gained from major investments in technology. He can be reached at dmerriman@chapinconsulting.com.

This was first published in June 2006

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