Two types of KPIs

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When you think about Key Performance Indicators (KPIs), what comes to mind? If you’re like most people, you think of metrics that matter to your industry and job function. If you work in a hotel, you may be thinking about KPIs such as occupancy, average daily rate, and revenue per available room. Restaurateurs are preoccupied with KPIs like average check, labor cost ratio, and food waste. And retailers track KPIs including sales per square foot, average basket/spend, and inventory turnover.

These KPIs are worthwhile to quantify, track, and correlate as part of management, but they only represent one type of KPI: lagging indicators. These are metrics that reflect results of past performance. There is another type of KPI that is often overlooked or at least, not given the same attention: leading indicators.

Leading indicators are actions that suggest future success. Wearing seat belt is a leading indicator of automobile safety that correlates with the lagging indicators of serious injury or death in the event of a car crash. In a sales environment, prospecting activity is a leading indicator of sales success that correlates with the lagging indicator of scheduled product demonstrations. And the frequency of product demos, in turn, is a leading indicator of sales success that correlates with the lagging indicators of signed contracts and new business revenue.

If a hotel wants to increase its weekend occupancy (lagging indicator), it will benefit by targeting local markets with a staycation campaign promoted via an email offer, social posts, or Google Ads with targeted keywords (leading indicators) that bundles, for example, dining options, spa treatments, valet parking, or even discounted admission to local museums or other attractions. Similarly, if a restaurateur wants to increase average check (lagging indicator), she will likely sell more cups and bowls of the soup du jour by having servers offer an amuse-bouche—a chef’s taste—of the featured soup (leading indicator) prior to taking food orders.

A few years ago, I worked with a multinational retailer whose internal customer survey metrics demonstrated an increase of 28% in average basket/spend (lagging indicator) when the customer encountered an employee on the sales floor (leading indicator). And if they were highly satisfied with the employee’s friendliness, then average basket/spend increased another three percentage points to 31%. The problem was that only 47% of their customers were encountering employees on the sales floor. So, we went to work devising ways to create chance encounters with customers by design.

These actions (leading indicators), which became KPIs that were themselves tracked, measured, and correlated with the lagging indicator of average basket/spend, included protocols aimed at initiating contact with customers on the sales floor:

  • Ask customers who have selected a clothing item if they would like assistance accessing a fitting room to try it on. (The staff at Lululemon takes this a step further and reinforces personalized service by writing the customer’s name on the opaque glass surface on the fitting room door, which they use during interactions.)
  • Retrieve a basket or cart for customers holding several clothing articles.
  • Suggest a clothing article or accessory that would complement the customer’s current selection. (The staff at Altar’d State takes this a step further by selecting a complementary clothing article or accessory and placing it in the dressing room together with the customer’s original selection. When I took my daughter back-to-school shopping last summer, this tactic added $80 in sales—a 57% increase—to our original order.)
  • Offer to enroll the customer in the store’s loyalty program.

As you think about your KPIs, don’t focus myopically on a set of predictable lagging indicators under the assumption that your team’s best efforts during the period measured will suffice and these results will take care of themselves. That is a passive approach to achieving your KPI targets. Instead, view leading indicators as the KPIs that will link employee performance (i.e., actions, behaviors, and decision-making) to the fulfillment of your lagging indicators. By analyzing both types of KPIs, you can determine the relationship between them and act on this intelligence to optimize performance.

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