As I listen to and read different news sources, I am perplexed how one can indicate a positive economy and another a negative economy. It reminds me of the joke about an economist having three hands.
Three economists are arguing about the state of the economy.
The first economist says, “On the one hand, the latest unemployment figures are showing a slight improvement.”
The second economist responds, “But on the other hand, inflation remains stubbornly high.”
The third economist jumps in, “And on the third hand, consumer confidence is at an all-time low.”
According to history, this drove President Harry Truman to ask for a “one-handed economist.”
Following up on recent economic data from different sources, and getting a note about the recent press release regarding The Conference Board Leading Economic Index® (LEI) for the US, I decided to see what they considered “leading” indicators.
A number of these “leading” indicators looked to be lagging to me as I work with manufacturing, technology, and transportation related businesses. Orders and permits look to be leading. But, stock index, interest rates, and weekly claims for unemployment insurance look to be more “lagging.”
Businesses from startup to fully mature need both leading and lagging indicators to assess how they are doing and plot a new and revised course for the immediate and long range future. I prefer to think of KPI as either Key Performance Indicators (lagging) or Key Predictive Indicators (leading).
Three questions for you as a business leader:
- What Lagging Key Performance Indicators are you tracking to assess the health of your company?
- What Leading Key Predictive Indicators are you watching to understand the future health of your company?
- What actions are you taking each quarter as you review these KPIs? You are looking at them at least quarterly and taking action, right?
For those who are inclined to read everything related to artificial intelligence and those that have some engineering training, here is a bonus. I put a couple of questions to GEMINI since lead/lag electronic circuits were something I studied more than half a century ago now. Don’t ask me to calculate anything related to these circuits. Once I thought 1+1=2 as an engineer. Then I moved into business and learned that 1+1>>2 or you won’t make money or get funded for your startup. Now, as a business coach and consultant, I learned the answer to almost any question is another question. If someone asks me what 1+1 equals, my response is, “What would you like the answer to be?”
If interested in seeing the interaction with GEMINI and how lead/lag in electronics is described to a layperson and how it applies to business, read the full post by clicking here: https://businessaccelerants.com/2025/07/lead-lag-and-kpi/ or reading on.
Gemini
Explain succinctly for a layperson the concept of lead and lag in an electronic amplifier or control circuit.
For a layperson, think of lead and lag in an electronic amplifier or control circuit like the way a boat behaves in water, or how you might respond to a command.
1. Lag (The Delay/Slowness):
- Concept: A “lag” means the output of a circuit or amplifier responds after the input changes. It’s a delay or a slowness in response.
- Analogy: Imagine you turn the steering wheel of a large boat. The boat doesn’t instantly turn; there’s a slight delay before it starts to respond to the new direction. That delay is a lag.
- In Circuits: In an audio amplifier, too much lag might make music sound muddy or distorted, as high frequencies (fast changes) get delayed. In a control system (like a thermostat controlling a furnace), lag means the furnace might keep heating for a bit after the room reaches the target temperature.
- Cause: Often caused by components like capacitors and inductors that take time to charge or discharge, or by inherent processing delays.
2. Lead (The Anticipation/Quickness):
- Concept: A “lead” means the output of a circuit or amplifier responds before the input fully changes, or tries to anticipate the change. It’s about speeding up the response or reacting proactively.
- Analogy: Imagine a very skilled driver who starts turning the steering wheel just before they reach the corner, anticipating the curve to make a smooth, fast turn. Or, in a thermostat, if it could predict the room would soon be too cold and start the furnace a little early.
- In Circuits: A “lead compensator” in a control system might make a robot arm move more quickly and precisely to its target. In an amplifier, lead might help sharpen a signal’s edges.
- Cause: Often introduced intentionally with specific circuit designs (like “lead compensators”) to overcome lag and improve responsiveness and stability.
In essence:
- Lag makes things slow or delayed.
- Lead makes things quicker or anticipatory.
In designing these circuits, engineers try to manage both lead and lag to ensure the system responds accurately, quickly, and stably, without overshooting or oscillating.
Now, relate this to key performance indicators for a business that are lagging indicators or leading indicators.
Okay, that’s an excellent way to bridge a technical concept (lead/lag in circuits) to a business context (leading/lagging indicators). The principles are very similar: one tells you what has happened, and the other tries to tell you what will happen.
Lagging Indicators (What Has Happened – The “Delay”)
- Concept: A lagging indicator measures what has already occurred. It reflects past performance and outcomes. Like the boat that turns after you move the wheel, these metrics tell you about a result that has already materialized.
- Purpose: They confirm trends, measure results, and are excellent for historical analysis and accountability. They tell you if you achieved your goals.
- Characteristics:
- Historical: Always backward-looking.
- Easy to measure: Often straightforward financial or operational outcomes.
- Conclusive: They reflect actual results.
- Examples for a Business:
- Revenue/Sales: You measure this after sales have occurred.
- Profit (Net Income): Calculated at the end of an accounting period.
- Customer Churn Rate: You know who churned after they’ve left.
- Employee Turnover Rate: Measured after employees have departed.
- Market Share: Calculated based on past sales data.
- Customer Satisfaction (e.g., NPS): Measured after the customer experience has happened.
- Analogy to Circuit Lag: If your revenue is down, it’s a “lagging” signal that problems existed before the revenue dropped (e.g., poor sales activity, low customer satisfaction, ineffective marketing). You’re seeing the effect, not the cause in real-time.
Leading Indicators (What Will Happen – The “Anticipation”)
- Concept: A leading indicator attempts to predict future performance or trends. Like a skilled driver anticipating a turn, these metrics give you an early warning or insight into potential future outcomes.
- Purpose: They allow you to be proactive, make adjustments, and influence future results. They tell you if you’re on track to achieve your goals.
- Characteristics:
- Predictive: Forward-looking, suggestive of future outcomes.
- Harder to measure: Often require more effort to track and interpret.
- Actionable: They point to areas where intervention can make a difference.
- Examples for a Business:
- Number of Sales Leads Generated: Predicts future sales.
- Website Traffic/Engagement: Can predict future leads, inquiries, or sales.
- Employee Training Hours: Can predict future productivity, quality, or retention.
- Customer Support Call Volume: Can predict future customer satisfaction issues or product problems.
- New Product Development Pipeline: Predicts future revenue streams.
- Sales Pipeline Value/Conversion Rates: Directly predicts future revenue.
- Employee Engagement Survey Scores: Can predict future turnover or productivity.
- Analogy to Circuit Lead: If your sales lead generation drops significantly, it’s a “leading” signal that your future sales figures are likely to decline. You’re seeing a cause that will soon lead to an effect, allowing you to intervene before the revenue problem materializes.
Why Both Are Crucial:
Just like a good circuit needs to manage both lag and lead for stability and responsiveness, a well-managed business needs both:
- Lagging indicators tell you if your past strategies worked and confirm your results. They are your scoreboard.
- Leading indicators tell you if your current activities are setting you up for future success. They are your compass and early warning system.
Effective business management involves understanding the relationship between leading and lagging indicators – what activities (leading) drive what results (lagging) – to make informed decisions and steer the company effectively.
