The 3 Most Important Metrics Every Business Must Have

A business is much like fire. Let me explain.

3 elements that Fire needs

There are 3 elements that a fire needs to ignite: Heat, Fuel, and Oxygen. With the right combination of each, it will occur naturally.

Remove one element and the fire will not survive. Changing the amount of each element will change the properties of the fire, such as the temperature, intensity, and longevity.

3 elements that a Business needs

Similarly, in business, you need to have the right combination of these 3 elements: Time, Quality, Cost.

It doesn’t matter what business or industry you’re in, generally speaking, you will need to keep these 3 metrics in check to keep the business afloat.

They are called metrics because you have to be measuring each of these elements, otherwise your business will not survive.

Changing the amount of each will have an impact on your business.

Faster processing Time means you’ll be able to produce more output, better Quality means you’ll have happier customers, and lower Cost means you’ll have more profit.

Leading vs. Lagging Metrics

However, all of these metrics are not directly controllable. What do I mean by saying that?

There are a set of actions that are within your control that you must do in order to produce a certain amount or measurement of each of these elements.

The amount or measurement of each of these controllable actions are called Leading Metrics, and the amount or measurement of the corresponding outputs – the 3 elements we’ve talked about, are called Lagging Metrics.

Leading vs. Lagging Metrics for Fire

In our fire example, you can change the amount of Heat by controlling the source. In most non-electrical fires you can reduce heat with the application of water, and in electrical fires you can turn off the electricity source to remove the ignition.

The amount of Heat is a Lagging Metric, whereas the amount of water and measure of electricity are called Leading Metrics.

You can change the amount of fuel by doing a certain action. For example, if the action you do is to remove the fuel, the fire will stop. If the action you do is to put only a small amount of fuel, the fire will only burn until it consumes all the fuel.

The amount of Fuel is a Lagging Metric, while the number of actions or effort required to do those actions are the Leading Metrics.

You can change the amount of oxygen by either blowing more air to improve combustion, or depriving the fire of air to extinguish it.

The amount of Oxygen is a Lagging Metric, while the actions or effort required to blow more air or deprive the fire of air are Leading Metrics.

Leading vs. Lagging metrics for Business

In business, there are controllable actions measured via Leading Metrics, that you can take to have a corresponding effect on your Lagging Metrics – Time, Quality, and Cost.

For example, the less time you spend on unproductive tasks, the quicker it will be for your business to produce your output product.

Time to produce a product is a lagging metric, while time you spend on productive versus unproductive tasks is a leading metric.

The better the Quality of your output, the happier your customers will be, and they will have less complaints.

So Quality or Customer Satisfaction can be a lagging metric, while the human behaviors or having the right skills that influence customer satisfaction can be your leading metrics such as adherence to the recommended conversation flow with customers, or behavior-specific metrics like helpfulness, knowledge, and so forth.

Cost, ROI, or Revenue per Square Foot can be leading metrics, while the lagging metrics can be things that are controllable such as schedule adherence, utilization, and the like.

Business example: Ride Sharing

For example, when driving a car as a business like Uber, Grab, or Lyft, Time is essentially your speed in Miles or Kilometers per Hour. This is a lagging metric. The leading metrics that are within your control are how much you step on the gas pedal to speed up, and the brake pedal to slow down.

Quality, in this example, is essentially the Customer’s satisfaction level when they give you a review after the ride. This is not within your control so it is a lagging metric. The leading metrics that are within your control will be how you ensure your car is always clean, how you open the door, greet the customer, help with the luggage, your driving skills, and so forth.

Cost is another lagging metric, where the leading metrics within your control can be how efficient you drive, how well you maintain your car, how well you choose your routes, etc.

Summary

Lagging metrics the indicators that are essential to see, in order for you to quickly judge the health of the business. But these are not directly controllable, hence you can only monitor them.

Leading metrics are the things that are directly within your control that will have a significant impact to your lagging metrics.

Identifying the right leading and lagging metrics, as well as which ones to focus on is a science in itself. Specially when it comes to identifying the right lagging metrics, as there can be so many.

Imagine driving a car while looking at all the available telemetry metrics like an F1 team. Numbers like Mass Air Flow readings, Exhaust Gas Temperatures, Spoiler Angles, Ride Height, and Damper settings may not be the most important leading metrics to look at if you just want to get from point A to point B, as compared to trying to win a race.

If you want to learn how to identify the right Leading and Lagging metrics for your business, I would recommend for you or your process improvement person to learn Lean Six Sigma. Visit https://robbieagustin.com/courses for details.

If you want a blueprint on how to optimize your process or business further, download my FREE (for a limited time only) eBook – The Business Optimization Blueprint, and start bringing the best value to your clients and stakeholders.