Leading vs. lagging indicators in business and in life

“If you can’t measure it, you can’t improve it,” is common business wisdom. It is especially important advice for startups searching for product/market fit via the build-measure-learn feedback loop, a major part of the Lean Startup ethos.

Build something. Measure its effect. Learn what worked, what didn’t. Repeat.

The ability to execute this loop quickly can make or break a startup, but some things are harder to measure than others. When the time-scale to measure the results lag the experiments to optimize them, iterating quickly on product becomes difficult. The solution is to look for leading indicators to use as a proxy.

At SharpestMinds, we want our mentees to land well-paying jobs. It made intuitive sense for our KPI (key performance indicator) to be the number of mentees getting hired over time. However, there is a significant lag between starting a mentorship and landing a job. When we were only measuring hiring rates, it was tough to iterate effectively on the advice, support, and software we provided. The job hunt is stochastic and grueling. It’s not obvious what the most effective strategies are until much later, when the offers start coming in (or not coming in at all).

This has led us to using number of interviews as a leading indicator. If you’re getting a lot of interviews, it’s a sign that you’re doing something right – it’s only a matter of time before one of them converts to an offer. By optimizing for number of interviews (a leading indicator) instead of the number of hires (the lagging indicator), we were able to learn what strategies were most effective and begin to the move the dial on our mentee’s success rates.

The concept of leading vs lagging indicators is also a useful concept in life outside of business. It is very relevant when forming new habits. Usually, the benefit of a good habit lags significantly from starting it.

Your outcomes are a lagging measure of your habits. Your net worth is a lagging measure of your financial habits. Your weight is a lagging measure of your eating habits. Your knowledge is a lagging measure of your learning habits. Your clutter is a lagging measure of your cleaning habits.

James Clear, Atomic Habits

This is one of the main reasons forming new habits is difficult. The rewards tend to be long-term, but we tend to be driven by short-term rewards. The solution, again, is to shift your mindset to leading indicators. In my experience, the most effective leading indicator is the habit itself.

Instead of measuring how fit you are, measure how often you’re working out. Instead of judging your success by the number of interview requests and job offers, measure how many applications you’re sending out. When starting out with a new habit, your leading indicator should answer questions like, “Did I show up today?” or,“Did I put time in today?” Optimize for yes.

The simplest way to adopt this mindset is using a habit tracker. Turn your goals into daily habits and try and make everyday a non-zero day. That is, put (at least) the minimum amount of effort into your goals everyday and, most importantly, call it a win when you do. Even if you only put in 5 minutes towards applying to jobs today, check it off your list and pat yourself on the back.

If you can derive internal satisfaction from the act of showing up (your leading indicator) and optimize for that, then the benefits will follow (the lagging indicators). If you’re goal is to simply run for a non-zero amount every day, you might eventually run a marathon.

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