CPM Insights: How About Those Leading Indicators? Do You Have an Early Warning System?
You have developed the strategic plan; you’ve identified the short- and long-term strategies and goals. But how well have you advised your organization on developing leading indicators to provide an early warning system for your board and executive and management teams? Are you still managing off the financials or lagging indicators? By the time the books close 10,15, 20, 25 days after month’s end, the impacts of yesterday’s decisions are already being felt. Wouldn’t you want to get ahead of the curve to know with some degree of certainty what is coming? Of course, we all do.
Let’s take the case of an IT consulting firm. You will need to translate this example into your sector. This firm has four categories of leading indicators that enable them to forecast their pipeline in four stages and predict booked and earned revenue over the next 12 to 36 months.
First, they publish white papers and track media citations, which represent a leading indicator for branding and securing positions on vendor lists. Their track record indicates that these activities are about 12 months ahead.
Second, they track prospective customer requests for information (RFIs) and requests for proposals (RPFs), which take 2 to 4 months to complete and submit but, with their past track record, typically result in a predictable win rate for oral presentations. This yields an expected value of future bookings.
Third, the oral presentations to win rate is consistent, so again they have an expected value for this stage and again a higher degree of confidence in their expected bookings.
Fourth, the win rate results in an expected earned value of a contract in its life cycle. This measure in and of itself can predict revenue over a project duration of 3 months to 3 years (backlog).
At any stage (1-4), the firm can make adjustments to raise or lower results. Perhaps a softer pipeline is an opportunity to defer new hires or focus employees on completing internal training or R&D.
In summary, have you included sufficient leading indicators in your game plan to avoid “surprises”? ###
June 24th, 2009 at 1:33 pm
I like the idea of using a range of leading indicators, including some that aren’t strictly quantifiable, but can give you an idea of what’s going on.
June 24th, 2009 at 2:56 pm
Doesn’t seem too hard to construct this kind of forward-looking metric array. Surprising that more companies don’t do it.
June 25th, 2009 at 9:44 am
In rough ideas this is very simple, the challenge (and fun part) is finding the right variables to track.
–”How can I break down the timelines to help me understand my business better?”
–”What market shifts (e.g. price shift or product/service mix) give me usable indicators?”
Once you find the right mix, its like watching a play unfold in front of your eyes.
July 1st, 2009 at 5:12 pm
Jeff - It sounds like you have had some success with this concept - I like the analogy of the play unfolding, implicit is the predictabe nature of the results.
John - I concur it is not to difficult to construct the leading set. It is remarkable how so many executives are focused only on outcomes - namely the financial results and not the leading drivers of their success. Being a CPA by training, I have however have to admit I spent the earlier part of my career in the financial details.
Karen - I would add that the objects of the measures are becoming more intangible as more companies move to the service sector - so measuring web rankings is measuring intangible results - rather than counting cereal boxes shipped.
Great discussion - thanks for the interesting comments and questions.
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