Business Intelligence basics

The first part of being smart is to be aware. To be aware of what's wrong and what's right and how you're progressing. However, in the past I have been completely fooled by my flawed perception of what to be aware about. I have also found that I wasn't the only one. So I'll try to go over the most basic element of BI, indicators, and how you can structure them.

Take a car manufacturer. For the business person, it's important to know sales numbers, revenue, and overall customer loyalty. But to tell those numbers to a factory worker who is actually building the car can be unproductive. Yes, the quality of the cars affects the satisfaction of a customer, and thus impacts sales and consequently revenue. However, tracking that for the worker has little value in daily operations. Each car will take at least a few days to be finished and sold, and at least a month to show up on sales reports. Also, there are many other people involved in selling a car and providing assistance besides the worker. It will be hard, then, for the factory worker to know how he's doing based on customer loyalty - also because there are many more variables at play. It's much more important to know how fast he finished his tasks, or how many faults his work contained.

So how should one approach indicators? As in the example above, we see that faults in the car production is a very immediate indicator, whereas loyalty takes some time to be affected by the workers' impact. We say that faults is a leading indicator of this workers impact and that loyalty ratings are a lagging indicator.

Dividing indicators into leading and lagging for each function to be analyzed is to me a crucial task of Business Intelligence.

Leading Indicators characteristics

  • They try to measure Performance. These indicators signal future events.
  • They are inspectable. Leading indicators usually refer to a baseline, or a standard performance against which we are measuring the subject
  • They are individual. This means that they are individually actionable, making them fair and less political to act on
  • They are instantaneous. This makes them easily observable and quick to diagnose and correct
  • They are immersive. They reflect the whole of the responsibility of a function or person in some detail
  • They are independent. Each leading indicator should be as much as possible unaffected by other indicators. People should in principle be able to optimize each of them separely [1]

Example of leading indicators for the performance of our car factory: speed at which the worker picks his screws to be bolted on to the car. Speed at which which he bolts each of them. Number of retries due to error. Number of screws needing fixing due to low quality work. Number of break pauses and time spent in break pauses. Again, these should be relative to a standard measure. Leading indicators mean that they improve before the system as a whole improves.

Lagging Indicators have the opposite set of characteristics

  • They measure Outcome (Output). These types of indicators follow past events
  • They are objectives-based, aggregate, cumulative, high-level and complex

Example of lagging indicators in our car factory are number of cars produced, average total cost per car, customer satisfaction with cars, revenue for the factory (in case it's tracked). Lagging indicators change much after the company has internally improved.

In between Leading and Lagging indicators we can establish a number of levels of lag or lead. Typically this concerns not Performance nor Outcome, but rather Productivity. Examples for the factory workers could be cars per hour, accidents per month, and througput.

To make an analogy, we can compare your company to the movement of an object. A force is applied producing an acceleration. Both force and acceleration are Leading Indicators to the performance of the mover towards the movement. Between them, force leads and acceleration lags because acceleration is produced by the result of possibly many forces. Speed and mileage lag behind as indicators, and they measure productivity of the mover towards the movement (km/h) and (km/ L). Finally, dislocation, total time or total costed the trip measure the output, and are indeed lagging indicators towards all other indicators.

Both types of indicators are very important. Leading indicators are good to establish the root causes for improvement, and lagging indicators are generally what the investors want to hear. The most frequent mistake is to evaluate workers by their productivity (pieces produced per hour), when many times this process is not entirely under his control. Maybe the worker has to wait for parts to arrive, or part feeding varies greatly according to personel available and hour of the day.

It takes time to build a fair Indicator system that can motivate people into doing a better job, but it's absolutely necessary if you want to consistently improve your business. Keep your leading and lagging indicators in check for an optimal and fair process.

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  1. Rather than calling them Immersive and Independent we could use the more formal notation of mutually exclusive, collectively exhaustive, or MECE. But I was enjoying the 5 I's