Lead Indicators

Managers usually make their decisions based on metrics, which can easily be measured and has an established system for measurement. Metrics which are important for high corporate performance, but hard to measure are not systematically followed. As a result, financial indicators, which are today’s reflection of past decisions, are over-weighted whereas indicators necessary for shaping the future are not given enough importance.

Consequently, many investors, even board members (!!!), belatedly realize the fact that their companies are facing important problems. Research on this subject reveal that management should concentrate on lead indicators as well as business results. For instance, decrease in customer satisfaction today may be an indication of tomorrow’s bigger losses. If market share in new products is below overall market share, this might indicate the result of insufficient resource allocation for innovation, which is an indicator of future market share loss.

The beginning of important corporate problems is failing to see change and/or being unresponsive. For example, Xerox which made the first important developments in personal computers, failed to notice the importance of this new technology and could not benefit from these developments, endangering even its own existence. For this reason, inability to understand the underlying success factors in the marketplace and being unresponsive to new developments thinking that they are transient is a risky proposition.

Instead of listening to customer complaints and/or demands, giving an explanation on why customers are wrong should be perceived as an important lead indicator for future threats. Management’s focus on one subject (like sales) and neglecting investments in infrastructural systems important for the whole business can also be perceived as a danger signal.

Another important problem is the management of the company with an inappropriate vision and/or lack of full acceptance of the vision among the management team which results in ineffective implementation. Especially when entering new markets, an important source of problems for many companies is implementing the current success formula in the existing markets to the new markets without thoroughly analyzing and understanding the requirements for the new market. Many companies in Turkey, who made this mistake, lost their existing markets as well.

When implementation methodologies are not evaluated and stress-tested on a regular basis, risks may reach uncontrollable levels. For example, many managers, in the Turkish banking sector maintained profitability by taking open positions. However, as they failed to realize the changes in the market sentiment, the banking industry faced serious losses. Few, who have been applying stress tests to their systems were able to recover from this crises period with strengthening their relative positions.
Managers emotional commitment to their past decisions and/or projects and making over investments ignoring performance measures might become a potential problem. If there is a disposition within the company, where differing ideas and voices are discoureaged then alarm signals might be flashing. In a transparent and fact-based system, this problem can easily be conquered without getting bigger.

Another point to watch, especially in successful companies, is extreme confidence and despising others. Managers neglecting competitors, suppliers, and the distribution channels might be making enemies rather than collaborators. Therefore, measuring all stakeholders’ satisfaction independently and ensuring the use of this measurement for evaluation by the board of directors, enables the utilization of an important lead indicator as an input for decision-making.

Therefore, we should manage our businesses by placing as much importance on lead indicators like perception, satisfaction, learning, innovation, which are relatively hard to measure, as we palce on financial results. This will help us in taking prevenive measures against risks and better manage our companies.

Dr. Argüden

January 21, 2004
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