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At a recent gathering of IT executives in Monterrey, Mexico, the group concluded that new leading business indicators were necessary to ensure more rapid market responsiveness. The group agreed that traditional, lagging financial indicators that measured past performance did not provide adequate insight on future trends or directions. The participants identified and discussed several leading indicators to improve business results by focusing on the future.
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Nine IT executives from various industries attended a session to discuss how CIOs can develop and use leading business indicators to help mitigate the problems faced by their CEOs. The attendees agreed that the use of traditional backward-looking financial metrics did little to improve financial results in a rapidly changing market. An IT executive from a food company remarked how IT is always focused on technical aspects and how implementing new leading indicators is an opportunity for IT to become part of the business. A CIO from a manufacturing company said, “We have already begun investigating new product success and timing ratios that are resulting in measuring the capability for new products more closely.”

The participants identified 40 leading indicators and selected the following ideas as most valuable:

1. Innovate to grow the business in a changing market, by:
– Measuring the time required to launch a new product or service
– Monitoring (e.g., monthly) the percentage of sales coming from new products

2. Improve the customer experience while growing the customer base, by more closely measuring:
– Number of new customers
– Degree of customer loyalty
– Customer satisfaction
– Customer service efficiency and effectiveness

3. Increase employee satisfaction and contribution by tracking:
– Employee loyalty
– Level of employee knowledge of mission, vision and value
– Level of teamwork and synergy in the organization
– Time required before new employees become productive
– Level of employee engagement with company leaders and visionaries
– Time spent working on the main company objectives

4. Become a market leader by improving:
– Market perception in terms of quality and brand positioning
– Degree that company products are top-of-mind with customers

5. Excel at sustainability by emphasizing:
– Positive environmental impact of products/services
– Improved energy usage to manufacture and deliver products/services

Several members of the group said they plan to conduct similar sessions with their executives to generate the leading indicators for the enterprise. The CIOs agreed on the opportunity to highlight and “market” a leading indicator initiative in their organizations.

CIO CALL TO ACTION
CIOs have an excellent opportunity to help improve business performance by working with other executives to identify and implement leading business indicators in their enterprises. New information sources, economic uncertainty and the accelerated pace of the global economy have convinced senior executives that new approaches are necessary. Organizations that use leading indicators have a 3% higher return on assets and a 5% higher return on equity. CIOs can help drive the leading indicator initiative by doing the following:
• Facilitate the definition of leading indicators among company executives until a common understanding is achieved.
• Work as a team with other executives and develop a balanced set of external and internal leading indicators.
• Realize that leadership does not mean ownership; the ownership of the leading indicators belongs to the executives accountable for financial success.

Bottom Line:
Many companies use lagging indicators to manage their business. To thrive in a rapidly changing global economy, enterprises must focus on the indicators of what is ahead instead of using the rearview mirror. CIOs have an excellent opportunity to participate in the leadership of this initiative because of their information and process expertise.

Business Impact:
Leading indicators, supported by new information and information sources, enable enterprises to embrace (and react to) rapidly evolving market and customer dynamics. The leading indicators help organizations better engage customers, design new products/services and gain market share.

Additional Insights:

“Capability assessment tool for leading indicators of business performance: The CIO’s role,” Michael Smith, Patrick Meehan, 23 October 2009 (Research)

“Interview with Professor David Larcker, Stanford Graduate School of Business: moving to leading indicators,” Michael Smith, Patrick Meehan, 29 October 2009, (Research)

* “Leading indicators of business performance: The CIOs role,” Michael Smith, Patrick Meehan, 1 October 2009 (Research)

“How MSEs can use leading indicators to support business performance,” Barbara Gomolski, 29 October 2009 (Research)