Danger of Leading Indicators

22 12 2009

UPDATED 12-23, 2009:  Boston.com story about home sales – seems like we have stories with divergent viewpoints.  Good example of how a single version of the truth depends upon the story teller…

CNN Opening Paragraph: NEW YORK (CNNMoney.com) — After surging 10% in October, sales of existing homes jumped again in November, growing 7.4% compared with October to an annualized rate of 6.54 million units, according to the National Association of Realtors. (full article)

Boston Globe Opening Paragraph: WASHINGTON—Sales of new homes plunged unexpectedly last month to the lowest level since April, a sign the housing market recovery will be rocky and heavily dependent on the generosity of Uncle Sam. (full article)

Read each…Ahh, the politics of spin, or is it the spin of politics of spin.

November saw a healthy jump in home sales.  The good news is that home sales and housing starts are usually very good leading indicators about the health of the economy.  Yet the bad news, in this case we have a potentially baked number.   The market is being artificially inflated with both lower interest rates and a government subsidy for first time home buyers.  What makes this worse is we have created a situation where we know less – we know a number improved, but we have no understanding if the economy is better.

CNN Story on November Home Sales

This is one of the fears about designing the right KPIs.  We want to find the perfect KPI, or create a list that tries to include everything.  What we need are a few KEY indicators to trigger the right conversations about what actions (business levers to pull) to take or not take.   We also need to discuss performance and action in a holistic manner and not get caught in panic mode because one indicator seems to be below expectation.  We also do not want to trigger an action to artificially improve a number.

For example…Days Sales Outstanding (DSO) can be used as a measure of customer satisfaction.  The interpretation is that people pay the bills of the people they like first.  If you are able to shrink the number, then you at least have an indication that customers are generally happier than they were last month.  If the Marketing VP were compensated on Customer Satisfaction and we used DSO, the VP might change the payment terms.  While we might see improvement in DSO, we are probably not seeing an improvement in Customer Satisfaction, which was the goal when we started.

As you are designing KPIs:

  • Start with your high level annual goals for the year
  • Build out a system to discuss the implications (don’t just look at the number)
  • Assign someone to write up the implications on a regular basis
  • Create a commonly understood definition of the KPI, and document it where it can be easily accessed
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28 12 2009
Telling a Story « PureStone Partners

[...] a slightly different note, last week I wrote about the housing market and the Dangers of Leading Indicators.  I had to update the post due to a new story with a different viewpoint that ran in the Globe on [...]

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