Nonprofits Need Leading Indicators

Some of the most familiar metrics are lagging as they describe what has happened in the past.  These include revenue, client satisfaction and contributions received and are reported after the fact.  While useful in assessing past performance, they provide little guidance on the future.  Leading indicators can provide insight into future performance and, due to changes in the sector, are becoming particularly valuable to nonprofits.

What are Leading Indicators

These metrics focus on activities that are thought to drive or cause future results.  For example, at a professional services organization, revenue is derived from the number of staff engaged in paid contract work at a set billing rate.  Revenue reported at the end of the month is a lagging metric, while the number of staff working each day is a leading metric.  If you know the average number of staff working during the month and an average billing rate, you can forecast revenue for the month accurately.

Why are Leading Indicators Valuable?

Decisions rarely wait on perfect data and business usually moves faster than reporting cycles, so how does an organization take the guess work out of critical decisions?  They use leading indicators, as a matter of fact, they are probably already unconsciously using them now.

Many organizations create interim performance forecasts that rely heavily on recent results and trends, however, better forecasters also look for clues about current performance.  Those clues may include hiring activity, timing of payments or production issues occurring while the forecast is being produced.  Adding these clues to a forecast process is an informal application of leading indicators.

For a nonprofit, leading indicators can prejudge performance on program requirements before it is too late.  Don’t just rely on the project plan, find ways that progress can be measured and add those metrics to regular reviews.

 

Big Bet Philanthropy

The nonprofit sector is seeing a major shift of funds toward much larger, multi-year projects.  In addition, Pay for Success program provide funding only when the project achieved its objectives, at the end.

Nonprofits must determine if they are going to meet these expectations long before the project ends.  Leading indicators can provide early feedback on project stages and interim impacts.  With these indicators, nonprofit leaders can make course corrections as needed and provide evidence of progress to funders.

 

Where Can I Find Leading Indicators?

They can be external or internal and external indicators may include;

  • Changes in expected state funding levels and budget priorities
  • Ratings on Guidestar or other services
  • % of donations flowing through Donor Advised Funds

Find possible internal leading metrics by deconstructing your lagging metrics to find components that might have predictive capabilities.  In the earlier example, if you have a labor-based revenue flow , then you have several potential leading indicators, such as;

  • Staff downtime
  • Trends in billing rates or experience mix
  • Contract labor hour capacity

See Non-Financial Metrics for Nonprofits for more examples of possible leading indicators.

Signs of Trouble

Leading indicators can identify troubles ahead.  Look for changes in key business drivers, such as;

  • Slow-downs in donation velocity
  • Changes in contributor demographics
  • Decreased diversity in funding sources

 

Signs of Progress

For larger projects, identify metrics that suggest that the desired outcome is becoming more likely as the project progresses.  Keep in mind that creating impact normally requires changing several factors that contribute to the current state. If decreasing homelessness is a project’s desired outcome, some leading indicators may include;

  • Decrease in local unemployment
  • Increase in capacity of affordable housing
  • Growth in participation in retraining or other programs

 

Risks

Leading metrics are not perfect since they are based on incomplete data.  Also, the relationship between the indicator and the result may not be as strong as expected, or the impact may diminish as the project continues.

  • Reconfirm indicators periodically to ensure that their relationship to results remains sound.  Recheck indicators if a significant external change or event occurs.
  • If an indicator provides an unusual value, don’t immediately discount it because the unusual result may be an outlier.
  • Unfamiliar situations can be a challenge, since good indicators require a sound knowledge about cause and effect.  In a new situation, with limited experience, these indicators can be very hard to identify, so get help.

 

Bottom Line

Leading indicators are becoming very important to nonprofits as projects grow, become longer and are judged on outcomes and impacts.  The shift toward larger value projects will accelerate this change and increase demands on nonprofits to assess progress. Nonprofits need leading indicators to increase the likelihood of success.

These indicators have risks; however, if used properly can help guide better decision-making.  They provide an early view on success or troubles ahead and allow leaders to change course before it is too late.

Does your nonprofit use leading indicators? If so, please share your experiences and insights in the comments section.

 

About the author:

Michael F. Cade is an advisor and executive coach, taking the nonprofit sector beyond the numbers.  He is a leadership pathfinder, optimizing operations and strategy to help organizations attain long-term viability and relevance.  His Framework for Fiscal Sustainability is an innovative approach for evaluating organizational health and securing the organization’s ability to deliver on its mission.

Mr. Cade publishes the nonprofit leadership blog  Not for Profit Beyond the Numbers

If you have questions or would like a consultation on a nonprofit leadership or operational issue, contact him at:  mfcade@nfpbeyondthenumbers.com

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