The objective of a KPI (key performance indicator) is to provide us with insights into our business so that we can make sound decisions. The kind of insights we can glean out of a KPI depends on its type. Broadly speaking, there are two types of KPIs that provide markedly different insights: backward-looking KPIs and forward-looking KPIs.
Backward-looking indicators, also known as historical KPIs, look to the past and tell us what has already taken place. They usually serve as a trailing indicator of what has happened. The vast majority of financial KPIs used by construction firms are backward-looking KPIs.
Revenue, project materials, labor cost, safety incidents, and project gross profit are all examples of backward-looking KPIs.
Although some may think of running a business with backward-looking KPIs is much like driving a car by looking in its rearview mirror, such an analogy is not entirely valid. There are several attributes of these KPIs that make them highly valuable.
A key attribute of backward-looking KPIs is that they are absolute and not speculative. They tell you a 100% truth about your historic performance so that you have a very solid foundation to make your business decisions.
Backward-looking KPIs are also the ideal candidate to benchmark your performance by comparing your KPIs with that of others.
For example, everyone calculates KPIs like revenue, net margin, safety incidents, etc., using the same method. Therefore, they serve as very reliable metrics to compare performance with that of other peer groups such as other projects, competitors, or the entire industry.
Finally, backward-looking KPIs are often the foundation of forward-looking KPIs. For example, a growing trend in quarterly revenue may indicate that the revenue is likely to increase in the next quarter. A forward-looking KPI may provide valuable insights into what may happen in the future. Such insights are entirely based on backward-looking KPIs and some predictive models that are used to derive the forward-looking KPIs.
As the name implies, forward-looking KPIs provide an indication of how a business or a project would perform in the future.
Forward-looking KPIs, also known as predictive KPIs, serve as the leading indicators of future outcomes.
Forward-looking KPIs are extremely valuable because they provide us intelligence so that we take corrective actions or make crucial decisions before it is too late. For example, if a forward-looking KPI indicates a growing likelihood of a safety incident, a company can take preventive measures to avoid unfortunate safety incidents.
As much as we all would like, forward-looking KPIs are no crystal ball that tell us what future holds for us. They only tell us what future is likely to hold for us. Therefore, much like statistical claims, future-looking KPIs need to be taken with a grain of salt.
The accuracy of their predictions is based entirely on the accuracy of the data and the reliability of a predictive model used to calculate the KPI.
Unlike backward-looking KPIs, forward-looking KPIs are not always universal. Which also means that, as you learn from experience, you can modify to make them more accurate for your unique way of doing business.
We all would love to use forward-looking KPIs to drive our business. However, keep in mind that doing it, is not quite the same as driving your car looking through your windshield. It is more like backing up your car using a rearview camera in your car. It gives you some indication of what the future may hold, but it does not tell you the entire story. To use it, you need to make sure you understand what it means and what its limitations are.