Any large organization should consider putting this gauge on its scorecard or collection of metrics that it reviews to assess its performance. If you are a real estate company, you probably want to have an external analytic that includes:
A local real estate publication in Manhattan Beach, California, summarizes all these factors into an index every week and indicates whether the market is favored toward buyers or sellers. These external factors exert a major influence on people deciding to put their home on the market, make an offer on a new home, or decide on pricing. An external index for an aircraft repair company I worked with included the following factors:
Most of this company’s work was interior work and body work like replacing windows or repainting the craft. Mergers also drove a lot of work their way. The new merger of American and US Airways will require a lot of paint jobs to be done on old US Airways planes. A package delivery service like FedEx or UPS might track fuel costs and sales of major customers like Amazon.com. A municipal water district in Santa Clara County, California, tracked rainfall, reservoir depth, average temperature, and water usage in its index. Obviously the county could not do anything about any of these factors (other than perhaps rationing to cut water usage), but these measures were critical for planning and managing the district. So if you are a government organization, a business, a health care provider, a school, a charity, or a military organization, you probably need to have an external index somewhere on the collection of metrics you track. Even a small organization can track some of these factors using data that is widely available without spending any money.
External factors can put you out of business very quickly if you don’t monitor them and develop a strategy for addressing them. One of my friends was too busy making big money to see the high-risk no-documents mortgage business come crashing down. His once successful company is now gone, along with hundreds of others. Their own metrics were looking really healthy until the crash hit. His company was small and survived longer than the giants like Countrywide, but the end was the same. Failing to monitor external factors can also cause you to miss huge opportunities. A scorecard software company I worked with was one of the first to allow users to monitor company performance on their BlackBerries and iPhones. Now everyone else has this capability, but being the first is a big thing. By monitoring external data, you can make real-time decisions about pricing, inventory, new product introductions, investments, and a wide variety of other topics.
At the Inter-American Development Bank in Washington, D.C., we talked about creating an external metric that looked at economic, political, and Mother Nature factors in each of the Latin American and Caribbean countries where they do business. Earthquake in Haiti, gauge in that region goes red. Food crisis in the entire world, the economic portion of the gauge goes red for all countries. Political coup in Venezuela or big surge in crime in Mexico, the gauges for those countries go red.
I was so glad to see Argo win the Oscar for best picture. There might have been a good opportunity to have an external gauge that assessed the sentiment of Iran toward America and the rest of the Western world before the embassy got stormed. If the politicians and the CIA had a quantifiable gauge that they could track on a daily basis, they might have taken action a lot sooner and Ben Affleck’s character might not have had the narrow escape story that made for such great cinema.
The cost to create and track an external factors analytic is low. Most of this data currently exists in public sources and can be easily accessed and put into your index. Quantifiable metrics like interest rates, housing starts, airline flight miles, customer industry financial trends, production figures, weather, and other similar factors are easy to gather and assign weight to in your index. Where this could cost you some money is in a situation where you have to take qualitative data and turn it into quantifiable data. For example, I worked with the Washington office of Raytheon to develop metrics that tracked the success of their lobbying efforts. We developed an external factors analytic that looked at the degree to which things in Washington were going for or against Raytheon getting more business and keeping what they had. Certainly world events played a role. Wars, conflicts, and new weapons from unfriendly countries were events that encouraged the government to spend more on defense. The economy and level of debt of the country was certainly a factor as well. The most interesting and complicated part of the analytic is where they stood with key power brokers in Washington: congressmen, senators, and others who could influence defense spending were each identified, assigned a weight based on their level of power or influence, and assigned a rating of positive or negative 1 to 10 depending on the extent to which they supported Raytheon products with their words and actions (e.g., voting, speaking, making calls, etc.) and were in favor of buying new and existing company products. The level of support of each politician was reassessed each month, because some they had thought were very supportive changed their tune. This measure ended up costing a bit to design and implement, but it gave the company a fairly objective way of tracking the success or failure of its lobbying efforts and predicting how the external political environment might impact future sales and pipeline.
Of course, there are simpler variations that may be enough for smaller, less complicated organizations. In my little business of one guy, external metrics that I track include: citations of my work by others, book sales, and queries (e-mails or phone calls). All three of these external metrics are sales pipeline metrics for me that are external factors. They are also things I can track without spending any money.
An external factor tracked by Purina that is very objective is the number of families with pets, as well as the number of cats and dogs per family. When the economy went south, that was bad news for those in the pet business. Shelters saw an increase in animals being brought in because people couldn’t afford another mouth to feed, and sales of new pets from breeders and shelters were also down. Another external factor measured is the trend toward smaller dogs. As people move to big cities, they want smaller dogs because they don’t have the room for a big Labrador or German shepherd. Both these trends are external factors that are very important for the pet food industry. A food company might have a simple external analytic that looks at consumer sentiment about their product. Those companies that produce high-fructose corn syrup or beef are fighting a trend of declining interest in these products. Ad campaigns trying to convince us that corn syrup is the same as sugar are a hard swallow for many consumers. If you are in the business of selling pomegranates or Brussels sprouts, business is good, and these products are selling like crazy because of their health benefits. A leading external indicator for many food companies might be whether you are mentioned on The Dr. Oz Show and what he says about your product. The cashier at Trader Joe’s the other day told me that Dr. Oz was singing the praises of their organic popcorn with olive oil and they have been out of it for weeks because people came in after the show aired and cleaned the store out. A negative review can have just the opposite effect.
This is one metric that really has to be tailored to your organization and industry. All industries and organization types are influenced by a handful of specific factors that they can’t control or sometimes even influence (like weather or the world economy). You need to determine what those factors are for you and build this metric. A metal products manufacturer I worked with tracked the price of raw steel, energy costs, and production figures from the three biggest industries that bought their products. Each of these factors was weighted 33 percent. A government organization I work with that helps disadvantaged people find jobs tracks funding for their programs (state, federal, grants, donations), unemployment, and the city economy, which includes things like job growth and new businesses.
Whatever metrics you settle on, make sure the data is from reliable sources and that the measures can be tracked daily. When I worked with Owens Corning, they relied on the Dodge Report, where all new construction projects were listed, along with specifications on the building size and use. This was one of their key external metrics for identifying opportunities for sales.
This is one type of metric where you don’t need to set targets, because these measures tend to be things you can’t do anything about. You don’t set a goal or target for raising interest rates, unless you are one of these big financial firms that actually manipulated those numbers and got caught for it. Even though you don’t set targets for these measures, you still want to define red, yellow, and green levels. These levels, when applied to the data, can help you determine if there is a need to take action based on external factors. For example, if a key politician has abruptly reversed his support of your programs and products, then this turns the gauge red; likewise if there is a big price increase for a key ingredient or raw material used in your product.
Keep in mind that most of what is in this analytic is not brand-new information. It is a way to summarize all the facts and figures that can have a major impact on your organization and how you make decisions. Think of this as a weather gauge for a pilot. Pilots can’t control the weather, but they certainly monitor it to determine how and where they fly the plane. The idea of gathering all of this information regarding financial metrics, economics, politics, and world events and summarizing it in a single analytic might seem foolish, but analytics come with warning lights. That way, even if your overall measure is showing green, the warning light indicates that there is some individual external metric that you need to drill into to get more information. One client linked news stories to individual submetrics so leaders could get all the facts behind the red submetric. Essentially what this metric does is screen through all the news we are bombarded with on a daily basis and sort it into data that impact the organization in a good or bad way.
The benefits of having this information at your desk every morning, or on your iPad that you look at on the way to work on the train, are huge. By the time you arrive at the office, you have been alerted to external events and statistics. You can then get together with your team and decide how to address these factors. Having this data can help:
A common objection to creating this analytic is that leaders already have this information, which they have gleaned from reading the newspaper, listening to Bloomberg or CNN, and from talking with others. While this is true, much of that news is irrelevant to your organization. This metric only includes the key factors that have a major impact on your success or failure and, in combination with measures of your own performance, allow for faster and more accurate decision making.