Chapter 7

The External Factors Index

WHY AN ORGANIZATION MIGHT TRACK THIS
Questions Answered
  • What economic factors such as the markets, real estate, interest rates, or other factors are having a major impact on our organization?
  • What are our competitors up to and how might this impact us?
  • What kind of threats or challenges will we face in the next few months?
  • How are customer needs and priorities changing?
  • Are there any emerging trends that we need to capitalize on?
  • Is the political situation at the federal, state, and local level for us or against us?
  • How are we handling negative events that have occurred in areas of the world where we do business or operate?
Why Is This Information Important?
Leaders are bombarded with information every day on what is going on in the world. You might read the Wall Street Journal each morning as my investment banker neighbor does while riding his exercise bike. You might listen to news radio on the way to work in the car or read another paper while on the train. You probably get news items sent to your work computer alerting you to factors such as market performance, politics, or world events. Other facts about the economy, competitors, or market research might be brought to your attention in meetings or in the hallway. The bottom line is that we are exposed to almost constant information about what is going on in the world. The problem is that we are overloaded with too much information, some of it relevant and accurate, and some neither. Another problem is the information tends to come as words and phrases, not quantifiable data.
It’s hard to understand how some organizations seem to be ahead of the curve when it comes to external factors, while others seem oblivious to them. How could Borders miss the electronic book trend and the trend of using bookstores for browsing and socializing but not buying books? All executives needed to do was spend some time in their stores to see people looking through books, going to have a coffee, and ordering those same books on Amazon for less money and no sales tax. Best Buy finally realizes that people use its stores as showrooms but buy products online, where they are almost always cheaper. Best Buy will match the prices of any store, but that is not the competition; it is web sites where things are almost always cheaper. How could pharmaceutical companies not see the rising cost of health care and think that Medicare and insurance companies would continue to pay premium prices for their drugs when cheaper alternatives were available?
All of these external factors and trends seem painfully obvious to us enlightened outsiders, so how is it that brilliant executives miss them? Part of the reason is that this information might get missed among all the other stuff we get bombarded with daily. In order to avoid this, some organizations track and trend external factors data on a daily basis for executives to monitor and use in their analysis and decision making. For a bank, the metric might include interest rates that change on a daily basis and other factors such as the Dow Jones index. For a home improvement retailer, external metrics might be new housing starts, housing sales, prices, and foreclosures. All of these factors might impact the future business of the retailer and could easily be quantified for daily review.
What is going on in the world can have a direct bearing on your own strategy. A health care client of mine had a business unit that was 100 percent funded by the state of California. My client was one of the pioneers in opening adult day care centers mostly aimed at senior citizens. The program—customers were picked up by company buses each day, given a nice lunch, kept busy all day with games and crafts, and returned home in the evening—was a huge success. As word of this program spread, the company opened more of these centers to deal with the demand. Then during 2011 the state of California was trying to get out of debt and had to start slashing state programs. This was one program that was under consideration for elimination. The client had people in Sacramento monitoring activities and reporting to the CEO every time there was news on which way things were leaning. By the time the final decision was made to completely eliminate funding for adult day care centers in California, my client had already implemented its contingency plan to repurpose the facilities and redeploy most of the staff to other parts of the business.

TYPES OF ORGANIZATIONS WHERE THIS METRIC IS APPROPRIATE

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:

  • Housing prices
  • Interest rates
  • Availability of mortgages
  • Inventory
  • Average days on the market

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:

  • Airline financial health
  • Flight miles
  • Number of operational aircraft
  • Average age of aircraft

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.

HOW DOES THIS IMPACT PERFORMANCE?

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.

COST AND EFFORT TO MEASURE

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.

HOW DO I MEASURE IT?

Step 1 is to decide on the broad categories of data that will be included in your analytic. Some of the factors to think about and consider include: political factors, economic factors, competitive factors, customer industry factors, consumer trends, technology trends, regulatory factors, and weather or Mother Nature factors. I recommend selecting three or four of these factors so as not to overcomplicate the index. Once you have selected the three or four dimensions that have a huge impact on your success or failure and strategies, then Step 2 is to assign a percentage weight to each factor based on its power to influence your business. For example, for Raytheon or another aerospace company like Northrop, political factors, world events, and the economy are probably the big three. Future spending is probably more determined by political factors, so that might get a 50 percent weight, whereas the remaining two dimensions get 25 percent each. For a bank, economic metrics like interest rates and economic stability would probably get a 50 percent weight. For a technology company, what’s going on with competitors might get the highest weight as companies try to be the first to market with some new technology.
Step 3 is to brainstorm possible metrics in each of the categories. Try to think of 20 to 30 possible metrics in each category, including ones that currently do not exist. This is best done with a team of four to eight people with experience monitoring external trends and data.
Step 4 is to narrow down the list of possible metrics to one to four per category that represent the measures that have the most impact on your organization. For example, for a drug company, a key external metric might be the number of people with chronic pain who have not found a satisfactory solution for treating their pain. For a bank or credit card company, there are 50 or more economic indicators that we might track, but interest rates probably will always make the short list. For the company I mentioned that repairs aircraft, the age of the fleets is a key indicator that predicts the amount of work needed in the future. Once you have narrowed down your list to one to four metrics per category, each of those metrics has to be assigned an importance weight, which is Step 5. The individual metrics that get the highest weights are the ones that are both the most important and with the highest data integrity—in other words, metrics that are tracked by outside companies using reliable data collection strategies, as opposed to subjective metrics that are measured by people who may have a bias.

VARIATIONS

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.

FORMULA AND FREQUENCY

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.

TARGETS AND BENCHMARKS

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.

BENEFITS OF DATA

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:

  • Increase the speed of responses taken to positive and negative events or trends in external factors.
  • React more quickly to external factors than your competitors.
  • Jump on emerging trends.
  • Nip problems in the bud before they escalate.
  • Adjust goals and targets to match the current situation.
  • Quickly change or abort strategies that are not working in the current environment.
  • Investigate alternative suppliers when prices rise too quickly.
  • Develop a counterstrategy against competitors.

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.

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