They were flying the Cessna outside of Fairbanks, Alaska, so the story goes.
Richard was training for his Instrument Flying Rules (IFR) test, certifying him to fly in poor visibility such as clouds, fog, rain or dust. My father, an experienced recreational pilot and already instrument rated, flew as co-pilot to help his friend prepare. Richard was wearing the standard IFR hood that covered his eyes from the windshield above but allowed him to focus on the flight deck instruments. My father watched as Richard made a significant error in reading the many gauges and devices in front of him, but said nothing. Then at the last critical moment—and knowing my father, likely with great fanfare—he asked Richard to remove the hood to look out the windshield.
They were flying straight into a mountain.
I thought about this story as nonprofits slowly rebuild or are forced to close after the economic devastation of the past year. How do organizations predict major obstacles ahead? Could they have been better prepared?
Resilient institutions are constantly looking ahead to what might be—good or bad—and prepare to respond. But the ability to react quickly to an unexpected problem, whether it comes from inside or outside the organization, requires speculating on what data tell us we WILL have a problem before we DO have a problem. This type of data are leading indicators.
A leading indicator is a measurement that predicts change in a process or another phenomenon. (A lagging indicator is a measurement that changes as a result of a process). The term leading indicator was first used in economics and is most widely associated with the modern-day concept of Gross Domestic Product or GDP. In the mid-1920s, Simon Smith Kuznets, a Russian-born American economist, discovered that changes in GDP could be predicted through time series analysis or in other words, the study of information taken over equally spaced time periods. Kuznets found that changes in population, the construction industry, national income, and other data points followed patterns that could describe changes in the economy.
Today leading indicators are used everywhere from manufacturing to finance to healthcare, allowing institutions to be resilient in the face of adversity. Leading indicators can also facilitate institutions to capitalize on an opportunity, helping it innovate and grow. Well-run nonprofits that track leading indicators of success or failure are better equipped to respond to internal and external forces and can have more mission impact.
Some leading indicators of resilience are common across nonprofits. For example, increasing reliance on a particular donation source could expose the nonprofit to overall decreases in revenue if funding from that important source dries up. Increases in unused vacation could forecast a decrease in morale and higher-than-normal staff turnover.
But what about indicators that are specific to the mission? The development of leading indicators might require gathering input from a diverse population of engaged sources, such as leadership, staff, board members, volunteers, and even critical partners and vendors, if appropriate. The more plentiful the data selected to track the nonprofit’s resilience, the better the predictive power and the more likely leadership will embrace the exercise.
Who is the audience for a leading indicator program? While clearly staff leadership benefit from tracking such data, board members should also be involved, providing them with a deeper understanding of the organization’s challenges, thereby increasing board engagement and support.
Nonprofits are finding it easier to implement predictive analytics to manage their community impact due to advances in computing power and better access to data in ways Kuznets could never have imagined 100 years ago. Carrie Beam, a Bay Area-based data scientist explained, “Lots of people don’t realize that the costs, performance, and availability of these have all changed dramatically over the past twenty years. And even a $500 laptop from Walmart will have enough computing power to run many analytics applications on a million rows of data. Think of the difference between an early flip phone and your kid’s smartphone today. That’s the approximate improvement in data science algorithms, computing power, and availability.”
So there is no excuse! Even the smallest of nonprofits should consider tracking leading indicators to ensure their resilience in the face of an uncertain world. While we can’t control external events from happening, it is possible to track information that predicts the ability to respond effectively. Nonprofit leaders taking stock of the chaos of 2020 owe it to their communities and beneficiaries to be better prepared to for the next unthinkable event.
Talk to the financial experts at Fairlight Advisors to learn more about managing your nonprofit’s investments. Schedule a free consultation today!