An Early Warning System is a dashboard of leading indicators, forward-looking metrics that predict problems months before they appear in your financials.
Most CEOs manage with dashboards full of lagging indicators (revenue, margin, churn) that only explain what has already happened. A well-built early warning system tells you what is coming.
This is the story of the 2 a.m. wake-up call that taught me the difference between lagging and leading indicators — and the simple three-category, nine-indicator dashboard I built that night, which has since saved my own company and hundreds of others from preventable train wrecks.
It was 2 a.m. I woke up in a cold sweat with my heart pounding.
My gut was telling me my company was headed for a train wreck. But how could that be? I had great talent on my team. Our clients were happy. Our Key Performance Indicators all looked good. We spent hours every single week reviewing project plans and statuses.
So why was I lying awake, soaked, at 2 a.m.?
The year was 1996. I was running Metasys, a startup that transformed how Fortune 500 companies shipped products to their customers. We were a rocket ship, growing 100 percent a year, ranked #151 on the Inc. 500, clients like FedEx, Monsanto, Cisco, Levi Strauss. Our hair was on fire, in the best way.
And yet, something in my gut knew, something I couldn't yet see in any of our reports.
I tried to write it off to stress, but that didn't work. By 2 a.m. I was wide awake, adrenaline flowing, and I had a choice, go back to bed and hope for the best, or get up and figure out what my gut was screaming about.
I got up.
Between 2 a.m. and 8 a.m. that night, I sketched out a new kind of dashboard, not the kind of dashboard most leaders use; this one looked forward.
Here's the truth I discovered that night: most of the KPIs we track are rearview mirrors. Revenues per employee, modules delivered, margin, churn. These measure what has already happened. They're excellent at explaining the past, and useless at predicting the future.
What I needed that night were leading indicators. Forward-looking measurements, like the headlights of a car illuminating the road ahead. Something that would tell me what was coming before it arrived.
I devoted the chapter on Early Warning Systems in The Journey to CEO Success to this exact lesson, because I've watched too many great CEOs get blindsided by results they could have seen coming months earlier. Warren Buffett put it perfectly: “Risk comes from not knowing what you're doing." And most of us don't know what's coming, because we're only measuring what already came.
I designed a dashboard with three simple categories, and three KPI (key performance indicators) for each.
The next morning, I met with my head of consulting, Jack, and I asked him to score every project against these new KPIs and report back the next day. Jack was not inspired by this new, non-revenue-generating assignment. He told me our current weekly status meetings already did the job. I pushed anyway.
The following Monday, Jack walked in looking embarrassed. His dashboard was full of Reds and Yellows. We were headed for multiple train wrecks. My 2 a.m. instincts were right.
Jack asked, half-jokingly, if he still had a job.
"Yes!" I said. "Otherwise, who's going to clean up this mess? Me?"
Then I did something that made Jack even more uncomfortable. I told him to put the dashboards up on the walls, publicly, in the hallways, where every team could see them. Reds and all.
"Why don't we fix these problems first," Jack pleaded, "and then display them publicly? That way we won't scare anyone."
Listen: I understood why Jack wanted to hide the dashboards. His instinct was the most natural instinct in business. It came from three forces I've since watched play out in hundreds of companies:
These three forces bring drama into a company, and drama blinds teams to impending train wrecks. In contrast, dashboards, honest, public, shared dashboards, help you lead without drama and focus on the right issues.
That's the key shift.
Over the next few months, most of those Reds and Yellows turned Green. We saved the company, and I've spent the last twenty-plus years helping other CEOs build the same kind of system. Here's what we learned at Metasys, and what I've seen work in company after company since:
After the Metasys story, I often have CEOs nod in agreement and then tell me why their company can't build an early warning system yet.
The most common excuse? "We don't have time."
Here's what I tell them: God gave you and me the same twenty-four hours in a day. The irony is that the urgency you feel right now was created by a crisis, and to stop the crisis, you have to stop and think. Stopping to think takes discipline and commitment. It's scarier to stop than to keep running.
The second excuse sounds like this: "But our results are great right now." I get a version of this call every few months. A CEO just finished a strong year, and yet his gut is telling him something's off.
Results are lagging indicators. They're the fruit already harvested. They tell you nothing about the next crop. Will your next harvest be strong or will you be facing a famine? Your leading indicators know. Your P&L doesn't.
The third excuse is the sneakiest: "We don't need a dashboard, look at what the press is saying about us!" Don't drink your own Kool-Aid. When a well-known company fails, the people outside the company are always surprised. The people inside rarely are.
In the spring of 2020, Bob Potter, CEO of SentryOne, pulled up his Early Warning Dashboard. COVID-19 was starting, his leading indicators were already predicting slower sales and an upcoming cash crunch.
SentryOne had been growing at 35 percent a year, running cash-flow breakeven, pouring everything back into growth. But his dashboard forced him to face a painful reality: he was going to have too many people for the work that was coming.
Bob made the hardest decision of his career, reducing his workforce from 180 to 108 through a mix of layoffs and furloughs. Forty percent of his people. None of it was easy, but all of it was necessary.
Six months later, when it was time to bring furloughed employees back, his dashboard told him another hard truth: he only had enough work for six of the twenty-six people scheduled to return. Emotionally, Bob wanted to bring them all back. The data said he couldn't.
His early warning system saved SentryOne twice. Those painful-but-right decisions set the company up for profitability in 2021, which attracted SolarWinds to acquire the company, giving investors and employees a strong return.
Bob's dashboard became what I call a CEO control tower. It gave him the information he needed to make brutally hard calls, in time.
If your team was surprised by last quarter's results, you don't have a people problem, you don't have a strategy problem, you have an early warning problem, and it's fixable.
Here's exactly what I want you to do in the next seven days:
Step 1: Interrogate your top three goals. Pick the three most important goals for this quarter. For each one, ask yourself the single most useful question a CEO can ask: "If we were going to miss this, when would we know?" If the honest answer is "at the end of the quarter," you don't have an early warning system. You have a hope-and-pray system.
Step 2: Sketch a three-category, nine-indicator dashboard. Company. Employees. Customers. Three leading indicators per category. No more. Resist the urge to add a tenth. If you're stuck, start with the template below. We've tested it with hundreds of CEOs.
Step 3: Put it on the wall, and review it weekly. Color every indicator Red, Yellow, or Green, publicly, and honestly. The magic isn't in the dashboard. The magic is in the weekly rhythm of looking at it together and having candid conversations.
That's the whole system, it's not elegant, it's not complicated, but it will tell you the truth months earlier than your P&L ever will.
Rhythm Systems, we've packaged what we've learned over our 20+ years into our Leading Indicator Tool, sample indicators by function, Red-Yellow-Green scoring criteria, and the weekly inspection rhythm we install with our clients.
Until next week, keep looking ahead, not behind.