Models of ecosystem change that incorporate nonlinear dynamics and thresholds, such as state-and-transition models (STMs), are increasingly popular tools for land management decision-making. However, few models are based on systematic collection and documentation of ecological data, and of these, most rely solely on structural indicators (species composition) to identify states and transitions. As STMs are adopted as an assessment framework throughout the United States, finding effective and efficient ways to create data-driven models that integrate ecosystem function and structure is vital. This study aims to (1) evaluate the utility of functional indicators (indicators of rangeland health, IRH) as proxies for more difficult ecosystem function measurements and (2) create a data-driven STM for the sagebrush steppe of Colorado, USA, that incorporates both ecosystem structure and function. We sampled soils, plant communities, and IRH at 41 plots with similar clayey soils but different site histories to identify potential states and infer the effects of management practices and disturbances on transitions. We found that many IRH were correlated with quantitative measures of functional indicators, suggesting that the IRH can be used to approximate ecosystem function. In addition to a reference state that functions as expected for this soil type, we identified four biotically and functionally distinct potential states, consistent with the theoretical concept of alternate states. Three potential states were related to management practices (chemical and mechanical shrub treatments and seeding history) while one was related only to ecosystem processes (erosion). IRH and potential states were also related to environmental variation (slope, soil texture), suggesting that there are environmental factors within areas with similar soils that affect ecosystem dynamics and should be noted within STMs. Our approach generated an objective, data-driven model of ecosystem dynamics for rangeland management. Our findings suggest that the IRH approximate ecosystem processes and can distinguish between alternate states and communities and identify transitions when building data-driven STMs. Functional indicators are a simple, efficient way to create data-driven models that are consistent with alternate state theory. Managers can use them to improve current model-building methods and thus apply state-and-transition models more broadly for land management decision-making.