Internal vs. External Metrics: Why what data you show your board doesn’t help you manage your business
Metrics, Analytics, Data – it’s the backbone of any tech company these days. We don’t debate anymore about the importance of defining, measuring, and optimizing metrics. I know this because of the warm reception I get when people find out I’m a data nut.
I love all the questions that I feel are solvable – “how do I know we have enough data to rely upon”? What should I A/B test? What tools work better for database analytics over web analytics, and so on. I don’t ever have THE answer, but I certainly can offer up ways to get at a solution.
There is one issue that comes up regularly from the start-ups I advise: it’s the one about how much effort they put into reporting on the metrics their boards want to see – sliced in a bunch of a different ways, open to the whims of board member X’s latest shiny new metric – don’t actually seem to help them drive their business forward. And of course, what should they do about it?
I hate to say this, but it’s life. The reality is that you need internal and external metrics. Whether your “external” is your board, Wall Street, or a reporter, the types of metrics you track and spend hours fancying up for presentation are rarely going to help you figure out how to grow the business. (This actually gets a bit into my reporting vs. analytics speech, but I’ll save that for another post…) Here’s why:
Board members are great. They advise, make connections, guide efforts, hold you accountable, etc. But they are not deep in your data. That’s not their role. Their role is more supervisory and advisory. Each month or quarter, you have to figure out how to tell your story by the numbers quickly, succinctly, and let’s face it, positively. (We’ve all been in the position of doing and redoing PPTs in the wee hours the night morning before a board meeting in an effort to be truthfully positive.)
So you end up focusing on what’s working well, and a couple of areas for improvement…but at all primarily a topline KPIs level. Things like LTV, Cost per acquisition, Conversion Rate, etc. And then there are lots of discussions about what to do about those topline KPIs.
The trouble is, in order to actually know what is driving a CPA of $50.00, or an average LTV of $100.00, you have to look at a bunch of metrics under that topline metric. You have to look at CPA by source, by keyword, by tactic, whatever. You have to look at it landing page by landing page. You have to look at defining customer segments granularly enough to know which products + consumer segments drive which LTV. Otherwise, you’d have no idea how to move the dial. Said another way, sure you can say that a CPA of $50 is too high for your business, and you can measure and get excited when it goes below that, or prioritize it as an issue when it goes even higher, but that KPI/metric doesn’t actually tell you how to manage or optimize.
The trouble is, the 15 or so metrics that tell the story behind that $50.00 CPA are just too much to look at in a board meeting – unless it’s the board meeting that’s about CPA. The one that inevitably comes after the board pushes on CPA as a focus and then wants to talk about results from that focused effort.
In the meantime, you need to actually manage that CPA down. So you have the team create dashboards or reports that tell this granular story, and that’s what you use to optimize. And if you follow this through, you’d have all sorts of internal metrics that are used to manage your business, and you have your reports that allow you to work with your board.
This isn’t to say that the efforts with the board are a waste of time. Rather, you have to respect that data, reporting and analytics are all the most useful when they are optimized for their context. There is a sociological element to all these numbers. Board members are busy. They need to make sure you’re listening and following up. They need to check on the health of their investments relatively quickly. This leans towards a focus on topline KPIs. It’s really up to the founders & CEOs to recognize that focusing on the topline is often not the most productive way to move that KPI (counterintuitive, I know). Rather, if you look at the granular components, you can identify the soft spots that allow you to move the big kahuna.
I know it’s a duplicate set of work to create and share all these reports. But it’s worth it when you have productive discussions with your board, and efficient optimization of your product and business with your team.