Hacking KPIs to growth hack your company

The idea of Meta Analytics (Beyond Analytics) is bringing up to the table a new way of understanding business, so we can measure them in a properly way facilitating a decision making process that brings companies closer to their business results.

The current method for measuring performance is through KPIs or Key performance indicators. KPIs were helping us measuring our companies’ performance almost for ever and the feeling was always (at least in my case) that they accomplish that goal when measuring the performance of areas or departments but not when measuring the company’s performance as a whole.

The Meta Analytics view of systems makes easier to understand why.

Let’s use a simple case to explain the difference. Think about a company that has only three areas:

1. Digital marketing department:

Responsibilities: This area is responsible of driving qualified prospects to the company website.
Regular used KPIs:
Visits (which is a count and not a KPI).
Bounce rate.
Click through rate (CTR).
Cost per click (CPC).

2. Sales department:

Responsibilities: Responsible for taking the opportunities generated by the Digital Marketing department and convert them into sales.
Regular used KPIs:
Conversions (Again, not a KPI but a count).
AVG ticket value.
CPA.
Products per purchase.
3. Product department (e-Commerce Website):

Responsibilities: Develop a product that improves the relevance of the offered products and simplifies the purchasing process.
Regular used KPIs:
Products views.
Abandon rate in product review.
Satisfaction rate.
Company Objetive: EBITDA (Earning before interest, taxes, depreciation and amortisation).

So, let say the Digital Marketing Department gets a 20% lift on the CTR which is a HUGE lift. So they go back home with an smile in their face thinking on the amazing impact, taking the quantity of landing browsers from 1MM to 1.2MM.

The Product department had no improvement in that period of time. So, if we have an holistic vision of the systems (organisations) we have a better system because we improved part of it.

How’s that?. We’ve sent 200.000 additional visits, so the campaign was a total success. However the total media investment increased since we pay per every click. So, let’s say (to simplify the analysis) that we pay $1 per click.

At the end of the month we will get a bill of 1.2MM, $200k more than the previous 1MM bill. Since the product area was not prepared for 200k extra visits, they haven’t improved their offer, their servers, etc (and don’t forget the law of diminishing returns) their conversion rate got a negative impact.

n-1 (previos period of time)= 1MM Visits & 100k Conversions

CR(n-1) = 10%

n (current period of time) = 1.2MM & 105k Conversions

CR(n) = 8.75%

Acquisition cost(n-1)= $10

Acquisition cost(n)= $11.42

If you are still are reading this post your nerd level is worrying, but get back to work.

What we are seeing here is that having a holistic, and not a systemic, view of organizations could be risky. You won’t have a better company just by improving its parts, that’s why KPIs show limited capabilities in strategic decision making scenarios. Why? The isolated view of the company’s performance drives the company to improve parts of the system, and not just the main restriction the company has. That generates inefficiencies (investing more money than really required) and generates more confusion (if that’s possible) because every time you replace or improve a part you are indeed modifying the entire system as a whole. Systems are alive so it’s impossible changing one part without affecting all the rest.

The way of improving an organization performance, and not the performance of just an isolated area that can even hurt the company performance, is improving its interactions, not its parts. In the previous example, the Marketing department would never try to “improve its performance” but the company’s performance. In order to do so, they have the improve the interactions intra departments. Find the best way they can work in order to accelerate the flow of money within the organization. With this in mind instead of using KPIs we have to use flow sensors.

A flow sensor measure the quantity of a measurement unit (ie visits) since it get’s in touch with the organization until it generates a conversion and eventually generates the revenues.

So in the case mentioned above instead of having a goal of increasing your visits (if you are marketing) you can have a target of 1MM visits, if you are in charge of generating the listings, you can have a Flow Target of 800k and the people in charge of the conversion process a flow target of 200k. If the 800k visits are not achieved by the digital Marketing department, it’s not a digital marketing department issue, but from the entire company. They will have to team work to understand if it’s a target problem, a technical problem (people landing in a site that’s not performing well) or it’s because the content is confusing or the promised was not delivered, among many other problems. But what it’s required to achieve are levels of flows at each instance of the conversion process.

 

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