The idea of Meta Analytics (Beyond Analytics) is showing 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 to measure performance is through KPIs or Key performance indicators. KPIs were helping us measure performance for several years and the feeling was always (at least in my case) that they are more useful for measuring the performance of áreas or departments from companies than for measuring the overall performance of the organization.
The Meta Analytics view of systems makes easier to understand why.
Let’s use a simple case to explain the difference. Let’s 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).
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.
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:
Abandon rate in product review.
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 impact So now, the quantity of landing browsers is 1.2MM instead of the original 1MM.
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.
Let’s see if that’s true. We’ve sent 200.000 additional visits, so the campaign was more successful. 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.
So, 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 level of nerdiness is worrying.
However, what we are seeing here is the problem of having a holistic (and not a systemic) vision of the organizations. It’s a huge difference in both views of the same thing. You won’t have a better company just because you improve the parts of it, that’s why KPIs show limited capabilities in strategic decision making scenarios. Why? The isolated performance view drives the company to improve parts of the systems, and not just the main restriction the company has. That generates inefficiencies (investing more money than the really required) and generates more confusion (if that’s possible) because every time you replace or improve part of a system, it impacts in all the remaining parts. 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, but let’s talk about that in the future.