When Lehman Brothers filed for bankruptcy in September 2008, the firm had $639 billion in assets, making it the largest bankruptcy filing in US history. Up until that point, the firm had been painting a picture of healthy finances even in the midst of increasing signs that they were headed downhill.
Using an accounting loophole known as ‘Repo 105,’ Lehman Brothers presented a positive balance sheet to gain confidence from its clients and investors. This is an extreme example of how vanity metrics can belie reality, and why relying on these kinds of artificial metrics––even when done unintentionally––can create problems for businesses.
Vanity metrics are all too easy to fall for because they look good on paper, leading firms and agencies to believe they’re doing well, when in fact they fail to accurately depict their true status. Vanity metrics don’t measure anything substantial for businesses and can’t be translated into actionable steps to help them grow.
Sometimes struggling firms become more vulnerable to relying on vanity metrics as they may be under pressure to present positive outcomes to both internal and external parties.
Yet in order to grow a business in a healthy way, the focus should shift from vanity metrics to actionable metrics.
What are some examples of vanity metrics?
Sometimes businesses measure metrics without realizing they don’t actually help them grow. They may sound good in a meeting, but with further study they aren’t actually contributing to business growth. Below are some examples of these metrics.
Number of clients
At first glance, this seems like a fairly straightforward equation. More clients equal more money. Client churn is something firms work hard to avoid.
But serving all of your clients is often a tricky act. Too many clients and you may struggle for resources to service clients properly. Too few and you may not generate enough profit to stay afloat. So while it’s important to track your number of clients, that number alone doesn’t give you any idea about how well you’re actually doing.
If you have 10 clients bringing in $1,000 on average, that’s better than having 20 clients bringing you $500 on average. In both cases, you earn $10,000, but in the latter case, you’re doing double the work. Yet that doesn’t give you the whole view either. If every single one of those 10 clients is incredibly difficult to work with and the 20 clients are much easier to manage, it’s valid and important to measure that strain as well.
So when it comes to clients, it’s far better to focus on who they are rather than how long your client list is. Here are some alternative metrics to track:
- Client retention
- Average value per client
- Hours billed per client
- Referrals brought in per client
If you’re not sure where to begin, here are some ideas on how to define a good client.
Another tricky metric is billable hours. While it’s useful to track, billable hours aren’t something you should base your performance on. That’s because billable hours alone don’t measure your firm’s work quality or client happiness.
A high number of billable hours suggests more work and higher revenue. But if you don’t focus more on project outcomes or client satisfaction you could ultimately end up with clients disputing bills or leaving your firm because they aren’t happy with your services.
Instead, consider metrics like cases or pitches won, client satisfaction, client referrals, and other types of feedback that let you know whether those billable hours are fueling more business.
History is full of bankrupt companies with billion-dollar assets, like Washington Mutual with $328 billion in 2008 or General Motors with $82 billion when it went bust in 2009. But total assets can be a less than meaningful metric for measuring your true financial health because it doesn’t take into account underlying liabilities.
A better way to gauge financial health and business value is to track net assets.
Net assets = Total assets – liability
This is important because by including those liabilities in the equation, you can stop operating under an inflated figure which will inevitably lead to poor business decisions.
Other metrics that can help businesses escape the ‘total assets’ trap include:
- Working capital: Calculating your working capital––exactly how much cash you have on hand to invest and cover expenses––can help you lower the risk of falling short in cash.
- Overhead ratio: What you’re spending on organizational expenses such as administrative costs, utility bills, etc. divided by total expenses. A good rule of thumb is not to exceed 35% in overhead costs.
- Accounts receivable: Rather than relying on projections that take into account outstanding invoices, be more conservative in estimating future payments that aren’t 100% guaranteed.
Social media and website page views
Marketing has many potential metrics you could track, but not all metrics are made equal in terms of actionability. In social media, public-facing numbers like the number of followers, likes, and retweets are nice-to-haves that don’t always translate to real results.
They aren’t actionable because you can’t form a game plan based on how many likes you’ve received on a given tweet. By contrast, measuring engagement and clickthrough rates give you a far better idea of how you’re performing with your audience.
Having 10,000 followers but little engagement is less effective than an account with 1,000 followers whose posts are getting consistent likes and shares. In the second case, people are actually interacting with your content, whereas the first case might as well consist of follower accounts that are inactive or bots.
Similarly, having a website with a high number of page views might make you feel good that people have visited your website. But beyond that, there’s no useful information that can help you get to your goal––attract more clients.
An example of more actionable website metrics would be form completion rate, which would measure how many of your website visitors actually contacted you after visiting. If that number is low, you could try featuring the form or contact information more upfront and visible to increase engagement.
How to tell vanity metrics from actionable metrics
Vanity metrics can be used to make a good impression on clients but actionable metrics based on insightful reports will give you a far more accurate picture of your business.
Below are some helpful questions to determine if a metric is actionable or not:
- Why do we believe this metric is a leading indicator, and not a vanity metric?
- Can I apply the results from this metric to continuously improve my firm’s performance?
- Is this an honest metric for my business or does it just make us look good?
Vanity metrics are dangerous because once you focus on them, valuable time is spent on ineffective tasks. By staying away from them, you have a better chance of putting your efforts where they’ll get you the most results.