The Urbach Letter 12/9/19
Do you know your Master KPI?
The idea that KPIs are anything new or special is laughable. Since the first caveman sold some antelope hindquarters for two rocks and a stick, businesses have been tracking the metrics that matter for them. Revenue. Costs. Profits. New Customers. Churn. Somewhere along the line, a corporate shock jockey decided to slap a TLA on the concept, and we’ve been stuck with KPIs since.
But try asking a business leader what their single most important KPI is, and watch their eyes roll back in their head. See, they’re not really using KPIs, at least not as Drs. Kaplan & Norton intended. They’re just doing what the cavemen did — measuring themselves on a broad dashboard of obvious outputs. KPIs are only useful when they represent the lead domino in a series of results which reinforce one another. Gun to your head: what’s the single KPI which indicates the health of your company or fund? At Brandt & Co. we call this the Master KPI, and it’s important enough for us to take a minute today and see about finding yours.
You can find Urbach Letter back-issues here, along with other writing I don’t deem important enough for your inbox.
Pick the Lead Domino
As usual, Billy Beane had this concept nicked long before it was cool. Surrounded by scouts peppering him with a panoply of piecemeal statistics, Billy ignored everything except for the OBP (On Base Percentage) of the player in question. Billy did the hard work ahead of time to recognize that the OBP was his lead domino. He wasn’t trying to stitch together some pastiche of batspeed, waistline, and criminal records in real-time and come out the other end with insights.
In Tim Ferriss’ recent interview with Gary Keller, the Texas real estate tycoon drawls out the following rhetorical question 14 times:
“What’s the ONE Thing I can do such that by doing it everything else will be easier or unnecessary?”
Gary calls this the focusing question. It’s also a good example of a lead domino. Using the lead domino framework is a useful path to a Master KPI. Imagine that you have a dashboard full of traditional component-KPIs like these. Sure, you could make a pact with your executive team to look at all 25 KPIs on the dashboard at your weekly meetings. Staff Advocacy Score. Net Promoter Score. CCC. Are you really going to do it? Are they going to provide actionable insight for you in aggreggate?
At McKinsey, my team built pretty dashboards for dozens of clients. How many of those dashboards do you think were up to date when we checked back 2 months later? Instead, you might paraphrase Gary Keller and ask:
“What’s the ONE KPI I can track such that by tracking it every other KPI will be easier to contextualize or irrelevant?”
3 Outside the Box KPIs
Here are a few examples of Master KPIs set using the Lead Domino theory:
- Testimonials. I’ll start out by putting my money where my mouth is, and giving you the Brandt & Co. Master KPI. We only consider an engagement successful if we feel confident asking the client to write us a testimonial. Throughout the study, we ask ourselves whether the way we’re conducting ourselves, the pragmatism of our expectation-setting, and the quality of the interim work are exemplary enough to merit asking for a testimonial. Before shipping a deliverable, we check in with ourselves to see if it’s really answering the question our client has posed. If we’re not providing value, it would be awkward to ask for a testimonial. Ditto if we’re not prompt with communications, or we’ve done a bad job scoping the project. This single lead domino sets the tone in our organization.
- CAC/LTV. SaaS and eCommerce businesses have long understood the primacy of the CAC/LTV relationship. The mistake would be to assume that it’s only relevant to them. The business which knows its customer acquisition cost, along with the lifetime value of a customer, can impute all of the key numbers for its health at a unit level, if not at an organizational one. The challenge is getting the assumptions right. Knowing LTV means knowing customer lifespan. Knowing lifespan means knowing churn. Once you’ve got it nailed down, the CAC/LTV Master KPI paints a clear picture of whether your margins, customer retention, and marketing are heading in the right direction. When the red flags start popping up, you can dig deeper to quickly figure out if it’s COGS or sale price that are dragging down your LTV.
- Founder Referrals. In the early years of a venture fund, traditional fund metrics like IRR and TVPI range from less-than-helpful to laughably presumptuous. Really? 30% of this portfolio isn’t going to end up in the toilet just because we’re taking this measurement 1 year in, instead of 5 years in? Ditto for the next 30% that’ll return less than invested? Until TVPI turns into DPI, it’s not real. And in the first few years, not only is it not real — it’s not helpful. So how do the best early stage venture funds in the world anchor their progress while young? They use qualitative metrics. One of the most popular is referrals. If founders are recommending their VC to their founder friends, it strongly implies that the VC is doing several things correctly. They’re being helpful, they are perceived as a strength not a liability on the cap table, and they are convening founders which match their ideals. Do you have a favorite fund KPI? I want to hear about it, and I want to know why you feel it punches above its weight class in terms of foreshadowing downstream effects and drawing a broader picture of success.
Cool Thing of the Week:
So … it’s perhaps not the best week to be Peloton, unless your Master KPI is to beat Hobby Lobby for the prize of “most out-of-touch brand in America.” What if I told you that you could fight the patriarchy, reduce waste, cycle indoors, and crush your friends, all for half the cost of a Peloton bike?
Enter Wahoo’s Kickr series of rear-wheel-replacement indoor cycling trainers. Load your sadly disused roadbike on there, and keep her humming through the winter. The Kickr works with apps like Strava and Zwift so you can live out your fantasy of kicking Kyle in accounting’s ass up and down the Alp d’Huez. Most importantly, it feels great with a beefy flywheel, takes up next to no room, and won’t make your significant other feel like trash.#savepelotonwife
After years building startups in NYC, and a stint helping McKinsey & Co. develop their startup accelerator, I’m now leading the charge @ Brandt & Co., a boutique consultancy serving investors and founders in the early-stage ecosystem.
If you like the Urbach Letter, the best way to give back is emailing me copious atta-boys to print out and stick on my fridge.
The second best way is connecting me to your friends at family offices, VCs, and terrific startups. For investors, Brandt & Co. focuses on a class-leading diligence product to shine light on technically complex early-stage investment targets. For founders, we aim to prepare them for institutional scrutiny and provide the tools to help their companies grow and scale.