It’s the last week of the calendar year, and much of the accounting world is abuzz. Corporate accountants are putting the final touches on the those revenue accrual entries that will ensure that their company’s earnings will meet analyst expectations. Global accounting firm auditors are completing audit “hand waving” exercises to justify their client’s optimistic balance sheet valuations and earnings increases. And accounting standard-setters continue to avoid meaningful solutions to significant reporting problems including revenue recognition, lease accounting, and goodwill valuation, just to name a few. What do grumpy old accountants do you ask? This one tilts at windmills…
It’s only been three months since I expressed displeasure with recent hype about what characterizes great CFOs today (see “Ten Commandments” for Today’s CFO), and nine months since I ranted about innovative performance metrics that were anything but (see “Innovative Performance Metric or Marketing Spin?” Well, the business press is at it again with an article in the Wall Street Journal (WSJ) CFO Journal titled “ModCloth CFO: Four Metrics That Mean More Than Money,” penned by Jeff Shotts, ModCloth’s CFO. The “innovative” measures this time are engagement, relevant user generated content (UCG), underserved market signals, and the ratio of rules broken to rules followed. These four non-financial measures purportedly “power a high return on investment,” but instead are quite superficial, ill-defined, and clearly qualify as MBA speak. What’s my beef this time? ModCloth’s CFO fails my transparency standard (Commandment No. 6) , and is close to violating my “real” performance measurement criteria (Commandment No. 7). Also, as someone who has clearly crossed the threshold of geezerdom, I have no patience for those selling something as “new and innovative,” when it is not. Not a good start at all at being a great CFO! So, let’s dig in…
My biggest disappointment in this article is the CFOs suggestion that some performance metrics “can be” more important than others. This completely ignores the basic principles outlined in the widely-used, and time tested Balanced Scorecard planning and management system. Performance metrics are supposed to provide evaluation data on different aspects of an organization’s operations (financial, customer, process, and learning and growth). So, if you decide to measure something, presumably this dimension is important in its own right.
It also is interesting that the four key metrics touted are all non-financial in nature. I am not surprised at all that financial measures are ignored by the ModCloth CFO. Since ModCloth is still a young, private company, presumably focused on growth, the financial metrics are likely not very flattering (i.e., operating losses, negative cash flows, etc.). In fact, I bet the Company’s senior leaders and investors regularly shrug off the financial metrics as not being representative of the great things happening in the organization. Could “adjusted EBITDA” be far behind?
But what about measures that provide insight into how ModCloth’s business model is performing ? Only one of the four non-financial metrics (i.e., UGC) appears to directly relate to even one of the Company’s five value chain activities. And then there’s learning and growth? How are ModCloth’s investments in its people and technology performing? How are these being evaluated? But enough on what was NOT discussed in this article. Let’s take a closer look at the customer-based measures about which ModCloth’s CFO is so passionate.
ModCloth’s CFO defines engagement as user actions that have been proven to increase the average lifetime value of a customer and drive powerful solutions to otherwise intractable business problems. He concludes that:
What an insight! Customer relationships matter and longer, more engaged customers are particularly valuable…I am simply stunned that this is something that should be measured…NOT! Don’t most retail businesses routinely recognize this through their use of loyalty programs, discounts for multiple service subscriptions, and the like?
What troubles me most about this so called metric is how this CFO measures engagement. His threshold for achieving engagement is quite low, as simply signifying that you “like,” “love,” “share,” “review,” or “endorse” constitutes engagement. Sorry, without an actual sales transaction, I would argue that he is really capturing technology usage, or interest…not consumer engagement. Yes, hopefully this consumer interest will ultimately lead to a purchase transaction, but ultimately it’s a sale that confirms engagement. At best, this “interest metric” is a leading indicator. However, this grumpy old accountant understands why this CFO measures customer engagement this way particularly in an online environment…absent actual sales, his engagement (and growth) numbers are going to look much better than the sales numbers. And this is likely going to be a big deal as ModCloth plans its inevitable IPO. Imagine if “brick and mortar” retail companies measured and reported customer traffic through their outlets as engagement…I am quite sure those numbers would dwarf retail sales.
User Generated Content (UGC)
The MBA-speak term UGC refers to nothing more than after-sale customer feedback that the Company captures and uses to improve the sale and marketing of its products. Again, after-sale customer feedback has been a key business model component for decades, so there is nothing new here. Should I be troubled that ModCloth’s CFO thinks this is something to write home about? Could there be other business model components that this on-line Company is missing or not addressing adequately?
Signals from Underserved Markets
This purported metric is NOT a measure, but rather data collected from a number of “tried and true,” traditional, customer-focused performance evaluation tools. And once again, ModCloth’s CFO serves up yet another marketing gem:
Imagine…listening to your customers and observing their behavior pays off! Who would have thought? And what media does this CFO use to collect this consumer data…nothing that we haven’t been using for decades: surveys and interviews. And of course, being an online retailer, there’s also the data gleaned from the aforementioned customer product reviews (i.e., engagement), and Facebook posts. Particularly surprising is that this CFO admits to learning the value of customer feedback from his eBay experiences, rather than his MBA program…hmmmnn.
Ratio of Rules Broken to Rules Followed
ModCloth’s CFO concludes his article, not with an actual performance metric (as promised), but with encouragement to “break the rules.” There is no discussion of which rules should be broken or which rules should be followed, which can be quite dangerous if he is “selling” his ideas to the uneducated and/or inexperienced entrepreneur. Not surprisingly, he provides no benchmark level for this metric either. His “ratio” is nothing more than encouragement to innovate by questioning the status quo and generating ideas on process improvement. As with his other three non-financial metrics, this “new” advice on innovation has been in the marketplace for quite a while. Maybe he should check out “Every Manager Can Be an Innovator” for some ideas on how to extend innovation throughout his Company’s business model.
Hopefully, you now share my grumpiness about this “fluffy” article, and are now asking how and why this CFO ever was allowed to publish this piece in what many consider to be a well respected, and reputable media outlet. Well, you don’t have to search far for the answer…simply google “MedCloth and Deloitte,” and the answer will be clear. You will find that MedCloth’s reporting manager came from Deloitte, as did one of the Company’s senior accountants. Additionally, a Deloitte partner Tim de Kay acknowledges providing client services to ModCloth on his LinkedIn page. So what, you ask? Well, Deloitte pays the WSJ to publish such articles.
So, given the superficial nature of this ModCloth CFO article, this grumpy old accountant must conclude that it was nothing more than a shameful exercise in hyping a future Deloitte technology IPO client. Doesn’t this call into question pretty much everything published in the WSJ’s CFO Journal? Now I have to view all WSJ articles with greater skepticism (if that’s possible) to decide if they are really news, or just marketing promotions (as apparently this one was). And, if it wasn’t bad enough that Deloitte has recently damaged the credibility of audits, now the firm is contributing to pseudo-journalism thus further hurting society. There has to be a New Year’s resolution in here somewhere, right?
This essay reflects the opinion of the author and not necessarily that of The American College, or Villanova University.