Data & Analytics

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July 2, 2020

Managing Internal and External Data to Optimize Your Business

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SECTIONS
  1. Internal data
  2. Pros of internal data
  3. Cons of internal data
  4. External data
  5. Pros of external data
  6. Cons of external data

In our Different Data Types to Better Understand Your Business article, we looked at a number of different kinds of data types and each of them had strong use cases. The effectiveness of that data can be utilized by each industry differently. It is also true that some industries may not benefit from certain data types too. For example, a clothing company will probably not have any useful advantage by making use of genomics data

As a business owner, your most common interactions will be with internal and external data. It would be unwise to pit them against each other as they both offer exceptional utility. In this article, we’re going to look at both data types in detail while discussing their pros and cons.

Internal data

Three people in front of a beige background, looking over the same laptop

In our data types article, we briefly touched upon what internal data is and what some of its use cases can be. To put it briefly, internal data is all kinds of data that originates from within the company.

This can be data from departments such as accounting, HR, supply chain, etc. All these segments perform tasks which are recorded in databases that can be extracted at will. When running a business, internal data is something that you will continuously come across.

Most of the decisions that a company takes are with respect to internal data because it depicts stories that are essentially unique to the brand and make for good marketing purposes.

A good record of internal data also shows how serious you are about your business processes. If your co-owner discusses improving delivery times for your business, it would be a shame to respond by saying you don’t know how it works. 

There’s no denying that internal data is extremely important for a company to succeed. But, what are the advantages and disadvantages of keeping an eye on internal data?

Pros of internal data

One of the biggest advantages of internal data is that it is readily available for analysis. The ability to make quick decisions is enhanced by almost-instant access to information.

Your accounting reports might state that expenses have been rising faster than profits and you’ll be inclined to know why that is so. Since you’re the business owner, a simple email will get you the reports. The reports can indicate a number of things adding to the expenses, like increased fuel prices, increased third-party supplier rates, and in the worst case, accounting deficiencies.

In any sort of business, it’s essential to actively know where your expenses lie and how you can remove excess spending.

Another advantage of internal data is that it shows a very clear trajectory of your company. No outside body can explain your failures and successes as well as your internal data can. Your data will clearly show which departments are doing well and what can be done to improve them. In some cases, the lack of such data could show that there is a need to gather specific data as well, further enhancing the company’s capabilities.

Cons of internal data

Man covered in yellow and blue sticky notes, looking stressed

While making use of internal data undoubtedly has its advantages, there can be a few downsides to it as well.

If you’re just starting out, chances are that you don’t have many departments and therefore your data is very limited. Generating insights from a small pool of data might not bring in favorable results, especially if you’re aiming for long-term strategies.

There’s also a chance that your internal data is simply not up to the mark. ‘Bad data’ is what’s used to refer to data that refers to inaccurate information. Basing your decisions on inaccurate data will almost always lead to poor and devastating outcomes.

Internal data is also guilty of not being able to provide all the necessary information. Sometimes you just have to make use of data from outside of your company, without which you will have voids in decision making.

It can also be costly to manage large amounts of internal data. If you’re trying to gather new customer insights through a different method, it might cost more than it’s worth. It will cost you to arrange, manage, and use the data. Before you start gathering large amounts of data, you should analyze if you even need it. Having too much data is a real problem for under-equipped businesses.

External data

External data is all data that a company does not own. It ranges from governmental databases, hospital records, weather data, public voting results, etc. It’s safe to assume that this list will keep growing and add more value to it.

External data has infinite use cases and the more we transition to a data-oriented lifestyle, the more we will continue to produce such data and make use of it.

Industries around the world make use of external data in creative ways and entire data analysis firms have been set up whose sole purpose is to collect data relevant to their fields and produce insights from it.

Real estate market research, a highly in-demand industry, makes extensive use of publicly available data to draw insights. One of the users of these insights are real estate agents who will strategize what suburbs and cities to target based on people’s income levels.

With COVID-19 continuing to wreak havoc around the world, it’s important to know if your customers can afford your offerings. One of the ways to judge the economic conditions of your target audience is to see current employment rates for that income bracket and make sound decisions.

If you were developing an application that would connect used car sellers with buyers in a specific region before the pandemic began, you can judge from the current unemployment data that it might not be the best time to launch such an application, considering people are prioritizing rent and food.

Pros of external data

Man in a red sweatshirt looking satisfied in front of a blue brick wall

External data is a necessity for a business to function properly. If a business fails to incorporate data of its surroundings into its model, then it won’t survive long. External data gives business owners the ability to see how the world around them is functioning and make decisions accordingly.

Customer reviews are one of the strongest forms of external data that a company could ever want. You have to figure out what your product gets right and where it can be improved. Customer feedback is something that you should never miss out on no matter what industry you belong to.

Using external data also relieves the company of the pressure of producing relevant data themselves. The existing databases contain enough value and suffice for most purposes. Generating data yourself is a time-consuming and arduous process that is simply not worth your time unless you own a data analysis firm.

External databases also continuously grow through the public’s help and can be a very reliable source of information. You will never have to worry about not being able to find updated information.  

Cons of external data

While data exists in extravagant amounts, finding relevant information can be difficult. It can take a long while to assess the credibility of any dataset you find and that’s not going to be a cheap process. Adequate resource allocation will need to be done if you hope to find good data.

Apart from relevant information, you will also have to keep an eye out for misguided data. In today’s world, fake news travels like wildfire, and coming across skewed statistics is not uncommon. Political rivals will leave no stones unturned in order to defame one another.

Every country will come across governments that try their best to either overstate their successes and undermine their shortcomings. Understanding what the data represents and where it comes from is crucial. 

Given how easy it can be to manipulate data, approaching it with caution cannot be overstated. If you end up making decisions based on data that was misleading you from the beginning, the end result would probably not be in your favor.

Should I use external or internal data for my business?

The correct answer would be to use both. No industry can survive based on either one of these data types. The question that you should be asking is ‘how much of each data type should I focus on’? 

A company that carefully looks at its internal workings and weeds out problems that costs them money will undoubtedly perform well internally, but if they fail to take into account the changing trends of their customers, they might not generate enough revenue if customers start abandoning their business.

On the other hand, if a company is too involved with understanding their customers in hopes of launching the perfect product, but fails to give attention to its business processes will be unable to see when its structure collapses.

The key is to strike a balance by judging your business. Every business is different and has its own demands. Just because one particular business got successful by focusing on a certain data type does not mean that success is guaranteed that way.

Closing words

Understand the needs of your business and focus on its basics first. Using data needlessly to gain a more tech-savvy public image is not going to get you the sales you were lacking.

The sensationalization of using more data for businesses is also becoming a recurring pattern. Since Artificial Intelligence (AI) has become a buzzword, more and more companies release statements which say they are now incorporating it. While it may sound exciting, the truth is that 40 percent of companies don’t do much with it.

Maybe your business is in a stage where your internal processes are volatile. If that’s the case, shift your focus to making a strong foundation. When that’s done, look around the world to see what’s happening and how you can adjust your business accordingly. 

Further reading

We took the liberty of gathering some useful material that can be beneficial for you and your business. Do give them a read!

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