Having worked in the IT field for over two decades I've seen backup tools evolve from tape magazines to cloud services, and I've seen simple backup methods at SMB's to more complex ones at larger organizations.
The variables at play:
Backups using Windows Server Backup
External hard drive
There is not 1 specific story about this scenario. There are not 2. There are countless. For myself, I've encountered this is many hotels, SMBs and even other organizations like churches.
Yes, this counts as a backup.
No, this is not something I'd ever recommend deploying as a backup solution.
Let's go over the setup:
Any Windows Server system (likely wearing multiple hats at an SMB like DC, DNS, DHCP & File Services) needs to be backed up. This is something that's been drilled into everyone for many years, just like frequently saving your Word doc or Excel spreadsheet has been (and we all do that, right?).
What's the lowest point of entry into checking that "backups" checkbox on the compliance worksheet? Why, grabbing whatever external hard drive you can find on sale and turning on the Windows Backup tool is. It's easy! It's cheap! And it just works!
All of the above statements are true. And, as long as the cheap hard drive never goes bad, you're covered in case something terrible corrupts your server's OS, or its hard drive(s) fail, or the hardware itself and you need to recover the backup on a new one.
What this backup strategy does not cover are almost any other conceivable event, disaster or failure:
Fire
Flood
Theft
Site outage (more for file access situations)
Incompetency (which can hurt nearly any backup strategy, but especially so with this basic one)
Backup hard drive failure
USB cable disconnection (see incompetency above)
Pretty much any other scenario where there's risk to the site or hard drive
So what would be a better backup strategy? Well, the 3-2-1 rule says you need:
3 copies of backups
2 different mediums, or storage types
1 needs to be offsite
There are 2 pretty easy, fairly economical ways to change the basic strategy into a 3-2-1 strategy:
Add a second external drive along with a cloud backup provider like BackBlaze
Add a NAS device with a cloud storage provider like a Synology and Dropbox/Google Drive
Obviously, the use case will determine what makes the most sense. 17 computers at $9 month with BackBlaze is ~$150 a month, but a smaller Synology with a Google One 2TB account will pay for itself vs. BackBlaze in a matter of months.
For an SMB with multiple sites you can use 2x Synology units and replicate the backups between them, and some of the mode advanced RS products even allow you to use them as a hypervisor, so you can restore the backup as a running VM almost immediately the remote site.
Obviously the more complex the server infrastructure, the more complex or capacious the backup setup needs to be, but for small environments the entry to 3-2-1 is pretty cheap and will save you much more in costs later when failure happens.
Don't leave your business vulnerable to total loss, it's critical you spend a little and ensure you have business continuity/disaster recovery.