1. You may not have as good customer relationship management as you could to support your growth so that customers actively engage with your products
2. There may be problems with your product that you need to fix or
3. Your pricing and/or packaging may not be optimal for your market and the growth of your business.

One or more of these issues could be impacting your churn rate.

We here at OPEXEngine are all about using numbers to analyze how to improve growth. We thought it would be useful to model what churn means in terms of lost revenue, and what happens if you improve your churn rate and/or upsell rate.   We created a Churn Improvement Calculator with Apptegic, a cool start-up which is helping companies with a freemium or free trial model to improve conversion rates.  Take a look and let us know what you think.

I’m interested in your comments on the calculator – shoot me an email if you have any suggestions.

Click here to download Benchmarking in a SaaS World

The presentation will use as an example an analysis of the correlation between some expense outlays, such as sales and marketing expense, and its effect on revenue growth in the software industry.   In addition, the presentation will look at differences in employee productivity for the highest performing companies in several industries.

Companies need benchmarks to help them make informed decisions by putting internal data in the context of external data.  Perhaps even more importantly, sharing benchmarks throughout senior management can help take some of the guesswork out of setting targets, as well as reducing the emotional and sometimes capricious, but always arduous, decision-making process followed by too many executive teams.  In this way, the finance organization can lead data driven decisions on performance-improving targets based on external benchmarks rather than gut instincts and HiPPOs (Highest Paid Person’s Opinions).   The experience of one CFO in using benchmarks to help drive a frictionless and efficient senior management annual budgeting process will be presented as an example.

CFO Conferences on LinkedIn

CFO Conferences has a vibrant LinkedIn group. If you are interested in connecting with other CFOs, you can join the CFO Conferences group on LinkedIn.

About the CPM Conference

CPM is CFO magazine’s annual conference focused on the financial planning and analysis needed to drive and monitor sustainable, profitable growth. The program will focus on how to run a business in a changing environment that boasts complex customer markets and delivery platforms. Presentations will explore how forward-thinking financial planning can move organizations beyond the days of spreadsheet-wielding accountants?arming sophisticated finance professionals with the latest tactics, tools, and technologies. This conference will also provide a crash course in the next best practices in FP&A.

For the agenda, go to:  http://www3.cfo.com/cpm-t3-2012/agenda  The conference runs from Jan. 29 to Jan. 31 in New York City.

Register for the Conference…

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Most companies are now preparing their 2012 budgets and going through the approval process. To say the least, few people enjoy the budget process. It is often long and drawn out to the point where many managers involved in the process are just relieved that it is over, regardless of whether they agree with the numbers.

Most companies follow a bottoms up/top down annual budgeting approach. In other words, the Finance Department sends a budget package to each department head asking them to fill out a detailed survey of line-item expenses for the coming year. Each department head asks their line managers to submit budget requests for headcount and resources, and the department heads compile the requests and come up with a total expense request for their department. Meanwhile, Sales is asked for both an expense request, as well as bottoms up calculation of how much they can grow revenue in the coming year.

At a recent CFO conference, the CFO of Netsuite, Ron Gill, made the comment that CFOs now really control the forecast, which has always been the purview of sales. It took a while for this concept to really sink in and was sort of shocking for many of the conference attendees. The reality is that in a recurring revenue world, with complex waterfall analyses involving contracted recurring revenues, new customer additions, upsell revenue streams, as well as churn rates, Sales no longer is in control of the forecast, because for an established SaaS company, the recurring revenue makes up the vast bulk of the revenue forecast.

Getting back to the budget process, all these inputs come back to Finance where they are compiled, compared to the topline revenue projections, then Finance either presents the draft budget and revenue targets to the management team or directly to the CEO. The next stage of the budget process involves negotiations between the members of the management team, the CEO and within certain departments to get all the numbers to the point where the CEO is comfortable finalizing the process (and presenting to the Board). This may include a lot of back and forth reviews of the numbers, heated discussions about the resources required to achieve the targets, and some horse trading. Eventually, everyone has their numbers, whether they agree with them or not, and the budget is presented to the board, which may or may not approve it on first pass, in which case, some of the back and forthing within departments has to be repeated in order to bring everything in line with the board’s

Image via CrunchBase

One of our benchmarking clients, Jim LeJeal, CFO of Rally Software, tried a new approach last year. His Finance group sent out the standard departmental survey of expense requirements to each department of the company, but he also sent each departmental head detailed expense benchmarks for companies with the same revenues, business model and revenue growth rates as Rally. He asked each department head to develop their budget estimates and be able to explain any major deviations from the benchmarks. Each department head had to be able to explain why their budget request and targets were either above or below the benchmark and supported the company’s business model and strategy. He said the budget process last year was incredibly efficient, productive and collegial:

“We carried out a parallel process whereby we collected inputs from the executive team for each departmental budget. We circulated a presentation with benchmarks for comparable companies and business models to each department head, 80% of which came from OPEXEngine and 20% of which came from public company data for other market leaders that we follow. We reflected as a team on the benchmarks and how our internal plan related to those benchmarks. We then used the benchmarking data to adjust the plans from the executive team as appropriate. The team said this was one of the most friction-free and productive planning cycles they had ever experienced—primarily because it was data-driven.”

“In the same way, we moved through a systematic process to get budget approval from our board by giving them supporting data for our plans. We circulated the benchmarking presentation to each member of the board in advance of the board meeting to approve the budget. Our goal was to start the board meeting with board approval of the budget and we did exactly that. In the past, we have spent 30 to 60 minutes of the board meeting discussing the budget. This time, we started the meeting with approval from the board first off and spent the rest of the board meeting talking about how to move forward with the plan.”

This kind of data-driven decision making has been proven to improve productivity and profitability among firms. Prof. Erik Brynjolfsson at MIT/Sloan has been doing work with very large firms showing that a one standard-deviation increase toward data and analytics correlates with a 5-6 percent improvement in productivity and a slightly larger increase in profitability in those same firms. After benchmarking hundreds of fast growth software firms over the past 5 years, I would venture to suggest that with smaller companies, an even stronger result can be seen. By the nature of our business (offering benchmarking services), we tend to work with data-driven companies. We tend to see the highest results in terms of revenue growth and profitability among the firms that are on top of their numbers, and hungry for outside data to compare to their internal numbers. These companies see benchmarking as a way to minimize risk and as an aid to making faster course corrections along the path to growth.

Rally found that by using peer benchmarks, it could speed up the process of developing next year’s budget and make it more productive for all involved. In the end, department heads could spend more time executing, rather than spending too much precious time at the end of the fiscal year being worn down in a frustrating budget process.

And department heads were committed to achieving the next year’s numbers – and that commitment is what is required in order to achieve those numbers. That’s another reason why having good, 3rd party data to help drive the budget decision-making process is essential.

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We’ve been tracking COCA for SaaS companies for about 5 years now.  We use the metric to calculate benchmarks for customer acquisition expense by size of company, and by type of product offering, ie., whether a company is selling a low cost solution or a relatively high cost solution.  We incorporate COCA into other benchmarks as well.  For example, we can use COCA to look at whether customer acquisition expense for new customers has increased or decreased over the years, what the “pay back” period is for new customers, and what the customer profitability benchmarks are.

One question I get asked a lot is how do you calculate “COCA?”  Do you include all of sales and marketing expense?  Do you include all of sales, and only some portion of marketing?  For what period do you calculate COCA?

We recommend using all sales and marketing expense, trailing one quarter, to calculate COCA.  For example, if you want to see your total COCA for 2010, then look at sales and marketing expense from Q4 2009 through Q3 2010.  We do this based on the assumption that most SaaS companies have a sales cycle between 30-90 days.  Some companies selling a larger, enterprise solution with longer sales cycles could look at sales and marketing expense trailing 2 quarters for the period being looked at.

We think that using all of sales and marketing expense to calculate COCA makes sense for small and mid-sized SaaS companies because most small and mid-sized SaaS companies are in growth mode, so almost all sales and marketing effort is expended in order to acquire new customers.  With billion dollar companies, it would be fair to allocate some portion of marketing to overhead, general brand awareness and other marketing efforts, but with smaller companies, even several million dollar revenue companies, we generally find that it makes sense to assess all or almost all sales and marketing expense to COCA.

If you want to see COCA per new customer acquired, you divide the annual COCA by the total number of new customers added in that year.  We suggest that you should use the net change in customers from one year to the next, ie., incorporating churn in the analysis, which gives you the true COCA for customers acquired that you could keep in a year.  If you use the total number of new customers, and do not incorporate churn, your COCA will be slightly lower, but does not reflect the cost of acquiring paying customers and customers that you can keep.

Certainly some companies may define COCA slightly differently depending on their business model, but we have found over the past few years that more and more SaaS companies are using the general definition of COCA as all of sales and marketing.  If you disagree or have more thought on the subject, I’d love to hear from you at Lauren@opexengine.com.

Lauren:  Why did you choose to participate in the software benchmarking?

Mike:  As a CFO I always want to balance growth plans with resources.  It is hard to make hiring decisions in a vacuum, especially in a high-growth environment.  Things are moving so fast, everybody is begging for more resources.  It is helpful to know how we compare to similar sized firms.

Lauren:  How do you think the benchmarking process and/or information has helped your company?

Mike:  It helps me keep some balance between the competing needs of the department heads.  We want to make intentional bets.  If we weight marketing or development more heavily than a competitor, we want that to be a strategic decision, not something that we wake up and compute after the fact.  The great thing about the OPEXEngine data is that there are several peer groups to look at.  You can look at metrics for private vs public companies, metrics for companies in your revenue band, or with similar headcount.  So many other metric reports are too focused on public companies.  Public company data just isn’t that relevant to us.

Lauren:  How easy was it to put together the required data for submission?  How much time did it take?

Mike:  Not too much time, but we keep a lot of that data on hand already.

Lauren:  Who in your company looks at the benchmarking data?  Which executives?  Does your board look at the benchmarking data?

Mike:  The executive team refers to it regularly.  We shared it with our board when we discussed our proposed budget and hiring plans.  It is helpful to show them you have done your homework and gives them comparative data to support our budget plan.  It shortens the meeting and shortens the list of questions they ask.

Lauren:  Any other thoughts you have on the value of the benchmarking?

Mike:  We thought the discussion would be around the risk of over-spending in certain categories versus our competition, i.e. are we spending too much on development or too much on marketing?

What was eye-opening was the discussion we ended up having on the risk of under-spending on certain areas versus our competition.

Here is Larry’s take on the key operating metrics that executives need to be on top of to stimulate growth and profitability — as well as the metrics that drive valuation in today’s market.

MIT by timony on Flickr

As most of our clients are currently finalizing their 2009 operating plans, I thought I’d share some of the insights from the recent annual MIT CFO Summit on operating in the current economic climate. CFOs from major public companies like Microsoft, Broadcom, and Cardinal Health mixed with financial professionals from smaller New England based companies, primarily in the technology industry.

One of the first speakers began his presentation stating that 2009 will be a mess, so start planning now for what you want your company to look like in 2010. Microsoft’s North American CFO, John Rex, asserted that when we emerge from this downturn, we will all be managing our operations and managing our cash differently than we’ve been doing in the past.

Some of the recurring themes were:

• Be vigilant and maintain good visibility every week, not just every month or quarter;
• Take advantage of opportunities in the current situation to position your company for the upturn in the economy. For example, buy ailing competitors or complementary companies;
• Use the opportunity to hire the best and brightest, while replacing low performers so your team is as strong as possible when the market turns.

A number of the differences in the way we operate will be fundamental, but some will be just as important for appearances and establishing a cost conscious company culture that is efficient beyond the crisis. For example, automotive executives flying to Washington in private jets to ask for a bail-out is not egregious solely because of the cost. Travel is a great area to put some focus. There are opportunities to reduce cash outflow and to get employees and managers thinking about how to achieve company objectives as efficiently as possible. The goal is to come out of this economic crisis with a stronger and more competitive company, not just tough it out.

Other good tips from the experienced CFOs at the Summit included:

• Scenario planning should include liquidity scenarios and capitalization scenarios, and have a plan if bank loans or outside funding dries up. Plan now for how to manage cost reductions, and go to your board now with solutions for various scenarios. Rather than starting the discussion with the board about what to do when a crisis develops and wasting critical time on trying to get consensus, management can focus on execution and stay ahead of problems.
• Visibility is critical at this point. Management needs to stay on top of the numbers, but more importantly the drivers behind the numbers on a weekly basis. Trusting the data and understanding the variances and assumptions behind the data is critical for maneuvering in a volatile environment.
• During difficult times like this, management should not just have a knee jerk reaction and start cutting across the board. Maintain focus on building the business. Don’t cut R&D and other critical activities with set cost reductions across the board. Management needs to keep focusing on developing people and sharing best practices and investing in the workforce. Do everything available to reduce all other costs, but make sure to have the best people in position for when the economy emerges from the crisis.
• Make sure to be a good communicator, especially as a CFO, but if it comes down to being upbeat or being credible, credibility is more important. Morale is incredibly important to get through a difficult market, but trading-off credibility for being upbeat in the end will result in lower morale. Take advantage of the opportunity to communicate in tough times and get ideas from the bottom up (from employees) and from the outside (from customers).
• Be tough on sales productivity. Identify who is productive and who is not, and cull the low productivity sales people. Make sure new sales people ramp quickly – measure it.
• Be in the middle on benefits. Benefits should not be the reason employees work for a company, but they also should not leave the company because of benefits.
• Most CFOs who commented on this topic did not expect the economy to turn around until at least the second half of 2009 at the earliest.

Once again, the MIT Sloan School Alumni put together a terrific conference with useful insights for CFOs on navigating these uncertain economic waters.