Benchmarking Insights: Business of Software 2023
I was honored recently to be invited to present at the Business of Software conference. It is a really valuable conference for founders and C-Suite executives of software and SaaS companies with an amazingly thoughtful curation of content and speakers. I presented on the topic of benchmarking and focused on some key themes which I’ll summarize here. The key take-away is that we are seeing SaaS companies successfully apply precise benchmarking to achieve better margins, efficient growth and faster planning in a challenging market.
As we all know, the environment has changed (and is continuing to evolve)
ACG SaaS Index P/E multiple up to 38x
- The rules for SaaS companies have changed in 2023 from a “growth at all costs” mentality to “efficient growth."
- Valuations continue to be more heavily weighted towards growth than profitability but companies, boards and companies are digging deeper into how spend is being converted into growth.
- At the same time, the market keeps growing: the market for digital and cloud applications is predicted by Gartner to continue growing at 21% (Gartner Forecasts Worldwide Public Cloud End-User Spending to Reach Nearly $600 Billion in 2023).
- Not all vendors will grow their share of that pie, many categories are over-saturated.
- New fundings and transactions are taking longer than ever before, with longer and deeper due diligence according to numerous investment bankers.
- Interestingly, R&D spend by the largest SaaS companies is trending up - a sign of consolidation, building out of platform strategies, and rolling up smaller tech companies, providing an exit for smaller vendors with strong KPIs.
At OPEXEngine, we’ve spent 2023 working with SaaS vendors primarily on 3 use cases for benchmarking:
Margin Improvement
- Compare accurate expense benchmarks by department against peers to identify areas of overspending where productivity doesn’t justify the spend
- Headcount costs comprise at least 80% of most SaaS vendor spend, so prioritize benchmarking headcount costs and productivity,
- Use benchmarks to build a detailed road map of how to get to cash flow positive, or improved EBITDA
Growth Efficiency
- SaaS growth efficiency is a combination of go-to-market and product spend efficiency - both motions need to drive a change in revenue
- Magic Number + R&D ROI combined are good, high level indicators of whether the model is working
Budgeting and Planning Roadmap
- Validate operating plans against peers and market leaders to fine-tune resource allocations
- Use 3rd party benchmarks to get C-Suite, Board and investor buy-in to the plan
There are three types of benchmarks:
Internal Benchmarking
- Benchmark current performance against historical performance
- Sourced through internal systems
Peer Benchmarking
- Benchmarking your current performance and plans against what peers and competitors are doing
- Sourced through investors, banks, surveys and OPEXEngine
Strategic Benchmarking
- Benchmark against world class organizations
- Sourced through investors, public financials and OPEXEngine
The most successful SaaS vendors use benchmarking as a roadmap, a way to reduce risk, and a management tool to drive productivity and efficiency through the organization.
Benchmarking as a Critical Management Process
- Benchmarks take the emotion out of discussions on resources
- Benchmarking should be used to diagnose root causes of weak operations
- Benchmarking builds trust, accountability, problem solving and creativity in the organization
Over the last 16 years benchmarking SaaS companies, I feel incredibly lucky to have worked with so many amazing business leaders and executives who are working to improve their companies.
Transparency Gets Results
Through transparent benchmarking with OPEXEngine, SaaS Companies have seen game-changing improvements in profitable growth.
Good quality benchmarking speeds up the process of prioritizing the right questions to ask — and makes finding the answers easier.
