In working with hundreds and hundreds of SaaS CFOs over the past 15 years, I’ve noticed that effective and strategic CFOs incorporate accurate benchmarking into the daily business of the company and especially into the budgeting and planning process.
Dramatic increases in SaaS enterprise valuations and competitiveness over the past decade have been driven by business model innovations more often than new rocket science technologies. From variations on the subscription model itself, to inbound marketing or product led growth, account based sales models and Customer Success organizations, the CFO is in the driver’s seat to guide the corporate vessel through evolving models and changing economics. Regularly benchmarking your own company in a disciplined process opens up a wealth of opportunities to shape outcomes with benchmarks tailored for your company that are credible and independent of bias.
There is nothing like an accurate peer benchmark to provide guide rails to any conversation about resource allocations. Conversations using benchmarks are far more effective than only relying on internal data and anecdotal benchmarks. Take this example of working with Sales on how many account executives to add in the upcoming year:
“Our current sales headcount is 30% higher than the sales headcount benchmark for SaaS companies our size and growth rate, and our ARR per sales rep is 30% lower than the benchmark. Could we increase sales productivity rather than hire more sales reps in order to make our growth target next year? And, our average comp per person in Sales is pretty high compared to comparable companies. Let’s look at the benchmarks for BDR to Account Executive ratios for our business model. Could we hire additional lower cost resources to make the high cost resources more effective and get sales productivity up to comparable companies’ instead of hiring more expensive quota-carrying reps?”
Use Benchmarks At the Start of the Budgeting Process
The typical annual budgeting process goes something like this: the CEO and CFO meet with the Board to discuss targets for the upcoming year the quarter before the budget process. It isn’t the first time there has been a discussion about this, of course, the growth path is an ongoing and evolving discussion.
From the top down, a revenue target and the growth rate plus expense targets for the upcoming year are discussed. For SaaS companies, the planning process will also include targets around CAC, Customer Lifetime Value (CLV) and customer and net dollar retention rates. Growth companies also typically have some areas that they are emphasizing in the upcoming year, like introducing new products, entering new markets, significant hiring and employee retention goals, and/or improving the go-to-market strategy and execution.
The CFO goes back to their organization and they build out the budget templates for all of the departments of the company to share with the respective department heads and build a bottom-up model that achieves the higher level targets. They usually include the current year’s budget and some guidelines for the upcoming year.
*This is the point where peer benchmarks for the target revenue and growth should be included but often are not. Include them upfront to guide modeling, instead of at the end.*
Benchmarks provide context for initial budgeting drafts and provide guide rails for managers to use in forecasting their needs for the upcoming year.
Provide Whole Company Benchmarks to the Executive Team to Provide Context for Targets and Align Management
Strategic Finance teams that want to move the dial and drive an efficient budgeting process use peer benchmarks upfront to provide context for department heads in the budgeting process. Benchmarks help cut the noise and friction of every department fighting for their piece of the pie by giving them context for how each function of the company fits together.
Some SaaS companies are completely transparent in the budgeting process, and everyone knows each department’s budget and headcount allocations, but that isn’t the norm. I’ve even talked to companies where all salaries and equity shares are shared openly – but that is definitely not the norm. The reality is that while the SaaS model is most efficient and effective when a company is managed collaboratively, the whole company collaboration model sometimes falls short in the budgeting process where everyone is heads down on their own area.
By including operational managers in a disciplined benchmarking process, it helps bring everyone together on the key metrics, the definition and calculation of those metrics and the appropriate benchmarks for those metrics.
Budgeting Best Practices
How can peer benchmarks help make the annual budgeting and planning process more efficient and effective?
- Use accurate, peer benchmarks at the start and throughout the budgeting/planning process
- Provide the management team a 360 degree set of peer benchmarks to make sure that all parts of the company are aligned on the resources each part of the company needs to make targets
- Involve functional areas in the benchmarking to make sure everyone is aligned on industry standard definitions and specifics on how performance is measured
- Use benchmarks to help the management team make trade-offs in resource allocations and reduce “horse trading”
- Identify inefficient areas to improve in the upcoming year through benchmarking
- Use benchmarks to identify areas of strength to possibly increase investment in the upcoming year
- Use benchmarks to provide context to the Board and get Board approval of the budget
- Use benchmarks to provide context to Investors on growth plans and show how your targets compare to peer and market leading companies
Benchmarks provide neutral, 3rd party context as guide rails for the inevitable back and forth between Finance and its business partners within the company during the budgeting process. Running a disciplined benchmarking process brings the entire management team on board with the key metrics, definitions, measurement and benchmarks. And including benchmarks with Board decks provide important context for Boards and investors so that budget plans are more quickly approved.