Managing Your Biggest SaaS Asset – Human Capital

  

Employees are the biggest asset of a SaaS company as well as the single largest expense.  Compensation & benefits alone represent from 65% to 80%+ of revenue.   With the Enterprise SaaS market generating revenues of $20B a quarter, the venture community continues to pump funds into new and expansion companies. The resulting competition makes it increasingly difficult and expensive to hire skilled tech employees in almost every discipline.  Investors examine employee statistics as key indicators of company value, competitiveness and ability to weather changes in the dynamic SaaS world.

Because hiring is so competitive and investors are looking at employee metrics so closely, SaaS management needs to tightly monitor and benchmark key employee productivity metrics to effectively deploy their largest asset.   

SaaS Employee Metrics

Employee Productivity:  Revenue per employee

Revenue per employee is a common financial metric to track employee productivity in relation to revenue or sales.   Hugely successful companies like Facebook, Google and Apple have extraordinary employee productivity ranging from $1M-$2M per employee, while SaaS companies with revenues under $2B had a median of $255k per employee in 2018, about a 25% increase in 10 years.

Workday’s employee productivity at $269k per employee is about the same as Five9’s at $262k or Blackline’s at $268k, with more than 10X the revenue.  In this revenue range, employee productivity slightly trends up as revenue increases.

The chart below shows employee productivity for 34 public SaaS companies in 2018 as well as recognized revenue.

human capital

SaaS Employee Productivity

Source: EdgarOnline

Operating Income per Employee

For the same group of 34 SaaS companies, median operating income per employee was negative $22k/employee, while the top quartile of companies made above $7k operating income per employee.  The bottom quartile of companies lost $44,000 operating profit per employee or worse.   High operating profit per employee is generally seen as a positive indicator of company value.

Key HR Metrics

Retention Rate is measured as the number of employees who were in the company at the end of the previous year who are still employed at the end of the current year, expressed as a percentage.  An employee retention rate in the mid-80s to 90% is a good rate for a SaaS company.  Lower rates can indicate a problem with hiring, with training or onboarding, or with management structures.  Lower retention rates tend to increase hiring and replacement expenses and can affect overall productivity.  At the same time, very high retention rates can also mean stagnation and not enough new hiring, especially if coupled with above-market compensation and benefits.

Turnover Rate complements Employee Retention Rate and measures the number of employees who left voluntarily during the year.  Some estimates show that turnover can cost 150% to 250% of the departed employee’s salary in recruiting and hiring costs to replace lost employees, so a high turnover rate is a drag on operating expense.

Conclusions

Almost every SaaS CFO we speak with in 2019 reports that VCs and PE investors are concerned about employee productivity AND employee costs. Early stage and growth investors are looking particularly at hiring and retention, while investors and acquirers of larger (>$100M) SaaS companies are looking at the balance between employee productivity and employee costs. Benchmarking your key employee metrics is an important management process to keep a focus on this key asset and plan for growth. To learn more detailed key SaaS employee benchmarks for private and public SaaS companies, contact us at info@opexengine.

 

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