Articles

SaaS Employee Productivity and Profit Drive Company Value

October 4, 2018

Employee productivity is an oft overlooked performance benchmark in fast growth tech companies. It is easy to calculate – divide revenue by number of employees.  The calculation is the same regardless of the business model.  The simplicity and consistency of how the metric is calculated is attractive and helpful in calculating the revenue potential of a company.

We looked at revenue per employee for a set of 11 public SaaS companies that have had IPOs in the last 18 months. Employee productivity was a median $245k and average $223k for the cohort.  Median revenue for the group was $260M in FY 2017 and average recognized revenue was $324M.

In our benchmarking of private companies, we see SaaS revenue per employee climbing from early stage around $120k/employee at under $20M in revenues to $168k/employee for companies up to $100M in revenues.

At the same time that companies look at employee productivity, they should also look at Profitability per Employee, to see how they are building company value.  Profit per employee illuminates how high value assets – people – are using tangible and intangible resources of the company to increase company value.

Profitability per employee is a better metric for SaaS companies than the traditional Return on Invested Capital (ROIC), underscoring the importance that talent and human resources are for tech companies.  SaaS companies can only improve their use of capital by so much, while the possibility to increase the value of their workforce is much greater.  One could argue that the ability of management to enable the workforce to be profitable is as much a competitive advantage as the value of the customer base, which we wrote about in SaaS Valuations Driven by Customer Base.

In looking at SaaS companies with recent IPOs, profitability per employee is in negative ranges across the board.   Fast growth SaaS companies are still spending in advance of revenues to maintain growth momentum.  For the same group of recent SaaS IPO companies as above, we find average EBITDA per employee of negative $66,000 and average operating profit per employee of negative $80,000.Interestingly, in our benchmarking of private companies, we find that EBITDA per employee ranges from median negative $57,000/employee for early stage companies up to $20M in revenues and improves to a median of negative $2,400/employee for larger private companies up to $100 million in revenues.

Employee Productivity and Profitability in 2019 Planning

As companies dig into their 2019 budgeting and planning, employee productivity and profitability should be tracked and benchmarked to help management focus on how employees can create more company value.

Workforces can be segmented by levels of profitability and productivity, ranging from highly productive and profitable segments, to less profitable segments.  By moving less profitable workers to higher productivity and profitability, overall company value is increased.

Relatively small investments in onboarding, training and management training can reap major rewards in terms of better productivity and profitability and should not be underestimated. Given that employee expense is by far the largest expense of any SaaS company, incremental investments that move the dial on employee productivity and profitability should be part of 2019 budgets.