SaaS G&A expense is surprisingly high. Unlike traditional software companies where G&A expense was expected to be in the 12-14% of revenue range at the time a company went public and then drop to 8-10%, SaaS companies present G&A expense between about 15% to 20%, and sometimes more, of revenue. Why is this and what are the benchmarks?
Take a look at 2017 SaaS G&A expense for public SaaS companies between $100M-$200M with an average of 19.3% G&A expense.
Even for larger SaaS companies, SaaS G&A expense doesn’t drop dramatically. The average in 2017 for SaaS companies between $200M-$500M was 17.4% of revenue. ServiceSource and Cloudera at the high end are both over 20%.
Some of the factors keeping SaaS G&A expense for SaaS companies higher than traditional companies are:
- Ongoing investment in business systems to increase efficiency and productivity in high growth companies
- Complex digital coordination of a multitude of processes to keep driving the business, expense which often is bucketed into G&A
- Acquisition expense is a regular consideration for fast growth SaaS companies continuing to scale and expand products, customers and markets
The ongoing investment in business systems and the coordination among those systems is probably the single biggest factor in driving up G&A expense beyond traditional software company expense benchmarks. In surveys that OPEXEngine has done, most SaaS companies do NOT allocate the following expenses out to operating departments:
- Payroll administration
- Recruiting administration
- Business operations
- IT security
- Corporate development
- CEO salary/benefits
- In-house legal personnel and outsourced legal expense, unless directly for a sales contract
SaaS CFOs juggle a complicated set of metrics critical to company valuation. Public market analysts tend to focus more on revenue growth, customer acquisition cost (CAC) and retention rates, than on traditional P&L metrics like G&A expense. Many or most “soft” benefits, like lavish lunches for all employees, company events, parties, and other employee retention investments, tend to be accounted for in G&A. Companies may err on the side of accounting for expenses in G&A in order to keep CAC low.
High G&A Expense Translates to Higher Employee Overhead in SaaS
Relatively high G&A expense translates to significant overhead per employee in SaaS companies of anywhere from an average of almost $40,000 per person to highs of $50-$60,000 per employee. Contrast this with other tech sectors, for example semiconductors, where G&A expense per employee averaged $25,000 per employee and often runs as low as $8,000 or $9000 per person.
Private SaaS G&A Benchmarks
How SaaS companies allocate expense to G&A varies significantly among private companies. We tend to see companies up to about $20M in recurring revenues not allocating out to operating departments many expenses like IT, HR/recruiting, executive salaries, etc. The focus at this stage through the countdown years before an IPO is primarily on revenue growth, and unit economics and associated metrics like CAC and retention. As companies are going through fundraising, they are particularly incented to reduce expense in CAC and much of overhead in sales and marketing may still be sitting in G&A. In addition, many companies don’t have the accounting precision at this stage to allocate out many overhead expenses to operating departments and it is simpler to leave it all in G&A.
Source: OPEXEngine 2017 Software and SaaS Benchmarking
G&A Overhead to Facilitate Growth – Or It May Need to Be Trimmed
SaaS CFOs need to continually validate that the bulk of G&A is spent on infrastructure and processes to facilitate growth, which require plenty of investment, as compared to expenses associated with less tangible business results. It is much harder to cut back these kinds of “soft” expenses when growth is slow and moral is already dampened. Many SaaS CFOs have talked about the pain of cutting down 5 day a week expansive breakfasts and lunches if that’s the established norm, or similar soft benefits that are expensed in G&A.
Key Take Aways:
- SaaS G&A is surprisingly high compared to traditional software companies and SaaS CFOs should track benchmarks for G&A to stay within current spending levels;
- SaaS CFOs should continually ensure that G&A spending is associated with and directly impacting business results – invest in processes and systems to improve company efficiency and productivity
- SaaS G&A expense per employee is high, in the $35k-$50k per person range and should be compared to employee productivity to ensure the investment is well spent.
Companies can benchmark their overhead spending with OPEXEngine’s SaaS and software benchmarking platform for every stage of growth, from early stage, through growth stages to the enterprise.