KPIs to drive alignment between R&D spend and corporate business goals
Our August SaaS conversation focused on high performance in R&D, with OPEXEngine CEO and Founder Lauren Kelley hosting Bain Expert Partner Rob Levy for an energizing discussion on this critical topic. Advances in automation and new engineering techniques are enabling faster development cycles, raising expectations for ROI from the R&D function. Lauren and Rob shared a range of benchmarks that executive management should consider to accurately assess R&D ROI and resource allocations.
Rob brings a wealth of operating, board and investor experience to the discussion. Starting as a developer, he advanced to Chief Product Officer at Progress Software, CTO at BEA (acquired by Oracle), and Chief Technology Strategist at Computer Associates, and setting up PWC’s Global Innovation Software Labs, Rob is now an expert Partner at Bain & Company, Advisor at Goldman Sachs and board member of two enterprise software companies.
R&D Spend as a % of Revenue Benchmarks
One of the eternal questions asked by CFOs is “what’s the optimal R&D spend as a % of revenue?” OPEXEngine’s current benchmarking shows that overall, R&D expense ratios do drop as companies grow over $IB – there are economies of scale as revenue increases, but interestingly, highly-valued SaaS companies actually spend a higher percentage on R&D than their peers in the same revenue size.
Source: 2022 OPEXEngine BenchmarkEngine™
A view of new revenue for every R&D dollar invested further reinforced the correlation of R&D investment to growth.
Source: 2022 OPEXEngine BenchmarkEngine™
Top R&D KPIs Every SaaS Company Should Track & Benchmark
Lauren and Rob reviewed the top R&D KPIs they recommend that SaaS Finance should regularly report on, just like companies track CAC, CLV, CAC ratios, retention rates, and other commercial KPIs. These R&D KPIs fall into 3 core buckets: Financial, Quality, and Speed.
R&D ROI: This metric looks at how many dollars of new revenue was gained for every dollar invested in R&D. As a KPI, it is not nuanced to take into account sales & marketing efficiencies, market issues, etc., but is a good rule of thumb to measure the revenue return on R&D dollars invested.
R&D spend as a % of revenue: This traditional metric is expected by investors but should be benchmarked against peers, not just revenue peers, but peers by similar business models and valuations.
Expense to revenue per product: Just like SaaS Finance teams must do cohort analysis on customer CAC and CLV, R&D expenditures should be segmented by product and product revenues to identify high-achieving products and less profitable products.
Cost per development hour: Cost per development hour helps average out differences in cost between remote, in-person, and outsourced development. At the end of the day, all that matters is the overall cost.
R&D/ Product Quality KPIs
Software quality after release: this KPI measures software bugs found after release to show the quality of the development and release management.
Tech Debt: every agile company has technical debt, which is fixable problems with software that were not fixed before release. If there was no tech debt, then release cycles would be too long, if there is too much tech debt, then developers may be too sloppy. The amount of tech debt indicates a good balance between high-quality code and commercial urgency to release products to the market.
NPS: Net promoter score is a measure of how valuable or useful customers find your software and whether they would be willing to recommend it to their peers. This KPI is managed typically outside of R&D but should be part of overall R&D quality analysis.
Cycle Time: Cycle time measures the amount of time from work started to work delivered. In an agile world, SaaS companies need to stay on top of the cycle time overall and by product.
Finally, a recurring theme of the conversation was the importance of continuous benchmarking over time to accurately assess the ROI of R&D investment. As companies have embraced agile development methodologies, it is important for business and finance oversight of R&D resource allocations to also become more agile and continuously review key R&D KPIs, benchmarks, and outcomes. While the correlation between some commercial and R&D benchmarks is within 6 to 12 months, it can take longer to see a true pattern that informs new surging investment or strategic change.
For R&D and all organization functions, performance benchmarking is a foundation of long-term success. You can watch the entire webinar here LINK or reach out to us LINK to learn more. We also hope you can join our next webinar in September, focused on the role of performance benchmarking for private equity companies and their portfolio companies.