R&D is the backbone of any SaaS company, yet to many CFOs, it is still a black box. Most companies track R&D as a % of revenue, and maybe a few metrics about activity, but few CFOs can answer the question of what’s the ROI on their R&D investment. Perhaps even more importantly, what are the levers for improving R&D ROI? How can Finance and Engineering management work together to diagnose weak areas, and shift R&D resources to produce better outcomes for the company?
These questions and more are ones that OPEXEngine is dedicated to helping to provide better answers to for software and SaaS companies. For over a decade, we have been benchmarking R&D expenses and headcounts. In 2022, we are improving the depth of our R&D benchmarks into efficiency and ROI and will be rolling out a new R&D benchmarking aimed at CTOs and Engineering management. We are working with our Bain colleagues, as well as the SaaS benchmarking community to develop a better understanding of R&D ROI and the levers that impact it. Investors are starting to take deeper looks at R&D management when developing investment theses and valuations. SaaS companies will need to be better prepared to meet these demands in due diligence, and in fundraising.
Last week, I was thrilled to join Andrew Lau, founder, and CEO of Jellyfish, a fast-growth SaaS platform for Engineering Management, in a SaaS Conversation on the topic of R&D ROI. We set the stage for the conversation by sharing OPEXEngine benchmarks for R&D spend. We looked at fast growth and slow growth SaaS companies. While fast growth SaaS are spending more on R&D, they are also delivering more new revenue for every dollar of R&D spent in the previous year. That’s a metric that we call the R&D ROI: for every dollar spent last year on R&D, how much new revenue are you getting this year?
In my conversation with Andrew, we talked about the issues that companies have in understanding how their investment in R&D is being applied, current trends, and some ways that Finance and Engineering management can do a better job communicating. We even discussed how to get engineers to stop grumbling about time tracking!
Following are some of the highlights, but listen to the full conversation here.
- Begin where the large dollars in R&D are being spent in the major categories of development work: break-out work on new features and products versus work on tech debt, bug fixing, and maintenance.
- Track manually if you have to get started, but automate when you can. Better to track something, even if incomplete, than nothing.
- Work with engineering teams to understand how and where they’re getting faster or slowing down.
- Understand how your outsourced teams are impacting your return. Just because the cost is less, if the outcomes aren’t equal, then it should be evaluated – you should be able to compare the productivity and velocity of outsourced teams with in-house teams doing similar work.
- Leverage tech debt time and investment to gauge whether development teams are appropriately balancing time to market against perfect code.
- Make engineering resource decisions backed by data and a common vocabulary – the onus is on both finance and engineering to bridge the other side of the conversation – providing both data and suggestions for each side to choose between.
- From early-stage to start-up, and selling to product delivery – it’s never too early for finance to ask ‘why can’t we do this now?’
- Engineering leaders are responsible for shepherding choices and problem solving from product roll-out options to sunsetting legacy products.
- Communicate regularly with engineers on how their work relates to the company’s success and KPIs. Engineers will be more willing to track their time if they understand how the information will be used and how it helps the company focus on growth. Engineers hate doing manual work for no reason – that’s why they write code! At the same time, good engineers don’t want to work on products and features that aren’t successful.
Finance and engineering management have to work together to iterate and improve on resource allocations that drive greater revenue growth. Trends like Product-led Growth (PLG) make understanding how engineering resources are being applied that much more important. Only Finance can connect the dots so that Engineering management can see how their organization and work impact the company’s KPIs of growth and profitability.
To that end, we are kicking off a series of reports that we will be publishing on R&D ROI and KPIs. Given the enormity of the investment in R&D as well as the strategic importance to any SaaS company’s success, OPEXEngine will be delivering:
- R&D expense benchmarks
- R&D ROI benchmarks, and
- R&D organization, efficiency, and resource allocation benchmarks
Please reach out and let us know if you are interested in participating in our new R&D benchmarking and if you’d like to join further discussions about it. Share our newsletter with your colleagues in Finance and R&D management.