OpFocus recently met with fellow SaaS maven & long time friend, Lauren Kelley, who founded OPEXEngine a decade ago in Waltham, MA and built it into the premier Software as a Service SaaS benchmarking resource. Lauren’s held executive positions of her own in some of the industry’s most successful companies, and having advised hundreds of forward-thinking technology businesses, Lauren has unique insights into the metrics SaaS organizations should benchmark against in order to grow profitable, high-value businesses.
We had some burning questions for Lauren on what our “as a Service” clients should track in their businesses, and how to measure ROI of these initiatives. In this interview, Lauren describes how benchmarks can level the playing field for SaaS companies seeking the quickest path to sustainable growth, and should inform any strategic plan. She reveals trends in benchmark popularity and the KPIs that should be of interest, and the cost of going it alone.
Here’s what she told us:
OpFocus: Why is benchmarking so important for a SaaS company?
Lauren: Research has shown that without benchmarking, companies have a much higher risk of not succeeding because they don’t have the data/intelligence needed to drive significant growth and efficiencies. Benchmarking helps them make better decisions faster and stay on top of the latest trends. For example, 10 years ago 60 percent of marketing budgets were spent on compensation but now only 30 percent is spent on salaries. The rest is earmarked for programs, infrastructure, and applications that make marketing teams more efficient. If your company doesn’t know this, you’ll have a hard time achieving world-class efficiencies and results.
OpFocus: How are SaaS companies using benchmarking data? What’s a great use case you’ve seen?
Lauren: A lot of companies use benchmarking when they’re looking for funding or to be acquired. It helps give them a holistic view of their operations, a better understanding of how they compare to peers, and insights into what it will take to achieve the kind of performance that will attract investors and acquisition targets.
At the simplest level, everyone wants standard benchmarks comparing core SaaS metrics like annual recurring revenue (ARR), ARR growth rates, customer lifetime value, retention and churn rates, overall bookings and revenue, and sales, marketing, and R&D as a percentage of revenue. But at a deeper level, they want to dig into details of their sales organizations, marketing funnel, employee productivity and more. We give them benchmarks for every department and every operation, as well as financial performance.
Another area where benchmarks are used every day is to help Finance support the company business owners – Sales, Marketing, Research & Development – plan and understand what peers are doing. Finance execs typically aren’t domain experts in sales, but by using benchmarks, they can look at peer companies who are at the same stage and same average contract value, and then make data-driven decisions. Benchmarking helps make up for a lack of domain expertise and takes emotion and bias out of the discussions.
OpFocus: Which benchmarks have your SaaS clients found surprising?
Lauren: Three to four years ago, SaaS companies that generated about $15-$20M revenue and then got big chunks of VC money to get to the next level would immediately hire a bunch of salespeople. They thought each new person would add an equivalent amount of revenue. But OPEXEngine benchmarks showed productivity actually went down as hires went up. Companies were growing, but inefficiently. This was a big surprise to our clients and their VCs.
Now, most companies are waiting longer before doing a huge financing round and the ones with savvy VCs are being advised to focus on onboarding processes, territories, and sales structures instead of hiring dozens of salespeople all at once. However, most companies don’t have access to these VCs and their best practices. Benchmarks are a great way of getting best practices like these out to the masses. We’ve helped a lot of companies who were hiring tons of salespeople discover that there’s a better, more productive, and less-costly way to grow business – and to be alerted to inefficiencies before they dig themselves into a hole.
OpFocus: Do companies use different benchmarks at particular points in their growth, and are there any clear trends?
Lauren: Yes, they track different metrics at early stage vs. growth stage vs. enterprise. They’re also influenced by year-to-year changes in the economy, their markets, and what’s important to investors, since most tech entrepreneurs are aiming for events like IPOs, Mergers and Acquisitions, or market dominance.
In the past, SaaS companies were focused on growth and sales and marketing as an engine of growth. But now, their investors are looking at productivity and efficiency, as well as growth. This makes sense because no one knows if the cost of capital will go up or how the stock market will perform—they can’t control that, but they can influence their own productivity. And as recent OPEXEngine research showed, even though 2017 was a really hot market, not all boats rose. Some SaaS companies had high valuations while others didn’t. It all comes down to operating metrics and efficiencies.
“No one knows if the cost of capital will go up or how the stock market will perform — companies can’t control that, but they can influence their own productivity.”
An interesting new employee productivity metric we’re seeing helps companies examine what they can do to make employees more productive. Start with comparing your employee productivity to peers and market leaders, then see what the drivers are of employee productivity. Faster employee onboarding and longer retention contribute to greater
productivity. If your employee retention rate is below the benchmark, look at what’s causing that. Most people leave companies because of bad managers, so you if can invest in improving managers and keeping people even one extra year, think about how much more productivity you could gain.
OpFocus: Are there any benchmarks companies should be asking for, but aren’t?
Lauren: A lot of companies focus on sales spending as a percent of revenue, but that’s not a reliable indicator of success. Look at sales performance and productivity. Then look at other indicators of where your sales productivity might be off. For instance, in most companies the head of sales declares what the sales cycle is—90 days, 6 months, etc.— based on a general sense of how long a “typical” sale takes. But if you track when an opportunity closes and converts, compare it to the industry benchmarks and segment by areas like deal type and salesperson, you can take actions to increase revenue without adding any salespeople. Anything you do that reduces the sales cycle, or brings more of the sales force closer to at least the average, will improve your sales, without going out and hiring a bunch of new reps.
OpFocus: What metrics should SaaS companies start benchmarking for the future?
Lauren: Sales and marketing efficiency is a very hot topic. Some of the things we’re exploring are the relationship and the cost of leads to converted accounts, and any conversion metrics around customer journey from lead to close to upsell to renewal, including net promoter score and customer satisfaction. We’re also looking at salesperson efficiency including the additional costs of supporting salespeople beyond their salary, like training and systems.
The other area we’re really excited to be benchmarking is R&D productivitybecause that’s been a black box for tech companies. We’re developing an efficiency metric focused on how much new revenue Research & Development is generating.
OpFocus: You mentioned how benchmarking can spur collaboration across departments. That’s a great point because collaboration really seems to drive success. Can you give an example of how this might play out in a company?
Lauren: Most companies have an annual top-down, bottom-up budget process. Senior management and/or the board reveals the revenue and other key targets like profit metrics that they want to achieve, and finance gives a budget package to each major department that shows their group’s previous year’s spending and accomplishments, and how much they must achieve and can spend in the coming year. Then it’s up to each department, i.e., sales, marketing, Research & Development, professional services, HR, to figure out how to make it work. Typically, they work in their own silos to do this. Many times, the department heads will ask for more money. They know the money will have to come from somewhere else, that in theory, it could affect the performance of another department, but they don’t really understand the overarching business implications.
What OPEXEngine recommends, and what our clients do, is give each department benchmarks for peers and market leaders – but not just for their own function. They also get benchmarks for all other departments. So, if sales asks for more headcount to make the target and requests taking it out of marketing, they will see how it will put marketing way under the benchmarks for marketing headcount. Then marketing and sales can come to the table together and collaborate on how the goals of the business can be achieved based on data, without so much of the bias and emotion that often accompanies the budgeting process.
“Department heads know that extra money will have to come from somewhere else, that in theory it could affect the performance of another department, but they don’t really understand the overarching business implications.”
OpFocus: How do your clients determine benchmarking ROI?
Lauren: They look at ROI in a few ways. Benchmarking is both a revenue driver and expense reducer. A big area where companies use our benchmarks is in compensation expense –compensation is by far the largest expense for any tech company. Hiring and managing people is such a major effort by any tech company, they sometimes lose the forest for the trees in getting the right people for each job. If your average compensation package overall is much higher than your peers, you better have some other magical way of reducing expense somewhere else.
In terms of dollars, the cost of subscribing to our benchmarking service and the time spent inputting data is more than paid for by cost savings. For example, a client who was spending five percent of revenue on travel found out the benchmark for their sector was four percent. By aligning with the benchmark, they saved 100 times the cost of their subscription – and that’s just one metric they benchmarked.
OpFocus: It’s so clear that the SaaS benchmarking you do has tremendous upside. It’s a short-cut to the heart of what businesses should be thinking about and the actions they should take to build world-class operations. Thank you, Lauren, this has been very enlightening!
So, what did you think of this interview on SaaS benchmarking? Have other influencers or topics you want to hear about in the SaaS space? Drop your suggestions in the comment section below!
This first published on OpFocus.